What Is Customer Segmentation, and Why Is It Essential for Your Business?

Let us assume you have different sets of customers with varying relationships.

For instance, you have three customers who contribute $3 million every year as revenue, three who contribute $500000 every year as revenue, and ten who contribute $100000 every year as revenue.

Which customer segment would your sales be interested in?

Obviously, the segment that contributes $3 million per year in revenues. Your promotions and marketing towards this high-value segment would be different compared to other customer segments.

What Does This Tell You About Customer Segmentation?

The high-value customers likely have similar buying characteristics and channel preferences.

How do you segment them in a B2B scenario?

I was running marketing for a mid-sized IT services company that focused on offering services to ISVs.

We used to segment customers based on their revenues, professional services revenues, industry focus, number of employees, locations, and R&D budgets.

This gave us a precise segmentation for structuring our outreach programs.

How do you segment them in a B2C scenario?

You would typically segment your customers on age, gender, marital status, earnings, location (urban, semi-urban, rural), and life stage (single, married, divorced, retired, etc.).

Why Customer Segmentation is Important?

The goal of customer segmentation is to identify high-yield segments – those segments that are likely to be the most profitable or that have growth potential – to target marketing efforts and resources effectively.

You will segment your customers based on the drivers behind a customer purchase. This would shape your product, sales, and marketing decisions.

Personalizing your message can hugely impact your bottom line, as customers are 75% more likely to buy from businesses that deliver targeted marketing.

Segments give context to a customer base, and that context explains how segments of an audience can best be engaged.

For example, a business might develop a marketing campaign targeting young, tech-savvy consumers, while another campaign targets retirees looking for more traditional products.

Take another example – a business might discover through customer segmentation that a segment of customers is looking for eco-friendly products. By identifying this segment and targeting it with appropriate marketing efforts, the business can tap into a new market and increase its revenue.

By segmenting customers, businesses can gain a more in-depth understanding of their needs, preferences, and behavior.

To segment customers effectively, you must first collect data on your customers. Your website is an enormous source of information where you can mine all your visitor’s data. Besides, you can collect data through various means, such as customer surveys and focus groups.

Once the data is collected, it must be analyzed to identify patterns and trends.

After which, you can personalize your marketing and promotions.

You can also check our article on: Customer Experience Vs User Experience

Personalization Vs Customer Segmentation

Once you segment your customers, you can personalize your marketing and promotions.

Let us look at some statistics that bat for personalization.

McKinsey reports that 71% of consumers expect personalization, and 76% get frustrated when they don’t find it

Hubspot reports that personalized call-to-actions convert 202% better than default versions

91%  of consumers are more likely to shop with brands that recognize, remember, and provide them with relevant offers and recommendations – Accenture research

Bombbomb.com reports these facts based on their experiments with a campaign team in a billion-dollar enterprise. Here are the findings: 

1. Personalization helped reduce the number of touchpoints from 10 to 3 for the lead response, which is a 70% improvement. It was primarily email, LinkedIn, and phone.
2. The campaign response rate doubled from 15% to 33% with a personalized approach. In essence, 1 in 3 customers that they reached out to responded to the campaign
3. Lead conversion into a qualified opportunity moved from 6% to 10%, which is a 60% jump with a personalized approach
4. They attributed a $200 million additional pipeline increase in 12 months due to the personalized approach
5. Their sales cycle was reduced by six months allowing the reps to run more campaigns in the given time

With a personal approach, they got many more insights than they signed up for.

For instance, the customers don’t just say ‘no,’ they also say why they say ‘no,’ and what else they expect from them. These insights also helped them tweak their campaigns.

I heard these statistics in a podcast by Ethan Beute of Bombbomb, which I thought was very relevant to share and write about.

There are cases where you don’t have personal data about your customers, especially in the B2C segment. Then, how do you personalize?

How Do You Personalize with Relevance?

Take the case of an online shopping site. As soon as visitors see the option between Men’s and Women’s fashion, they choose one.

Assume they choose Men’s fashion, then you show them the sub-categories and price points. Based on the filters, you know what they are looking for, and your recommendation engine can throw suggestions around those filters besides looking at what people with similar interests bought.

Do you know that Amazon’s product recommendation engine contributes more than 30% of the e-commerce giant’s revenue?

This would throw up a ton of choices for customers about whom you don’t have personal data.

After their visit, your cookies pick up their preference, and you can start to provide them with better suggestions in their subsequent visits.

Personalization Can Also Help Retain Customers

I have been using Grammarly for the past three years, and you must subscribe yearly.

How do you get the motivation to subscribe?

This is what Grammarly does with its personalized reports.

Here is what I received this week.

• You were more productive than 92% of Grammarly users last week.
• You were more accurate than 81% of Grammarly users
• You used more unique words than 91% of Grammarly users
• The tone detected in your writing – confident, direct, and informative
• The top mistakes are – missing periods, commas, and commas in a series.

What is the point of this personalized report?

The point is not just to make you look fantastic and identify mistakes but also to show the users how useful the app is for them – positioning it as a vital tool for content creators.

Does this work? I’d say Yes because I have been using this for the past three years.

Poster Boys of Personalization

Who are the leading poster boys of personalization that we encounter regularly?

One is Amazon, and the other one is Netflix.

• Inspired by your recent shopping trends
• Sponsored products related to this item
• Frequently bought together
• Customers who viewed this item also viewed
• Customers who watched this also watched
• Recommended movies for you

You will have these categories displayed very generously on Amazon and Netflix pages.

How often have you ended up doing impulse buying or binge-watching based on the suggestions?

These are not random suggestions. They collect your data and run them through intelligence and analytics engines before these are shown to you.

30% of my purchases on amazon were based on the recommendations given by its personalization engine, and 1 in 3 movies that I watch on Netflix is based on the suggestions it provides.

So, 30% of my decisions on both these platforms are due to personalization, based on my purchases, viewing, and preferences.

Let me explain how Netflix does personalization.

Customer Segmentation of Netflix

Netflix collects data on what you have watched, how many minutes you have watched, your search patterns, your demography, the devices you watch, and the time of the day. They also collect data from people with similar demography.

They collect so much data to ensure that their suggestions are closer to your preferences.

Let us assume I am a fan of Al Pacino, and I search for “Al Pacino movies” on Netflix. So, the next time they show Godfather as a part of the recommended movies, they would show me a thumbnail with Al Pacino on it, not Marlon Brando.

You get the drift right. That’s how thorough Netflix is when it comes to personalization.

Besides using data to suggest what users should watch next, they also advise their content creation teams.

Can you believe that the success of Netflix originals is a whopping 93%?

With the data gathered, they engineer content creation and production. The record-breaking successes of Stranger Things and Bridgerton were predicted to succeed much before hitting the screen.

How Do You Make This Happen for Your Customers?

You already have a lot of information about your customers. The only part is that you are not fed that information when talking to your customers.

Let me explain this with a scenario.

As a contact center agent, you get a call from a customer. With his number, you pull up all the information and say thus, “ Hello, Mr. X. I see that you have recently subscribed to our support service for your air conditioner. Thank you so much for that, and is this call related to that? I would be happy to assist you with anything.”

The customer would really love you for this. Most likely, they are calling to report an issue with their air conditioner, and you already have all the relevant details of the customer.

At the end of the call, the agent says, “I also see that you have looked up our vacuum cleaner but did not go ahead with the purchase. There is a 20% offer on the specific model that you looked up. Would you be interested?”

How do you think the conversation ended? Most likely, on a positive note.

This is what personalization does.

For this, you need to have customer data segmented with possibilities of upselling and cross-selling.

Customer segmentation is not just about defining your target segments but also constantly collecting customer data and feedback to understand them deeply. This would give you ample opportunities to slice and dice your customer segments to develop innovative offerings, thereby increasing your revenues.