How Customer Segmentation Can Help Your Business Grow

What is Customer Segmentation?

Customer Segmentation is the process of categorizing your customers into distinct groups based on shared characteristics like age, income, interests, profitability, retention, and more.

Not all customers are created equal - most have different reasons for considering your product or service and different motivations when deciding whether to buy.

• Many consumers are price-sensitive and focused on finding the best value for their money.
• Others are short on time and are willing to pay a premium for faster or more convenient service.
• Some consumers want products and services they can trust and rely on and look for the best option available.

Different types of customers engage with your business differently beyond the initial purchasing decision. Some customers stick around for a few months and switch to a cheaper alternative, while others retain for years or regularly make repeat purchases.

If the types of customers your business attracts feels random, identifying the shared characteristics of your most profitable customers can help you tailor your marketing efforts to attract and convert customers that buy more willingly and more often.

What Data Do I Need to Segment My Customers?

Customer Segmentation is most useful when you have a sufficiently large (at least 50, but a few hundred or more is ideal) list of customers you've acquired in the past as well as key information about them, such as age, income or budget, location, interests, and profitability. At a minimum, you'll want clean data on where the customer came from and their profitability over their lifetime (how much did it cost to acquire them, how often have they purchased, how much did they spend, etc).

There is no one-size-fits-all approach to segmenting customers - the data you use to segment depends heavily on your business and the product or service you offer. You can uncover the most useful data for segmentation by identifying trends in what you already know of your most profitable past customers, or by interviewing past and current customers on their decision-making process.

Customer Segmentation In Action At Root Insurance

Our Root Insurance case study outlines a helpful example of customer segmentation and the data used. At Root, we found that the customers who paid the most and retained the longest were generally...

• middle-aged and older
• married with children
• homeowners with multiple vehicles who bundled their policies
• higher-income with higher credit scores

With this data, we hypothesized that many customers were either price-sensitive and shopped often for the lowest rate, or re-evaluated their insurance needs after major life events like getting married, buying a home/car, or having children.

This clarity allowed us to ensure we were collecting all the data we needed and to start to tailor our marketing efforts on our website, in our advertising, in our communications, and more.

How To Segment Your Customers

1. Start by calculating key profitability metrics for your customers such as acquisition cost, number of purchases, total revenue, and total profit.
2. Pull a list of past customers that includes your key profitability metrics and any additional information you know about your customers. If this data is limited, consider setting up time to talk with your highest profit customers to better understand who they are and why they chose to purchase.
3. Look for trends and associations between high/low profit and characteristics like age, financial status, family status, etc.
4. Identify the key characteristics associated with your best customers and develop a hypothesis as to why these individuals are higher value.
5. Test messaging and marketing strategies oriented to the specific needs and pain points of your high-value customer.

Let Us Know If We Can Help

If you want to explore Customer Segmentation for your business and want a second set of eyes, we'd be glad to help. Click below & complete our form to set up a free exploration call and we'll be glad to walk through your needs with you and see if we're a fit.