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.
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:
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:
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.
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:
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.
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:
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.
Psychographic customer segmentation divides your audience according to their preferences, opinions, interests, and beliefs. Some of the many ways to do psychographic segmentation include:
Behavioral customer segmentation divides your audience according to their purchasing behavior with your company. Some of the useful ways to perform behavioral segmentation are:
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.
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?
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.
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:
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.
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.
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.
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.
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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