What is Customer Segmentation? Practical Guide with Templates

Updated on: 14 February 2024 | 10 min read
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Customer segmentation is a strategic approach to understanding and categorizing your customer base. It helps businesses customize their approach, making products and marketing more effective. And in this guide we will share what is customer segmentation along with insights and tips on how to use customer segmentation to boost satisfaction and overall success.

What is Customer Segmentation?

Customer segmentation is the practice of grouping customers based on similarities in characteristics, behaviors, or preferences. This helps businesses tailor their products and marketing to meet the specific needs of each group, ultimately improving customer satisfaction and overall success.

Segmenting customers involves dividing them into distinct groups or segments based on identifiable traits, behaviors, or preferences. These characteristics could include demographics (age, gender, income), psychographics (lifestyle, values, interests), geographic location, purchasing behavior, or other relevant factors. The primary aim is to create segments that share common attributes and respond similarly to marketing efforts.

Understanding each segment’s unique needs and preferences helps businesses create targeted marketing strategies, personalized communications, and tailored products. By doing this, companies can allocate resources more efficiently, target high-potential customers, and improve customer satisfaction.

Customer Segmentation vs Market Segmentation

Customer segmentation is about grouping a company’s existing customers based on things they have in common, like age or interests. The goal is to understand their needs and tailor products or marketing to each group.

Market segmentation is a broader concept, including not only existing customers but also potential customers in the target market. It divides the overall market into segments based on various factors to identify and prioritize different customer groups.

In short, customer segmentation focuses on current customers, while market segmentation considers both current and potential customers in the broader market.

What is CLV-Focused Customer Segmentation

CLV-focused customer segmentation involves sorting customers based on how valuable they are over the long run. It involves grouping customers by the potential revenue they can bring to the business throughout their entire relationship. Businesses then prioritize strategies for the high-value groups, like personalized marketing and special offers, to maximize their loyalty and contribution. The goal is to allocate resources wisely and build strong, profitable relationships with customers who are likely to be most valuable over time.

Types of Customer Segmentation

1. Demographic segmentation

Demographic segmentation involves categorizing customers based on specific demographic factors.

  • Age: Sorting customers by age groups like teens, young adults, middle-aged, or seniors.
  • Gender: Grouping customers as male or female.
  • Income: Categorizing customers by income levels - low, middle, or high.
  • Education: Segmenting customers based on education levels such as high school, college, or postgraduate.
  • Occupation: Sorting customers by their jobs, like healthcare professionals, IT specialists, or teachers.
  • Marital status: Grouping customers as single, married, divorced, or widowed.
  • Family size: Considering the number of people in a customer’s household, like singles, couples, or families with children.
  • Ethnicity or race: Segmenting customers based on their ethnic or racial background.

2. Geographic segmentation

Geographic segmentation involves categorizing customers based on their geographical location. Here are key aspects of geographic segmentation;

  • Country: Dividing customers based on the country they reside in.
  • Region: Segmenting customers according to their specific region or area within a country.
  • City: Categorizing customers based on the city they live in.
  • Climate: Considering the weather and climate conditions of the customer’s location.

3. Psychographic segmentation

Psychographic segmentation involves categorizing customers based on their lifestyle, values, interests, and personality traits.

  • Lifestyle: Grouping customers based on their activities, hobbies, and overall way of life.
  • Values: Segmenting customers according to their core beliefs and principles.
  • Interests: Categorizing customers based on their hobbies, passions, and areas of interest.
  • Personality traits: Considering customers' personality characteristics, such as adventurous, conservative, outgoing, or introverted.

4. Behavioral segmentation

Behavioral segmentation involves categorizing customers based on their behaviors, actions, and interactions with a product or service.

  • Purchasing habits: Grouping customers based on their buying patterns, such as frequent, occasional, or seasonal purchases.
  • Product usage: Segmenting customers according to how often and in what ways they use a product or service.
  • Brand loyalty: Categorizing customers based on their loyalty to a particular brand or willingness to try different brands.
  • Responses to marketing: Considering how customers respond to advertising, promotions, and other marketing efforts.

5. Needs-based segmentation

Needs-based segmentation involves categorizing customers based on their specific needs, preferences, or challenges that they aim to address through a product or service.

  • Specific needs: Grouping customers based on the particular requirements or problems they are looking to solve.
  • Preferences: Segmenting customers according to their preferences and desires related to a product or service.
  • Challenges: Categorizing customers based on the difficulties or obstacles they face that the product or service can alleviate.

6. Technographic segmentation

Technographic segmentation involves categorizing customers based on their technology usage, preferences, and familiarity.

  • Technology usage: Grouping customers based on the types of technology they use, such as devices, software, or platforms.
  • Preferences: Segmenting customers according to their preferences for specific technological features or functionalities.
  • Familiarity: Categorizing customers based on their level of familiarity with and adoption of new technologies.

Why Segmenting Customers is Important

Segmenting customers helps businesses better understand, target, and serve them. It’s essential for marketing success, customer satisfaction, and overall business success. Here are some benefits of customer segmentation to consider.

  • Helps businesses comprehend the varied needs and preferences of different customer groups.
  • Allows for personalized and effective marketing strategies tailored to specific customer segments.
  • Enables businesses to allocate resources more efficiently by focusing efforts on high-potential customer groups.
  • Tailoring products and services to customer segments leads to increased satisfaction and loyalty.
  • Facilitates the customization of products to meet the specific demands of each customer segment.
  • Tailoring communication to specific customer segments ensures messages resonate effectively.
  • Helps businesses adapt to changes in the market by understanding customer responses to evolving trends.
  • Provides a competitive edge by positioning products or services uniquely for specific customer groups.

Customer Segmentation Template

Creating a customer segmentation template can help you organize and document key information about your different customer groups. You can use this template to begin segmenting your customers. You can customize and expand on this template based on the specific needs of your business:

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How to Segement Customers

The idea of segmenting customers is to break them down into smaller, more manageable groups based on shared characteristics, behaviors, or preferences. Remember, customer segmentation is an ongoing process that evolves as your business and customer dynamics change. So, it’s important to reassess and adjust your segmentation strategies regularly.

Step 1. Define objectives

Clearly articulate the goals you want to achieve through customer segmentation. Whether it’s improving marketing effectiveness, increasing customer satisfaction, or targeting new markets, having well-defined objectives will guide your segmentation strategy.

Step 2. Gather data

Collect relevant data about your customers. This data can include demographics, psychographics, purchase behavior, geographic location, and other pertinent information. Use both quantitative data (such as sales records, website analytics, and customer surveys) and qualitative data (customer feedback, interviews, and social media interactions).

Step 3. Identify segmentation variables

Determine the criteria or variables that will be used to segment your customer base. Common segmentation variables include:

  • Demographic variables: Age, gender, income, education, occupation.
  • Geographic variables: Location, region, urban/rural.
  • Psychographic variables: Lifestyle, personality, values, interests.
  • Behavioral variables: Purchase history, frequency of purchase, brand loyalty.
  • Technographic variables: Technology usage, online behavior, platform preferences.

Step 4: Segmentation analysis

Use statistical techniques and tools to analyze the gathered data and identify patterns or groups within your customer base. This may involve using clustering algorithms, regression analysis, or other statistical methods. The goal is to group customers who share similar characteristics.

Step 5: Develop customer profiles

Create detailed profiles for each customer segment. These profiles should include the defining characteristics, behaviors, and preferences of each group. This step involves combining both quantitative and qualitative insights to develop a comprehensive understanding of each segment.

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Step 6: Implement targeted marketing strategies

Tailor your marketing strategies to each customer segment’s needs and preferences. Develop personalized messaging, promotions, and product offerings for each group. This helps make sure that your marketing efforts resonate more effectively with specific segments, leading to improved customer engagement and satisfaction.

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Step 7: Evaluate and refine

Regularly assess the effectiveness of your segmentation strategy. Monitor key performance indicators (KPIs) such as customer retention, conversion rates, and sales. Gather feedback and be prepared to refine your segmentation approach based on changing market dynamics or evolving customer preferences.

When to Use Customer Segmentation

Use customer segmentation when you want to:

  • Identify and comprehend diverse customer groups with unique needs and behaviors.
  • Customize marketing efforts to address the specific preferences of each customer segment.
  • Increase customer loyalty by addressing the individual needs of different customer segments.
  • Identify characteristics of target audiences when entering new markets or launching products.
  • Set prices based on perceived value, maximizing revenue and competitiveness.
  • Inform product design and innovation by understanding the unique needs of customer segments.

Tips for Effective Customer Segmentation

Here are some tips to help you segment customers successfully.

  1. Blend traditional demographics (age, gender, location) with psychographics (interests, values, lifestyle) for a richer understanding of your customers. This will provide a more holistic view of who they are and what motivates them.
  2. Make use of advanced analytics tools and machine learning algorithms to process large datasets. This helps uncover hidden patterns, predict customer behavior, and refine your segmentation strategy.
  3. Map out the customer journey and segment customers based on where they are in the buying process. This allows for targeted messaging and interventions at key touchpoints.
  4. Don’t forget that customer preferences change. Stay relevant and responsive with dynamic segmentation strategies that adapt to changing behavior.
  5. Gather insights about customer sentiments, opinions, and emerging trends on social media and online platforms. You can tweak your segmentation strategy based on this real-time data.
  6. Establish feedback loops to continuously gather input from customers. Understand their experiences, preferences, and pain points to refine your segmentation and improve customer satisfaction.

Simplify Segmenting Customers with Creately

Creately’s visual collaboration platform offers several features that can help teams perform effective customer segmentation.

Visualize customer data

Creately’s diagramming tools allow teams to visually map out customer segments. Using shape libraries or templates for flowcharts, Venn diagrams, customer journey maps, user personas and other visual elements, teams can organize customers based on attributes like demographics, psychographics, behaviors, and needs. This visual representation makes it easy to see how segments differ and where they overlap.

Integrated notes and data fields

Keep all customer segment related data in one place with per item notes and data fields. Attach files, images, and embed anything on the canvas to centralize information.

Real-time collaboration

Work with teams across the organization with real-time collaboration features like live mouse tracking, synced previews and comment threads. Use Creately’s plugin for Microsoft Teams to easily brainstorm, plan, and execute your ideas during meetings.

Present and share

Use presentation mode to create slides right out of your visuals on the canvas and create interactive presentations for clients and stakeholders. Easily share your customer segmentation research with other collaborators with a workspace share link or embed it in any site or intranet with a secure link.

Project management tools

Go from idea to execution in the same place. Ideate, plan and execute your marketing strategies for each customer segment with built-in project management tools. Assign responsibilities, set due dates, and monitor progress with Agile Kanban boards, Gantt charts, timelines and more. Create task cards containing detailed information, descriptions, due dates, and assigned responsibilities.

Customer segmentation helps businesses understand and connect with different types of customers. By looking at demographics, interests, and behaviors, companies can create better, more personalized strategies. It’s important to keep adapting and working together across teams to stay in tune with what customers want. We hope that this comprehensive guide on customer segmentation helps you with that.

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Author

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Amanda Athuraliya Communications Specialist

Amanda Athuraliya is the communication specialist/content writer at Creately, online diagramming and collaboration tool. She is an avid reader, a budding writer and a passionate researcher who loves to write about all kinds of topics.

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