Customer Segmentation: Step-By-Step Guide

What is customer segmentation?

Customer segmentation is the process of dividing your target market (customers and prospects) into distinct groups based on shared characteristics, demographics, needs, and behaviors.

You’ll begin the process by analyzing a range of signals and data that include things like demographics, purchasing patterns, preferences, and psychographics (we go into more detail about this below). Dividing – or segmenting – customers helps you understand the nuanced needs and expectations of your market.

Each customer segment is a subgroup within your broader market. Customers can be divided into subgroups just like you might bucket your own social circle into subgroups (e.g., family, friends, acquaintances). You’re essentially identifying people based on shared traits and behaviors.

Each customer segment gives you a more granular understanding of why and how different groups of people do business with you. Here are some examples of customer segments by industry type: 

• A fitness apparel brand: Yoga enthusiasts, marathon runners, trail walkers, gym-goers.
• SaaS marketing platform: Tech-savvy early adopters, practical users, budget-conscious buyers.
• A healthcare group: Doctors, patients with chronic conditions, new parents.  
• A specialized materials manufacturer: Small-scale manufacturers, large industrial businesses, high-precision tech companies

What are the 4 types of customer segmentation?

Understanding the four primary ways to segment your customers is important for building relevant and meaningful groups. Here’s an overview of each:

1. Demographic segmentation: This category focuses on straightforward, easily quantifiable characteristics including age, gender, income, family structure, education, and occupation. Some additional demographic characteristics that you may or may not want to include are race, nationality, and religion.
2. Geographic segmentation: Segmenting groups by location enables you to time your messaging and ad copy in ways that are meaningful and time sensitive. Segments can be broad (e.g., North America, APAC, etc.) or highly specific  (e.g., Chicago, LA, Long Island, etc.) When carving out location segments, consider factors like climate, urban/rural settings, and culture. 
3. Psychographic segmentation: Psychographics help you understand what motivates and drives your customers. Segmentation factors include lifestyle, interests, hobbies, attitudes, and values. This is the good stuff – it helps you dig more deeply into your customer pain points and needs, so you can target messaging, experiences, and new products that resonate closely with each segment. 
4. Behavioral segmentation: This final segment looks at how your customers interact with your business and your products. Elements of behavioral segmentation include usage rate, loyalty, and purchasing patterns. Behavioral data can help you better understand customer sentiment and experience, which makes it possible to improve and enhance your service approach, messaging, and overall experience.  example, you might segment customers into frequent buyers, occasional buyers, and first-time buyers.

How to perform a customer segmentation analysis

Performing a customer segmentation analysis doesn’t have to be complicated, but it should be thorough. Here’s 4-step approach to help you get started:

Step 1: Establish Goals and KPIs

Determine your customer segmentation goals and key performance indicators (KPIs) by defining what you want to achieve with each segment. Some common goals include increasing customer engagement, improving product recommendations, enhancing customer service, and driving loyalty. Clear objectives are what steer the marketing ship. They allow you to measure segmentation success and adjust course as needed. 

Step 2: Create Your Customer Segments

Once you’ve nailed down your goals, you can create your segments. This involves categorizing your customer base into distinct groups based on shared characteristics (e.g., demographics, purchasing behavior, product preferences, etc.) It helps to create customer personas, which are fictional representations of actual customers. Personas allow you to visualize each segment and more easily connect  it to your goals, KPIs, and business objectives.

Step 3: Test and Analyze

After creating customer segments, you can deploy personalized campaigns and messaging that you create with a given segment in mind. As results become available, you should regularly analyze performance data to ensure your segments remain relevant and useful. The business landscape and your customers’ preferences will inevitably change, so testing segment performance should be built into your segmentation strategy. 

Step 4: Reiterate

As with most things involving business growth, you’re never done with customer segmentation. Use the data and insights gained from running live campaigns to update your marketing strategies, sales approaches, and customer service protocols. You can also use this information to develop new products and services targeted to different segments. This continuous process of learning, applying, and adapting your segments ensures you’re always aligned with customer needs and market dynamics.

Discover your most profitable customer segments

Identifying your most profitable customer segments puts a spotlight on the customers (and customer types) that make the biggest impact on your bottom line. These are the segments you should be investing the most time and resources into keeping happy. Here are some metrics that help you identify them:

Purchase Frequency 

This measures how often customers buy from you. Loyal customers will buy more often and more consistently versus tire kickers and occasional shoppers. The higher the purchase frequency, the higher the loyalty, so this is a group that’s worth keeping happy. 

Average Order Value (AOV)

AOV tracks the average dollar amount per order. Customers with a consistently high AOV are more valuable, so it’s a good metric to use when carving out high-value segments. 

Customer Lifetime Value (CLV) 

A measure of loyalty and customer satisfaction, CLV estimates the total revenue a business can expect from a single customer throughout their relationship. A high CLV signifies a highly profitable customer over time.

Cost Consciousness

Cost conscious customers are frequently motivated to buy when you offer a discount or sale. Grouping cost conscious customers into their own segment allows you to create messaging and pricing strategies that resonate with your price-sensitive customers. Be mindful here though. Make sure you separate pure “bargain hunters” from loyal customers who are looking for savings, so that you remain profitable and don’t fall into the trap of constantly trying to please the cheapskates. 

Upset Customers

“Upset customers” are people who’ve expressed frustration in some way. They can be identified by tracking support team interactions, negative reviews, and paying close attention to your customer support and call center logs. Bucketing your upset customers into their own segment helps you identify pain points so you can course correct when something isn’t working. This creates better experiences for everyone.

Customer Segmentation Software

Embracing effective segmentation starts with understanding the nuances of different customer groups. It provides a more comprehensive look at the specific characteristics, behaviors, motivations, and buying needs that drive sales and loyalty. 

Segmentation is the only way to create meaningful messaging and experiences for every customer in a way that scales across devices, locations, platforms, and mediums.

Monetate’s advanced personalization platform supports targeting and segmentation by enabling effortless creation of targeted customer segments which allows for the deployment of personalized content across various platforms like web, email, and apps. With over 150 targeting criteria, Monetate ensures you’ll make dynamic, informed marketing decisions. 

We make getting started with segmentation easy so you can deploy the right content and product to the right audience, no matter where they happen to be (or what touchpoint they happen to be using). The bottom line is a better overall customer experience, higher conversion rates, and the ability to maximize your customer data in a way that improves ROI.