Customer experience (CX) remains top of the list of factors that influence customer loyalty, retention, and satisfaction.
A report by PwC revealed that 73% of customers take CX as a primary criterion when purchasing. Also, 43% of consumers would pay more for better convenience and experience.
So how can you meet the needs of every customer and personalize their experiences?
The answer lies in customer segmentation.
Customer segmentation divides your present and potential customers into various groups based on demographics, values, needs, attitudes, goals, and behaviors.
In this article, we will dive into the nitty-gritty of the customer segmentation framework – creating one, using it properly, and improving on it. All these would be done with adequate examples to guide you.
Introduction to Customer Segmentation
Customer segmentation is not a new concept. It has been used by many marketers for years to target different segments of customers with different channels, offers, and messages.
However, today, it seems more difficult to segment customers in a world full of diverse customer choices, information, and power compared to the past.
But fret not, there are many things customer segmentation can help you achieve in this digital age, including:
- Identifying your most valuable customers and channeling more resources to them
- Understanding the needs, pain points, expectations, and motivations of your customers
- Creating customer personas for different characteristics and customer behaviors
- Tailoring your marketing and communication strategies based on customer interests and preferences
- Personalizing your product and service offerings based on the needs and goals of your customers
- Effectively utilizing feedback to properly refine your segmentation framework
All these being said, it is worth knowing that customer segmentation is not a one-size-fits-all solution. You must create one that works for you, your business goals, your specific industry, and your customers.
Customer Segmentation Framework
Think of the customer segmentation framework as a tool or board that helps you organize customer segments to become meaningful based on different criteria. Your customer segmentation framework must help you achieve five things:
- Define the scope of your segmentation
- Identify key variables that differentiate each segment
- Analyze the potential, profitability, and size of each segment
- Prioritize the most important segments
- Align your internal teams on how to approach the segmentation
To create a solid customer segmentation framework, you must follow certain processes and steps:
Understand your customer base
The first step you need to take is to understand the “who,” “what,” and “how” of your customers. This means understanding who they are, what they want, and how they behave.
To achieve this, you can collect customer information from your CRM system, web analytics tools, social media platforms, market research reports, surveys, and interviews.
Information you should aim to gather includes qualitative and quantitative data such as Demographics, behavioral data, psychographic data, technographic data, needs-based data, and value-based data. Finally, once you finish this, you can start identifying key customer segments.
Identify key customer segments
At this stage, you need to identify the key customer segments that you want to target. Many methods can help you achieve this. The most common ones are:
- Cluster analysis: a statistical technique that groups customers based on their similarity across multiple variables
- Decision tree analysis: a graphical technique that splits customers based on their responses to a series of questions or criteria
- RFM analysis: a simple technique that segments customers based on their recency (how recently they purchased), frequency (how often they purchased), and monetary value (how much they spent)
- Persona-based analysis: a qualitative technique that creates fictional characters that represent each segment based on their characteristics and behaviors
In choosing any of these, you must consider your business objectives, data availability, and analytical capabilities.
You also need to consider measurability, accessibility, sustainability, differentiability, and actionability. Finally, avoid creating too many or too few segments that can limit your CX efforts.
Create Customer Personas for each segment
The next step in our customer segmentation framework journey is to create customer personas for each segment. These are fictional characters used to represent the ideal customer in each segment. This is usually based on their characteristics and behaviors. Why is this important?
- It helps to humanize your segments and empathize with the needs and expectations of your customers.
- It helps to visualize the interaction between the segment and your brand, product, or service across different channels.
- It helps to create a communication link with all segments using the right language, message, and tone.
- Finally, it helps personalize each segment’s product and service offerings based on your business goals and company values.
Many templates, canvases, and software are available to help you create a customer persona. Here are the things you need to include in each persona:
- Name: a catchy name that reflects the personality or behavior of the persona
- Photo: a realistic image that represents the appearance or lifestyle of the persona
- Demographics: basic information such as age, gender, income, education, location, etc., of the persona
- Psychographics: deeper information such as attitudes, values, personality, lifestyle, etc., of the persona
- Technographics: device usage, online behavior, channel preferences, etc., of the persona
- Needs-based: problems, goals, solutions, etc., of the persona related to your product or service category
- Value-based: willingness to pay, price sensitivity, perceived value, etc., of the persona related to your product or service category
- Journey map: a visual representation of how the persona interacts with your brand, product, or service across different stages, touchpoints, and channels
The ultimate goal is to create a customer persona that is realistic, relevant, and specific to your business.
Tailor your marketing and communication strategies for each segment
The next line of action is to tailor your marketing and communication strategies for each segment based on the different characteristics and behaviors of the customers. Techniques you can employ here include:
- Product differentiation: offering different features, benefits, options, packages, etc., for different segments based on their needs, preferences, and values
- Price discrimination: offering different prices, discounts, incentives, etc., for different segments based on their willingness to pay, price sensitivity, and perceived value
- Place optimization: choosing the best distribution channels, locations, platforms, etc., to reach different segments based on their accessibility, convenience, and loyalty
- Promotion personalization: creating different messages, offers, campaigns, etc., to attract different segments based on their interests, motivations, and expectations. You should also consider using omnichannel marketing, which involves integrating multiple channels (online, offline, social media, email, etc.) to provide a seamless, consistent, and engaging experience for each segment across different touchpoints.
Personalize the customer experience
Now we have to personalize the customer experience at this stage. This means providing specific, tailored, and relevant experiences to each customer in the segment through the right message, recommendations, and offers.
This removes the notion of the customer being a part of a general audience. The customer is thus treated as an individual with a unique taste and preference. Getting this right can help you:
- Increase the level of satisfaction and loyalty of your customers by delivering value and convenience
- Increase customer retention and lifetime value through trust and good rapport
- Increase customer advocacy and referrals when their expectations and exceeded
- Increase customer acquisition and conversions through engagement and attraction of new customers via targeted campaigns
Utilize Customer Feedback to Refine Your Segmentation Framework
The next step is to utilize customer feedback to refine your segmentation framework and improve your CX. Customer feedback refers to the information customers provide about their experiences with your brand, product, or service.
This can help you achieve the following:
- Measure customer satisfaction and loyalty by using metrics such as Net Promoter Score (NPS), Customer Satisfaction Score (CSAT), and Customer Effort Score (CES)
- Identify customer needs, pain points, motivations, and expectations using surveys, interviews, focus groups, and reviews.
- Evaluate customer behavior, preferences, feedback, and value using web analytics, social media analytics, customer journey mapping, and RFM analysis.
- Test customer segmentation hypotheses by using techniques such as A/B testing, multivariate testing, split testing, and cohort analysis
- By utilizing customer feedback to refine your segmentation framework, you can ensure that your segments are accurate, relevant, and actionable. You can also discover new opportunities for improvement, innovation, and growth.
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Continuously Evaluate and Update Your Segmentation Strategy
The last step you must remember is to continuously evaluate and update your segmentation strategy.
And it’s for one simple reason – market trends and customer behaviors change. This is why customer segmentation is not a static process but a dynamic one that requires constant iteration and adjustment. How do you do this?
- Track every performance from every segment using KPIs like growth rate, revenue, profitability, retention rate, conversions rate, and churn rate.
- Make a thorough comparison of each segment with your business goals and your set benchmarks.
- Identify each segment’s strengths, weaknesses, opportunities, and threats (SWOT analysis).
- Adjust your segmentation variables if they become irrelevant.
- Add or merge new segments if they become too small or similar.
- Don’t be scared to experiment with new segmentation techniques if they offer better insights and results.
Continuous evaluation and update of your segmentation strategy can help you align each segment properly with your business goals, industry, market, and customers.
Customer segmentation remains a powerful tool that can help any business to improve its CX by creating unique experiences targeted to individual customers.
In this article, we have taken you through a rundown of how to create a customer segmentation framework and what you need to get it going. We highlighted six steps to create and use a customer segmentation framework:
- Collecting data about customers.
- Identifying key segments.
- Creating personas for each segment.
- Tailoring marketing and communication strategies for each segment.
- Personalizing product and service offerings for each segment.
- Using feedback to refine the framework.
Following these steps, you can create a customer segmentation framework that suits your business objectives, industry, market, and customers. You can also use it to improve your CX and differentiate yourself from competitors.