A common piece of advice every entrepreneur hears these days is, “The riches are in the niches.” The person saying it probably proceeded to explain how targeting a small niche would help boost audience engagement. But what if your audience isn’t that small? You’ll have some subsets of customers that have different wants and needs. Fortunately, this is where you’ll find customer segmentation is your best friend.

What is Customer Segmentation?

Put simply, customer segmentation is the process of dividing a diverse audience of customers into smaller groups of similar individuals. Businesses that segment customers typically use characteristics like demographics, behaviors, and interests as the basis for forming groups.

Once a business effectively segments its customers into groups, it can achieve many performance improvements. Good customer segments can lead to more effective marketing, increased customer loyalty, and efficient resource allocations.

Unless your business niche is very narrow, you should consider customer segmentation an important growth tool.

Choosing How to Segment

One question entrepreneurs new to customer segmentation often ask is, “How do I know what to segment my customers on?” In other words, what factors should you use to create smaller groups?

There are many options you can choose from for segmentation, depending on the data you have available. Here are a few options commonly used:

• Demographic: age, gender, race/ethnicity, education, income, etc.
• Behavioral: website visits, purchasing patterns, email opens/clicks, referrals, etc.
• Psychographic: interests, lifestyle choices, social status, opinions, values, etc.

You can segment customers using nearly any factor you can measure them by. However, just because you can, doesn’t mean you should.

You want to select segmentation factors representing key customer profiles that differentiate their relationship with you. Chances are you may already have a good idea of the best factors to start with.

Do you have groups of customers who use your products differently? Do your customers’ pain points differ across recognizable social groups? Are there customer groups who talk about your products in different terms?

For example, clothing companies will create very different marketing messages based on customer gender and age groups. If the company makes clothing for specialized activities like sports, business attire, or costumes, it will segment further based on customer interests.

Ultimately, choosing the factors to segment your audience by isn’t about being right or wrong. Instead, different factors may lead to better or worse performance from customer segmentation.

You may want to experiment with different factors to determine which are the best for your application. If it proves useful, you can even combine factors for segmentation (e.g., female basketball players or pickleball players over 50).

Learning from Segmentation

How do you know if your customer segments are working? And how do you learn from them once they are?

Ideally, customer segmentation should help you target specific types of customers with more efficient and responsive messaging. After developing your segments, calculate your key performance indicators (KPIs) for each segment.

Are some of your segments performing well on specific metrics but underperforming on others? The differences in KPI performance will help you identify which segments respond best to your current messaging.

You’ll know your segmentation works when you identify subgroups of customers who produce KPIs with strong performance and low variability. Here, low variability means customers in the subgroup tend to behave similarly.

Once your segments feel stable and known, you can begin working to improve your messaging, conversion rates, customer value, brand loyalty, and internal efficiency.

Begin by assessing which marketing channels are most likely to reach each segment. Then develop segment-specific messaging through social media and advertising.

Adjust your messaging to align with the type of customer represented by the segment you are targeting. Consider what you know about the various factors used to identify your segments.

After you reach out to each segment with a more targeted message, reassess your KPIs for that segment. Did they improve? If so, then you have made an improvement in performance from good customer segmentation.

Continue refining your message and assessing how it resonates with each segment. You might use customer feedback surveys, interviews, focus groups, or online reviews to see how responsive segments are.

Track the purchase patterns of your segments if you are not doing so already. Depending on your focus, you might look for a higher percentage of potential customers converting from advertising. Or you might expect that the average customer order value in the segment will increase.

Segmentation Monitoring

Regardless of your specific KPIs or goals for customer segmentation, you are entering a rinse-and-repeat phase of the project. You should continue performing segmentation analysis regularly to ensure your customer segments remain stable.

If you change product offerings, features, or pricing, you may need to reassess whether your customer segments remain appropriate. The same is true if customer tastes evolve.

Using common sense, customer feedback, and KPI analysis will help you identify changes in segments. Pay close attention to changes impacting social groups with similar backgrounds to the factors used to create your segments.

By keeping a close eye on your customer segmentation, you’ll be able to adapt quickly to changes in the market. And that adaptability will help reinforce your brand with your loyal customers, creating a self-reinforcing loop of loyalty.

Conclusion

This article takes a dive into customer segmentation and attempts to simplify the process for those not yet familiar. Segmentation isn’t a hard science in which one is either right or wrong. Creating customer segments is part art form and part depth of knowledge about your customers. There are lots of different ways you can develop segments, some of which will be better than others. Trying different factors is your key to finding the best customer segments.

Once you have customer segmentation stabilized, you can begin assessing performance among your segments. You will also begin refining your marketing to target and nurture each segment more effectively. When done well, you will find improved performance in each customer segment.

Customer segmentation is not a one-and-done activity. You’ll want to keep testing and assessing your segment performance to confirm they are holding stable. Additionally, you’ll want to keep an eye and ear open for new information that might lead to new or different segments.

Happy segmenting!