8 Customer Segmentation Models to Help You Familiarize Your Market

Yauhen Zaremba
|
2023-03-21

Using a customer segmentation model is a fantastic way to get to know your customers better and personalize their experience with your brand. It enables you to send out the right marketing materials, at the right time, to the right people to achieve the best possible results.

But what exactly is customer segmentation, and how can it help your business? Let’s explore some of the best models that you can use to understand your audience and ultimately boost your revenue.

What is customer segmentation?

Customer segmentation is the process of grouping your customers into sub-categories, or segments, based on their common traits. These could be by demographic, location, or even based on spending habits. 

Practicing customer segmentation allows a business to understand its audience better. This means that it can reach out to its target consumers through the most appropriate channels and design personalized marketing materials that address specific wants, needs, and pain points.

What is a customer segmentation model?

A customer segmentation model is the exact way in which your audience has been divided up based on their shared characteristics. 

There are a variety of customer segmentation models. Which one works best for a particular business will depend largely on what the brand does and who its customers generally are.

What are the benefits of using a customer segmentation model?

Customer segmentation is an important aspect of customer relationship management, with numerous benefits.

Improves customer lifetime value

Acquiring new customers is crucial for any business, but retaining existing ones is equally important. In fact, in many cases, customer retention is a greater driver of revenue than customer acquisition. 

Not only does it cost less to retain existing customers than acquire new ones, but the likelihood of selling to an existing customer is 60-70%, compared to the 5-20% chance of successfully selling to a new customer.

Customers who feel seen and understood will be more likely to do business with you again in the future, which increases their lifetime value. In fact, customer segmentation is reported as one of the most effective tactics for increasing customer lifetime value.

Builds engagement

When marketing teams undertake customer segmentation, they can build campaigns that will speak directly to their target audience and fully engage them. Specific marketing campaigns can be targeted at specific audiences, allowing them to offer relevant products or answer questions to popular queries among that segment.

Boosting customer engagement is a great way to improve conversion and retention. Research has shown that 91% of consumers are more likely to shop with a brand that remembers them and provides them with relevant recommendations and offers.

Improves customer satisfaction

One of the best ways to achieve high customer satisfaction is to offer products and services that meet the needs and expectations of your customers. A customer segmentation model can help you meet this goal, aligning the products, services, and marketing you offer with your target audience.

When you understand your customers better, you have a greater understanding of their needs and wants. This allows you to tailor the customer experience, providing great products and great service. 

Improves marketing ROI

Customer segmentation can be used to improve an organization’s marketing efforts. Data from purchase histories can be used to identify what kinds of products a customer is interested in, which allows for the recommendation of relevant products in targeted emails. 

Not only will this improve email open rates and click-through rates, but it also increases conversion rates when the customer makes it to the landing page. A higher chance of customers purchasing the products you recommend increases the return on investment of your marketing greatly.

It’s not just about email marketing, either. Customer segmentation can influence the way you promote products and special offers on specific social channels, too. Targeting specific audiences with personalized offers tailored to their demographic increases the likelihood that they’ll visit your website or store and spend money with you.

Customer segmentation models you can use

There are a multitude of customer segmentation models that a business can use to better understand its customer base. Here are some of the most commonly used.

Demographic segmentation

A demographic segmentation model separates your audience by factors such as age, gender, education, or income. These factors will often be used in conjunction with one another to form sub-categories. 

For example, a healthcare and cosmetics brand may target younger men with advertisements for electric shavers and body trimmers while targeting higher-income women with totally different products, such as designer fragrances.

Factors such as income and education level can be good indicators as to how much disposable income a prospective purchaser may have and, therefore, how much they’re willing to spend on perceived luxury items. 

The age of a consumer can also be incredibly informative. Younger customers are more likely to be in touch with popular trends and to see advertisements on social media networks such as Snapchat or Instagram

Older customers, however, are more likely to see social media adverts on Facebook, so if you’re selling an annuity contract service, for example, the ads for it would be best placed there.

Using this information, customer segmentation can not only tell you which products to recommend to your audience but also where to recommend them.

Psychographic segmentation

Psychographic segmentation involves dividing customers up on the basis of their psychological characteristics. This could include their personality traits, interests and hobbies, or core values.

Psychographic information can be gathered in several ways, such as through polls and surveys or by monitoring how customers interact with your brand on social media channels. This particular method of segmentation is one of the more difficult ones to apply, as it requires quite specific data that is comparatively hard to acquire. 

When carried out successfully, however, it can provide a great deal of information and help you form a lasting connection with customers.

Behavioral segmentation

Behavioral segmentation involves dividing consumers up based on how they interact with your brand. This could include factors such as purchase history or social media interaction.

Triggered emails are a great example of how behavioral segmentation is used to inform marketing. Emails can be sent out to customers when they perform a certain action on your website, such as leaving without purchasing what’s in their shopping cart.

By identifying browsers who abandon their cart, you can send them emails prompting them to return and complete their purchase. In many cases, these customers just need a small final push to get them over the line in making a purchase, so you could offer an incentive such as a discount code or the promise of free shipping to entice them back.

Geographic segmentation

A geographic customer segmentation model groups your audience by their physical location. It is especially useful for businesses that cater to customers in numerous countries or even continents.

For example, a clothing retailer which operates across North America may use geographic segmentation to tailor its marketing efforts to different areas. This allows it to advertise swimwear, sun hats, and sunglasses to customers in Florida and California while promoting knitted hats and scarves to customers in Canada.

Geographic segmentation can also be used to great effect by food outlets that offer a delivery service. There’s no point sending out emails advertising a delivery service to an area that you don’t cover, so marketing emails can be configured by zip code to ensure you're only targeting customers who can take advantage of the service. 

Needs-based segmentation

Needs-based segmentation involves dividing up your customers based on their specific physical, emotional, and financial needs. This helps you to target your marketing campaigns to where they’re most relevant.

For example, there’s no point in advertising a sample product manufacturing proposal to anyone other than a manufacturing company or snow boots to customers living in the middle of the desert.

Although it can be difficult to gather and collate the different information required to carry out needs-based segmentation, the results can be well worth it. It allows you to speak directly to the pain points of your customers, giving them solutions to their individual problems.

Technographic segmentation

A technographic segmentation model groups your audience together based on the technology it uses. It has become increasingly popular as a model in recent years and allows for personalized marketing based on the software, hardware, and SaaS platforms your customers use.

This is especially useful when you consider the many different ways that customers can browse your online store. Spending habits can change depending on whether a potential customer uses a desktop, mobile, or tablet to view your website. 

The shift towards mobile e-commerce globally means that this is an audience that needs to be catered to. There are many changes you can implement to entice mobile customers when using a technographic segmentation model, such as creating quick and easy checkout options and offering exclusive discounts and vouchers for shopping through your app. 

Value-based segmentation

RFM segmentation takes into account the recency, frequency, and monetary value of purchases made. This model helps businesses to categorize customers into ‘low-value’ and ‘high-value’ groups based on the types of purchases they make and how often they make them.

Marketing efforts can then be tailored accordingly. For example, customers who purchase subscriptions annually can be reminded of their upcoming renewal as the date draws near, offering them incentives to renew with their current provider rather than looking elsewhere. 

Value-based segmentation is a similar model which involves grouping your customers based on their financial value to your brand. This could be measured using metrics such as customer lifetime value. 

By identifying which segments of your audience generate the most income for your business with the least investment, you can focus your efforts in the right places to maximize your ROI. 

Choosing the right customer segmentation model

Choosing a customer segmentation model to use isn’t always an easy task, and there may be some trial and error involved before you find the right one. Ideally, you’re looking for the model that will provide you with the most value, insight, and the best possible ROI. So where do you begin?

Data

The first step is to determine what kinds of customer data you have and which of these will have the biggest impact on your revenue. 

If you have information regarding the age, gender, and address of your customers, then demographic or geographic segmentation would be logical models to start with, as these will help you quickly realize the benefits of marketing personalization.

If you want to employ a needs-based or psychographic segmentation model, you may need to collect additional data specifically for that purpose through the use of surveys or other data collection methods.

Tools

It’s also important to identify the tools that you’ll use to collect and analyze data.

For example, Google Analytics will give you access to a range of data about your website and how visitors find and use it. Visitors to PDFPlatform.com are likely to be tech-savvy individuals who have found the website via searches for ‘PDF’ and ‘conversion’. Access to this information will make using a technographic segmentation model possible.

Goals

Finally, you should have a clear idea of your business goals and be mindful of which customer segments will most likely help you achieve them. Aligning your choice of customer segmentation model with your business goals is key to success.

If you want to increase sales of a particular product, what is the target audience for that product? If it’s a mobile app, then technographic segmentation will be useful. 

If it’s, say, a fashion show sponsorship proposal template, then you may need to employ needs-based, demographic, and geographic segmentation to narrow down the incredibly specific audience of business owners who would want to advertise at upcoming fashion shows.

Use customer segmentation models to get to know your customers

Customer segmentation models are the best place to start when you want to get to know your audience. They can facilitate personalized marketing, greater customer engagement, needs-based selling, and an all-around better customer experience.

Many different models are available, and which one is right for your business will depend on a range of factors, including what you’re selling, who you’re selling it to, and where you’re selling it. 

Take stock of the customer data you have access to, determine which models can be built using it, and how these will help you achieve your business goals. 

Tags:
Sales Development
Yauhen Zaremba

Yauhen Zaremba is the Director of Demand Generation at PandaDoc, all-in-one document management tool for almost all types of documents including this PandaDoc escrow agreement sample template.  

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