Customer Segmentation: The Who, Where, How & Why

Your ‘one-sale-fits-all approach’ to sales and marketing leaves profit on the table and unsold inventory in the warehouse. To fix, segment your customers and adjust the offer/approach to maximize your revenue. Here’s how:

Instead of thinking about your customers as 1 entity or 1 large group, break them into a few well-defined segments with ‘like’ needs. For a concrete segmentation example (that’s close to home), think of all the people you interact with. Chances are, 95% of these people can be categorized with 1 of 3 labels: Family / Friend / Colleague. Each group fulfills an important aspect in your daily life with different needs, expectations, demands, and roles.

Transport this thinking and use a segmented approach with your customers. Make it easier to attract, retain and build revenue relationships by calling out specific needs, pain points, and common/linked expectations of your business and product/service.

When you break customers into clearly segmented groups and communicate the most relevant and appealing offers specifically, you’re going to notice an immediate improvement in your bottom line!

Here are four common ways to segment customers: Demographic, Geographic, Behavioral, and Psychographic:

Demographic Segmentation (The Who)

When conducting demographic segmentation, describe who the customers are. Look for identifiable but non-character attributes like age, gender, or income. Demographic segmentation is one of the most common ways to divide customers as demographic data is readily available. When utilizing tools like Google Analytics or SurveyMonkey, data is automatically collected and analyzed. You don’t have to lift a finger!

Unfortunately, demographic data is often not granular enough to provide value as it paints every demographic with a broad brush. Even segmenting customers by industry still has the same fallacy. For example, a person’s age or income doesn’t really give you insight into their specific needs. Not every 30-year-old or six-figure earner thinks the same.

Geographic Segmentation: (The Where)

Segmenting customers can also be completed by location (country, region, city, etc.). With geographic segmentation, the assumption is that people in the same area will share similar needs.

Given the current shipping and freight costs, the benefits of geographic segmentation are more relevant than ever. As current shipping and freight costs increase, geographic segmentation helps companies determine how far to target customers, avoiding unprofitable distribution margins. Focusing on specific locations also helps businesses tailor communications and offerings to match the expectations of local audiences.

Unfortunately, only focusing on utilizing geographic segmentation will not get your business enough useful data. Sweeping generalizations about customers’ whereabouts can not only be misguided but also offensive. Moreover, as the world moves online, physical offerings may change to digital.

Behavioral Segmentation (The How)

Behavioral segmentation divides customers into different categories based on similar behavioral patterns. Unlike demographic and geographic segmentation, behavioral segmentation provides deeper insight into spending history, like how much customers spend and how frequently.

Behavioral segmentation removes obstacles in optimizing a buying experience to tailor a customer journey. Behavioral segmentation helps businesses focus their sales and marketing efforts on specific group types in hopes of high levels of engagement. These behavioral insights are driven using transactional data, like how long they’ve been customers, which group types most utilize customer services, order timelines, or even how widely customers buy across your business portfolio.

This avoids dedicating resources to the wrong target audiences. The best part, behavioral data is also easy to obtain and is tracked by website/analytics tools.

The downside with behavioral data is that you can’t understand the motivations (the why) behind customer behavior. Also, human behavior and online trends are always changing, so it’s difficult to pinpoint whether an activity is standard or sporadic.

Psychographic Segmentation (The Why)

Psychographic segmentation breaks down customers into groups based on shared beliefs, values, lifestyles, and motivations. Understanding your customers’ psychological characteristics is the final piece of the puzzle when building holistic customer segments.

Psychographic segmentation is often confused with behavioral segmentation, but there’s a distinct difference. Rather than track customers’ financial history, psychographic segmentation draws out customers’ underlying motivation behind the behavior. When businesses have a clear picture of your psychographic segmentation they’re empowered to speak the customer’s love language and showcase offerings on a personal level.

Unfortunately, psychographic data is the hardest to obtain. The only way to get psychographic data is by surveying your customers. There’s also the risk that because data is qualitative, it can be easily misunderstood.

Why Market Segmentation Matters

When properly utilized, market segmentation saves time and money for every business, every time. By knowing the specific needs and desires of your customers, businesses can utilize effective campaigns to reach the maximum profit customer base. Target engagement improves customers’ overall buying experience while delivering a favorable return on investment.

A more targeted sales & marketing approach may also reveal previously hidden niche markets. This can lead to the development of new offerings and high-conversion, high-quality leads.

When customers perceive your offerings to be valuable and it solves their problems, trust develops. Ultimately, they return. Improving customer retention and loyalty is a lasting competitive advantage!

Final Thoughts

There are various ways to segment customers and refine your targets effectively. For the most value, we recommend starting with both behavioral and psychographic segmentation.

Good customer segmentation is the basis for good pricing. Don’t leave money on the table. Our Revenue Management Experts can segment your customers and utilize your data to create lasting, profitable growth in your business.


ABOUT THE AUTHOR Avy Punwasee is a Partner at Revenue Management Labs. Revenue Management Labs help companies develop and execute practical solutions to maximize long-term revenue and profitability. Connect with Avy at [email protected]

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