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November 19, 2019

How Customer Segmentation Can Improve Online Sales: The Ultimate Guide

Introduction

Making smarter use of your customer data should be the goal of every business, from tiny startups to massive multinational firms. According to a McKinsey & Company study, “intensive users of customer analytics” are 23 times more likely than their competitors to excel at acquiring new customers, and 19 times more likely to be highly profitable.

Unfortunately, implementing a high-powered customer analytics solution that delivers cutting-edge insights is easier said than done. While 74 percent of companies say they want to be a “data-driven” organization, just 29 percent believe they have achieved this goal.

Customer segmentation is an essential analytics tool for companies of all sizes and industries who want to better understand their clientele. Through smart, judicious use of customer segmentation techniques, e-commerce stores can boost their revenues and audience, turning prospects into buyers and buyers into repeat customers.

But what is customer segmentation for e-commerce, what are the benefits of using it, and how can you best implement customer segmentation for your e-commerce store? In this all-in-one guide, we’ll discuss everything you need to know about improving online sales with customer segmentation.

What is Customer Segmentation?

It’s a truism that every person has their own unique needs, goals, and desires. The life of a 21-year-old single mother from Arkansas is very different from that of a 45-year-old businessman who lives in New York City, and those differences are reflected in their media consumption and purchasing habits.

Clearly, the “one size fits all” approach is inappropriate for nearly every marketing campaign. The basic concept behind customer segmentation is the recognition that your audience is highly variable in terms of factors such as:

  • The most important benefits that they see in your product
  • The needs that they want to address by using your product 
  • The amount of discretionary income that they have
  • The type of marketing language that best resonates with them

Customer segmentation is defined as dividing your customer base into multiple subsets or segments, based on certain shared characteristics, in order to better understand and communicate with them.

Traditional marketing methods such as TV and magazine ads are able to use a limited degree of customer segmentation. Marketers first seek to determine which types of customers (like the all important “18-49 demographic”) are most likely to watch certain shows or consume a particular piece of content, and then tailor their messages accordingly.

The digital revolution, however, has unlocked new heights for customer segmentation tools an techniques, helping online sales and marketing campaigns be more powerful and effective. E-commerce stores now possess more data than ever before about their customers and potential customers, helping them tailor their messages to different situations and segments.

The benefits of customer segmentation include:

  • Greater profits: By segmenting your customers, you can identify which groups are most profitable for your business and devote greater effort to winning them over. Bain & Company found that organizations with great customer segmentation had 10 percent higher profits over a five-year period.
  • Higher customer retention: Another study by Bain & Company found that increasing customer retention efforts by just 5 percent can improve profitability by 25 to 95 percent. Customer segmentation helps you deliver more personalized messaging and identify your customers who are likely to depart (e.g. those who haven’t used your service in a while), so that you can work on bringing them back into the fold.
  • Better products at better prices: Customer segmentation will help you understand who makes up your customer base, what kind of products they want to buy, and how much they’re willing to spend. You can take the lessons learned from customer segmentation, apply them to the design and development process, and then offer your products and services for the right price point upon release.

4 Ways to Segment Your Customers

Theoretically, you could break up 1,000 customers into 1,000 different customer segments, with each customer constituting a different segment. Of course, such a classification would be next to worthless for sales and marketing purposes.

Customer segments need to be large enough to be meaningful, yet small enough to be useful—presenting one or more points of distinction that separates them from the rest of your customer base.

While each business will have its own unique customer segments, there are four types of customer segmentation that e-commerce marketers typically agree on: demographics, geographics, psychographics, and behavior.

1. Demographics

Demographic customer segmentation divides your audience according to customers’ demographics, making the assumption that these groups will have similar purchasing patterns and interests. This includes variables such as:

  • Age
  • Gender
  • Marital status
  • Children
  • Race or ethnicity
  • Religion
  • Language
  • Nationality
  • Job title
  • Income

Depending on the product or service, demographic customer segmentation can be very effective, or it may have better results when combined with other forms of segmentation.

Most clothing retailers, for example, sell products that are highly segregated by age and gender, which makes demographic segmentation a wise choice.

On the other hand, demographic segmentation may only be weakly effective when attempting to capture a certain segment that is not exclusively defined by demographics: for example, marketing a smartphone with a high-quality camera to photography enthusiasts.

2. Geographics

Geographic customer segmentation divides your audience according to customers’ geographical location. The geographic factors below may all influence which customer segments you market to and how you do it:

  • City
  • State
  • Area (urban, suburban, rural)
  • Region
  • Country
  • Supranational regions (e.g. Latin America, Asia)
  • Climate

One popular use case for geographic customer segmentation is the fast food industry. Geographic factors influence both the menus that restaurants offer and the way in which they market their food, based on the tastes of the local population. For example, McDonald’s serves beer at many of its restaurants in Germany, and also operates more than 50 kosher restaurants in Israel.

3. Psychographics

Psychographic customer segmentation divides your audience according to their preferences, opinions, interests, and beliefs. Some of the many ways to do psychographic segmentation include:

  • Personality traits: The “big five” personality traits (openness, conscientiousness, extraversion, agreeableness, and neuroticism) are often used to assess a person’s personality for sales and marketing campaigns. For example, if an outdoors equipment retailer finds that most of its customers are introverted, they might prefer marketing images that show people alone in the outdoors, rather than accompanied by other people.
  • Opinions, attitudes, and beliefs: These factors heavily influence customers’ shopping and purchasing behavior, even subconsciously. Customers who care strongly about the environment, for example, will likely be attracted by a marketing campaign emphasizing that your product is made from recycled plastic.
  • Values: Different people have different core values that they prioritize in their lives, such as creativity, reliability, patriotism, and compassion. A company with many customers who value patriotism, for example, might capture this sentiment by using patriotic imagery like U.S. flags and bald eagles, or by offering sales on national holidays and discounts to military veterans.

4. Behavior

Behavioral customer segmentation divides your audience according to their purchasing behavior with your company. Some of the useful ways to perform behavioral segmentation are:

  • Customers who spend the most money
  • Customers who only buy during sales or during the holidays
  • Customers who are extremely loyal to your business
  • Customers who have only placed one order
  • Customers who read your email newsletters

Once you separate customers into these behavioral groups, it becomes much easier to target them with tailor-made messages and campaigns. For example, you can incentivize one-time customers to come back to your business by offering them a discount code on their next order.

5 Steps for Effective Customer Segmentation

We’ve discussed how to segment your customers based on demographic, geographic, psychographic, and behavioral factors—but how can you get started with customer segmentation for your own business?

1. Get buy-in from key stakeholders

As with every major IT project, a customer segmentation initiative needs buy-in from key stakeholders such as managers and the C-suite. The first step is to draw up a plan that includes the project’s objective, scope, and deliverables.

When pitching your case, focus on the bottom line that executives can best appreciate, with facts and figures to support your argument. Mention the benefits that the project is expected to have—e.g. higher profits, more focused marketing, and greater customer retention.

2. Establish the basics

Once you’ve gotten approval for the project, the next step is to draw up a list of the customers (and perhaps potential customers) that you want to segment into different groups. Applications such as customer relationship management software (CRMs) and customer data platforms (CDPs) are extremely useful for capturing customer profiles and transaction history.

You also need to settle on metrics and KPIs (key performance indicators) for the initiative, as well as a mathematical formula to assess a customer’s value. Some of the most relevant KPIs for a customer segmentation project include:

  • Net Promoter Score (NPS): The Net Promoter Score is a number between -100 and 100 that measures how loyal a customer is and how willing they are to recommend your services.
  • Retention rate: This KPI measures the percentage of customers who continually return to your business after making an initial purchase. 35 percent is generally considered a “good” retention rate for e-commerce websites, but calculate your own retention rate before you begin to use as a baseline.
  • Lifetime value (LTV): A customer’s lifetime value measures the total profit that they are expected to generate for you during their relationship with your business.

3. Run focus groups and surveys

Focus groups, interviews, and surveys are an essential part of customer segmentation. They can help measure the suitability of the various segments you propose, as well as capture the elusive psychographic data that is difficult to obtain through indirect observation.

Use this opportunity to brainstorm the relevant characteristics of your customer segment and create hypotheses about the most effective ways to divide the audience. At the end of this process, you should come up with roughly four to eight possible segments that you believe identify the most meaningful differences in your customer base.

4. Collect data and crunch the numbers

It’s now time to put your ideas to the test and apply what you’ve learned by creating targeted messages and campaigns for your chosen customer segments. Before you begin, understand which types of data are available to you, and how you plan to use them for analysis.

Depending on your current tech stack, you may want to make changes to your website or purchase new software in order to collect the data you need. CRMs, CDPs, and web analytics software are all extremely powerful tools for customer segmentation.

5. Review and refine

The last stage is to take a step back and look at your customer segmentation results thus far. How have your hypotheses been validated or denied by the analyses that you’ve run? Are there any assumptions you need to cast out, or any further research that needs to be done?

Customer segmentation is an ongoing process that’s never finished as your business continues to grow and evolve. Take the time to reevaluate your segments and marketing campaigns at regular intervals for any potential improvements that can be made. 

Conclusion

The first rule of marketing is to know your customer. Unfortunately, too many companies break this rule by adopting a coarse “one size fits all” approach to their marketing campaigns, failing to  account for the nuances and divisions in their customer base.

Customer segmentation helps you build more focused and refined strategies for appealing to different groups of customers, creating curated and even personalized content. The benefits of customer segmentation speak for themselves: higher profits, greater customer satisfaction and loyalty, and improved retention rates. 

About Eniture Technology

Eniture Technology specializes in helping e-Commerce merchants grow by providing useful information, digital marketing services, off-the-shelf apps that solve common problems, and custom programming services. Please contact us if you need help growing your online business or implementing the concepts presented in this blog post.

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