Customer Segmentation: Revealing the mystery
Every company has a different product and provides a different service to a particular set of customers.
Customers pick a company for a particular reason: convenient prices, better product or service quality, brand name and reputation, more benefits and advantages…etc.
These customers can be of different types and natures some are individuals, companies, governments or various types of organizations but the reasons of choosing their service provider or the product they are willing to buy can vary from customer to customer.
In order for companies to better identify the business opportunities they can have and the potential new products or services they can develop, they need to know very well their customers.
The question now is: How can a company identify and understand its customers?
Customer segmentation is the
answer!
“The process of selecting customers and grouping them into homogeneous,
distinct and meaningful subgroups based on various characteristics and
attributes”.
The main objective for segmenting the customers is to identify the different typologies within the customer groups. This new understanding gives a better knowledge of the customer groups and more insight into its composition and behavior.
There are various segmentation types based on the criteria used. Specifically, customers can be segmented according to their consumption value, socio- demographic information, behavioral and loyalty characteristics.
Customer segmentation can have many positive benefits. The time and effort spent into a customer segmentation project can have a high return on investment. In marketing, customer segmentation can be used to:
Have a better view of customers. Understanding the customer’s behavior and needs can help marketers identify new business opportunities, enhance existing products and offer new benefits and promotions for a particular set of customers.
Having a clear insight on the different segments of the customer base can help companies tailor specific customized products designed to prevent customers from leaving to competitors and losing them. It is widely known that the cost of acquiring a single new customer is higher than the cost of keeping an existing customer.
Optimizing the existing resources and focusing on getting more value from the important segments of the base instead of wasting energy and time on mass market offers and promotions, this way the company can make sure to offer new prices, discounts and promotions to customers that struggle with the existing prices and think of going to competitors offering better prices but with lower product or service quality.
Types of segmentation:
Different business situations call for different segmentation definitions and methodologies, and not all business require segmentation the same way other sectors do it. Here are the most commonly used segmentation methods:
Behavioral segmentation:
In behavioral segmentation, we group the customers according to their habits of consumption. The number of hours they spend on an online service, the number of products purchased from an e-commerce website, the number of international minutes consumed…etc.
Behavioral segmentation is widely used because the company do not need to go and collect new data from customers, it will use the existing data stored in their databases from the transaction history of its customers.
Socio-demographic segmentation:
In the socio-demographic segmentation, we group the customers based on their social and demographic attributes.
These attributes can be the age of the customer, the marital status, the income…etc.
Also, we can target adult-segment for more benefits and value for their consumption to encourage them to keep using the service and spend more.
Value based segmentation:
In value-based segmentation customers are grouped according to their value. This is one of the most important segmentation types since it can be used to identify the most valuable customers and to track value and value changes over time.
We must say here that the value definition is absolute, but a better way of making the value groups is to relate it to 2 types of value: Revenue or Profit.
I will talk more about Value based segmentation in the next blog-post with more details and insight.
Propensity based segmentation:
In propensity-based segmentation customers are grouped according to certain scores, called propensity scores. These scores are calculated according to business objectives.
Companies might want to predict the customers that have the highest risk of churning, or the highest ability to purchase a complementary product or service...etc.
Customers then are grouped into homogeneous segments with similar score ranges, and actions can be taken according to each risk or opportunity designed for each group.
Loyalty-Retention based segmentation:
In loyalty-and-retention based segmentation, customers are grouped according to predefined loyalty related criteria. It can be the customer’s tenure, how many services they are subscribed to, and how many products they purchased.
Loyal customers can be targeted for more rewarding offers, whereas customers that present a migration risk can be targeted with retention based offers and promotions.
Final thoughts
The above list of different types of segmentation contains the most commonly used methods and definitions. Some companies have a combined segmentation where they mix the value and behavior to get more micro-segments.
There are other cases where propensity scores are added to a value-based segmentation to prioritize any effort for the high-value customers that might churn and target them first.