Forget what you think you know about customer segmentation.
Beyond just better marketing, it has the ability to cut through to the heart of your business strategy. If you don’t believe me, that’s understandable. Customer segmentation has been in vogue, fallen out of fashion, and come back many times.
Done right, it is a way to decide on business strategy, to pinpoint growth opportunities, to acquire and retain customers, and to build loyalty through better customer service. Moreover, in the age of ‘personalisation’, a structurally sound customer segmentation is key and can accomplish more than one goal, zooming its view from strategic oversight all the way down to the customer of one.
Not all customer segmentations — the division of customers into smaller groups of similar traits — are the same, and a lot of that has to do with the data they are built from. Traditionally, and before data and analytics were as prolific and accessible as they are today, segmentations were built using ‘top down’ market data. This tends to be ‘big picture’, based on broad swaths of people, such as income brackets, ethnicity, or location. Nowadays in business, this high-level data is not that useful. You may be able to understand how many of your customers are likely to be middle-aged female homeowners, but it isn’t really an actionable insight.
To get more nuance, needs-based or attitudinal segmentations were developed — for example, by conducting focus-groups or surveys. These can of course be small or large, but they are almost never based on all customers, and sometimes not even on your own company’s customers. The accuracy, therefore, is still not good enough to use for targeting, though it may give a business a ‘general idea’ of who its customers are and what some of them may want.
The more recent way to know who your customers are is to leverage their actual data. Data-driven and behavioural segmentations are based (assuming your data retention and information management is up to scratch) on all of your customers and they are detailed, including behavioural attributes and channel preferences (email, phone, social etc). It should incorporate all the interactions, across all mediums, that you have with your customers. And while it probably sounds like this is the clear winner when it comes to segmentations, in fact it is a combination of all three of these approaches to segmentation that provide a business with the most robust segmentation.
Done well, customer segmentation is more than just a good marketing tool. With the right segmentation, knowledge of the best way to use it and the capabilities to do so, it will reveal tangible insights and prioritise business initiatives.
For customer acquisition, segmentation aids in understanding the people your product will appeal to and how to market to them, and in retention, can identify links between lost customers and your product or experience. For customer satisfaction it will help in prioritising who is ‘at risk’, or your most valuable customers for preferential treatment such as incentives, dynamic pricing, or going to the top of the customer service line. At the same time, customer lifetime value (CLV) can be more accurately projected through better understanding of a consumer’s journey through different segments.
Understanding market trends on the other hand, allows a business to identify untapped opportunities — for instance, where to open stores, product needs in five years time as the population ages, and so on. The ability to gain insight into these macro shifts and how they interact with your customer base enables future preparation.
The key, I believe, is that your customer segmentation must have the ability to scale from simple to complex at the same time. It needs to be granular enough to facilitate meaningful prioritisation and targeting for action, but not too detailed to inhibit strategic business decisions. Knowing that every single one of your customers is a unique and complex person who wants different things can be paralysing, but knowing they’re all located on Earth is rather useless.
We find that when customer segments ‘aren’t working’ for a business it’s because they haven’t been built right. There may be too many segments or too few, they may not be robust, or simply not meet the needs of the business. Often, different departments have different segmentations that they use to yield different results. It’s not uncommon to find that they were created years ago and never updated. Here are some of the common problems I see that businesses need to avoid:
Customer segmentation needs to be rethought. The value it can bring to a business is immense, particularly in an era when personalisation is becoming ever more important, but macro trends still need to be planned for. Its use is a real way to pull tangible insights from your data. After all, if you’re collecting it, you may as well make something useful out of it.
While they may fall in and out of fashion, the value that can be gained from a good customer segmentation will never go away, and indeed, will continue to get more useful as AI finds ways to extract increasingly complex insight. Never has there been a better time to gather your data and divide (to) conquer.
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