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Customer segmentation is the practice of dividing a customer base into groups of individuals that are similar in specific ways relevant to marketing, such as age, gender, interests and spending habits. Customer segmentation, also called consumer segmentation or client segmentation, procedures include:
- Deciding what data will be collected and how it will be gathered
- Collecting data and integrating data from various sources
- Developing methods of data analysis for segmentation
- Establishing effective communication among relevant business units (such as marketing and customer service) about the segmentation
- Implementing applications to effectively deal with the data and respond to the information it provides
Companies employing customer segmentation operate under the fact that every customer is different and that their marketing efforts would be better served if they target specific, smaller groups with messages that those consumers would find relevant and lead them to buy something. Companies also hope to gain a deeper understanding of their customers' preferences and needs with the idea of discovering what each segment finds most valuable to more accurately tailor marketing materials toward that segment.
Customer segmentation relies on identifying key differentiators that divide customers into groups that can be targeted. Information such as a customers' demographics (age, race, religion, gender, family size, ethnicity, income, education level), geography (where they live and work), psychographic (social class, lifestyle and personality characteristics) and behavioral (spending, consumption, usage and desired benefits) tendencies are taken into account when determining customer segmentation practices.
By enabling companies to target specific groups of customers, a customer segmentation model allows for the effective allocation of marketing resources and the maximization of cross- and up-selling opportunities. When a group of customers is sent personalized messages as part of a marketing mix that is designed around their needs, it's easier for companies to send those customers special offers meant to encourage them to buy more products. Customer segmentation can also improve customer service and assist in customer loyalty and retention. As a by-product of its personalized nature, marketing materials sent out using customer segmentation tend to be more valued and appreciated by the customer who receives them as opposed to impersonal brand messaging that doesn't acknowledge purchase history or any kind of customer relationship.
Other benefits of customer segmentation include staying a step ahead of competitors in specific sections of the market and identifying new products that existing or potential customers could be interested in or improving products to meet customer expectations.
Not only do companies strive to divide their customers into measurable segments according to their needs, behaviors or demographics but they also aim to determine the profit potential of each segment by analyzing its revenue and cost impacts. Value-based segmentation evaluates groups of customers in terms of the revenue they generate and the costs of establishing and maintaining relationships with them. It also helps companies determine which segments are the most and least profitable so that they can adjust their marketing budgets accordingly.
Customer segmentation can have a great effect on customer management in that, by dividing customers into different groups that share similar needs, the company can market to each group differently and focus on what each kind of customer needs at any given moment. Large or small, niche customer segments can be targeted depending on the company's resources or needs. In B2B marketing, companies are concerned with decision-makers' job titles, the industry sector, whether the company is public or private, its size, location, buying patterns and their technology at their disposal, for example. In B2C marketing, companies are concerned with particular customers' profiles, attitudes and lifestyles.
Approaches to B2B customer segmentation include vertical or horizontal alignments. In vertical segmentation, companies select certain industries or job titles that would likely find their products appealing and then focus marketing efforts on those segments that they feel are most ready to buy. In horizontal segmentation, companies simply focus on one job title across a wide range of industries and organizations.