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The complete guide to customer segmentation

What is customer segmentation?

Customer segmentation is the process of classifying customers into specific groups based on shared characteristics. This allows companies to refine their messaging, sales strategies, and products to target, advertise, and sell to those audiences more effectively.

This approach is used for both Business-to-Consumer (B2C) and Business-to-Business (B2B) marketing. B2C consumer segments are generally based on things like demographics, lifestyle, values, and needs. B2B marketers, on the other hand, tend to segment customers by industry, location, payment terms, or the specific products a company previously purchased.

Why should you segment customers?

Segmenting customers makes it easier for companies to sell their products and services. It is the difference between marketing a product to anyone and everyone, versus tailoring your messaging to address the needs or interests of specific groups of customers. 

Marketers often create buyer personas, or research-backed representations of their ideal customer, for each major customer segment. They will categorize customer groups using demographics, psychographics, shopping behaviors, and purchase motivations. 

Once a company has established buyer personas, it can map out a buyer’s journey that represents the decisions and steps a customer takes before, during, and after a purchase. This enables it to tailor its marketing messaging, branding, and pricing to every step in the journey.

Customer segmentation and vivid buyer persona descriptions bring specific buyers to life, increasing the chances of selling products and reducing the high risk of product failure. Companies use these descriptions to upsell and cross-sell additional products, improve the customer experience, and build overall brand loyalty. Segmenting helps companies identify their best groups of customers, understand which messaging and buying channels they prefer, and sell in a cost-effective manner.

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How to segment customers 

Organizations often segment customers as part of a larger market research effort to understand the opportunities that exist in the marketplace. This includes finding the answers to questions like:

  • How large is the market opportunity for our product or service?
  • How does our brand stack up against the competition?
  • Which demographics are most likely to buy our product or service?
  • Which advertising campaign will resonate best with our target market?

Market research surveys are frequently used to collect detailed data on customer motivations and behaviors. These typically cover questions like:

  • How likely is it that you would recommend this product to a friend or colleague?
  • What do you like most about the product?
  • What do you like most about competing products on the market?
  • What reasons do you have for choosing the product?
  • What are the reasons why you might not purchase the product?

Often, these questions will be asked to the same audience several times over a longer period of time. This is known as a panel survey, which measures changes in customer attitudes and provides valuable insights to marketers.

You can use market research templates and other market research resources to understand why someone buys a product. But you also have to know who will buy the product. This is where customer segmentation comes into play. When you determine the characteristics of people who like and will buy your product, you can effectively divide your customer base into subgroups.

You will need to collect data to segment customers into specific groups. Surveys are a great way to get data related to demographics, purchasing patterns, preferences, and other distinct categories. You can also use interviews, existing customer data, focus groups, and other data collection methods. 

Once you have sufficient data, you can begin categorizing your customer groups. Demographics are a common way to segment customers. You can use surveys to collect data about a customer’s age, gender identity, income level, educational degrees earned, and marital status. Depending on your research goal, customer segmentation questions may also address who makes purchase decisions in the household, what lifestyle challenges they have, and similar purchase behavior details. These are a few examples of groups you can survey through SurveyMonkey's Audience panel:

General population

General Population (Medium Sample)

  • All Genders (Census)
  • All Ages (Full Census)
  • All Incomes
  • 500 Responses, United States (USA) - SurveyMonkey
Full-time employees

Full-Time Employees

  • All Genders (Census)
  • All Ages (Basic Census)
  • All Incomes
  • Employed Full-time
  • 250 Responses, United States (USA) - SurveyMonkey
Consumer shopper

Consumer Shoppers

  • All Genders (Census)
  • All Ages (Basic Census)
  • All Incomes
  • Primary Decision Maker in Household
  • 250 Responses, United States (USA) - SurveyMonkey

Based on the answers to these questions, you can define specific customer groups that will (and won’t) buy your products.

Once you have segmented your customers, you can work on targeting those groups. However, people often confuse segmenting and targeting. Segmenting is when you create multiple groups of people who have common traits. Targeting is when you focus on a particular segment or segments because they have a higher potential of buying your products. 

For instance, you might have a new type of tea to sell. Your customer segments might include people of different demographics who drink tea for health benefits, for a caffeine boost, or as an inexpensive alternative to soda. 

You will need to understand which customer segment is likely to buy your new tea. Demographics and behavior traits will help you define the right customer segment for your product. Both B2C and B2B companies use this approach to clearly identify the customer segments who will have the highest probability of sales.

However, to define your target audience, you will need to answer questions that further clarify your customer segment and how you might sell to them. Questions include:

  • Are you selling to individuals, businesses, or both?
  • Approximately how many people are in your target audience?
  • How many people or companies currently provide a product similar to yours?
  • How competitive is the market for your product?

Now you can create a survey for your target audience and include questions like:

  • How often do you drink hot or iced tea?
  • How often do you shop online?
  • How interested would you be in a tea delivery service?

When conducting a survey, you will want to make sure that you sample the right number of people in your customer segment. For instance, you might want a representative sample of 30 million people to see if they will buy your tea. Depending on your target audience, you might find that 400 survey responses from your target audience will provide the insights you need.

By using statistical sampling, screening questions, and appropriate questions, you will get the survey data you need to see if your tea will be a big seller.

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Example customer segmentation models 

Customer segmentation involves dividing people into groups according to common traits. To accomplish that, marketers use customer segmentation models that define which criteria best describes the ideal audiences who will buy their products. 

Companies gather customer data, market research survey results, purchase transactions, current trends, competitor analysis, and other information that will help them categorize buyers into distinct groups. Automation has made collecting data about their existing customer base and potential customers easier to collect and analyze.

The segmentation model used will depend on the products and services sold. These models are used for both B2C and B2B customers as well as for other segmentation purposes like public opinions and employee perceptions. Customer segmentation types include demographic, geographic, psychographic, technographic, behavioral, needs-based, and values-based approaches.

Geographic segmentation

Geographic segmentation refers to where customers live and work (for B2C) or where businesses are located (for B2B). There are six factors that are commonly used to perform geographic segmentation:

  1. Geographic location (state, city, zip code, region, province)
  2. Timezone
  3. Climate
  4. Cultural or religious preferences
  5. Languages spoken
  6. Population characteristics (urban, rural, population density)

Geographic segmentation is especially useful in advertising, particularly by U.S. zip code. Local businesses can more easily advertise their services, both in print and online advertising, by using specific zip codes that are nearby.

This type of segmentation is also useful because customers in different geographic areas have specific tastes. For instance, McDonalds sells beer at its restaurants in Europe and South Korea, but not in the U.S. McDonalds also sells lobster rolls in six Northeastern U.S. states, near the Atlantic coastline.

Demographic segmentation

Demographic customer segmentation is frequently used to divide people into groups based on their personal and lifestyle characteristics. This may include:

  • Age
  • Gender identity
  • Income
  • Ethnicity
  • Occupation
  • Religious affiliation
  • Household structure
  • Education

Demographics are commonly used for audience targeting, especially for market research surveys. Audiences with similar preferences or identities represent potential customers, making it easier to perform concept testing, check pricing sensitivity, and evaluate marketing messaging.

Psychographic segmentation

Psychographic segmentation focuses on psychological characteristics like personality, attitudes, social status, lifestyle, and opinions. Creating customer segments based on these characteristics helps shed light on what consumers really think about your products or services. 

When performing market research, psychographic surveys are used to gather data to  understand not just buying behaviors, but the motivation behind those behaviors. 

Psychographics are often included in buyer personas, providing information about what consumers want, how they view your products, and what gaps you need to address in order to improve your messaging, products, or customer experience. 

Behavioral segmentation

Behavioral segmentation is all about grouping customers based on their actions, rather than their characteristics. It helps uncover not just who customers are but how they behave when they interact with a company or complete a purchase. 

Homing in on customers’ habits, tendencies, and actions often involves analyzing their purchasing behavior. What steps do they go through? What is necessary for them to complete a purchase? What obstacles stand in the way of their purchasing decision?

Four factors that can influence consumer behavior include:

  • Purchase behavior - what happens when they make a purchase?
  • Occasion and timing - which audience will buy via store, mobile app, or website?
  • Benefits desired - what value proposition or benefits are they hoping to get?
  • Customer loyalty - how committed are they to your brand or loyalty program?

Behavior doesn’t stop once a customer has paid for your product or service. Behavioral segmentations goes further to consider:

  • Customers’ stage in the customer journey
  • Their level of engagement with the product
  • Their satisfaction level with the purchasing process

Through behavioral segmentation, you can understand what your customer experiences at the point of purchase, identify cross-sell or upsell opportunities, estimate the overall value to your business, and design a strategy that optimizes your buying experience.

Behavioral segmentation is frequently combined with demographic, psychographic, and other models to create a more comprehensive customer segmentation analysis.

Technographic segmentation

Technology has a major influence on how consumers and businesses buy products and services. Technographic segmentation identifies what applications and devices are part of the purchasing decision.

For B2C customer segmentation, marketers must consider what apps and devices people use to purchase products and incorporate those technologies into the sale. Customers who purchase products via a phone app may differ from those who buy instore or online from a website. Each technology characteristic must be considered as part of the sale.

For B2B sales, customer segmentation can include what tech stack is used by customers, including CRM software, marketing automation tools, frequently used applications, and emerging technology. When combined with location, industry, and customer base information, technographic segmentation data increases the effectiveness of reaching specific target specific audiences.

Needs-based segmentation

Needs-based segmentation helps marketers further refine their customer segments by focusing on how consumers get their emotional and practical needs met. Market segmentation surveys are helpful for gathering this kind of qualitative information about consumers’ must-haves. 

Emotional needs frequently center on:

  • Attributes and product characteristics
  • Functional benefits of products and services
  • Emotional benefits
  • Values met

Through surveys, consumers reveal which product features meet their needs. Understanding these needs and how they translate to customer pain points helps you create products that solve problems for specific customer segments. 

Specific messaging, value propositions, and better engagement are all benefits of needs-based segmentation. Panel surveys will reveal if companies are successfully meeting those needs not just once, but over a longer period of time.

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Values-based segmentation

Values-based segmentation focuses on what value customers get for the money they pay for a product or service. It has a direct impact on a product’s price and what economic value it provides.

Grouping customers with similar economic values helps companies understand the price sensitivity of a product or service. Sellers can compare what price customers are willing to pay with their production costs to determine the potential profitability of a product.

Combining values-based segmentation with other segmentation models will help you determine why people buy your products, which needs will be met, and what price customers are willing to pay for the value they receive.

How to develop your customer segmentation strategy

Your marketing strategy will guide you in developing your market segmentation goals. Your project goals may include brand repositioning, launching new marketing campaigns, understanding how new employees perceive your company, or if B2B customers would use a newly developed app. A clear project goal will make it easier for you to identify your customer segments and select your target audience.

Many marketers formulate their customer segmentation strategy with the STP approach: Segmentation, Targeting, and Positioning. 

Segmentation will divide your market into specific groups using customer segmentation models. Demographics, psychographics, technographics, behavioral, needs-based, and value-based models are all ways to segment your customer groups. These models can be used individually or combined to divide customers into multiple groups that have common traits.

Targeting will involve choosing which customer group(s) you want to target—this is usually based on which segment is most profitable or most likely to convert. Once you have a target audience, it is easier to focus your marketing efforts and conduct further surveys to understand specific problems and interests. Targeting a large audience before you segment it into groups can result in confusing and inaccurate results.

Positioning will require you to identify the best ways to position your product, service, or brand to appeal to the customer segments you’re targeting. If you’ve surveyed your target audience, you can use the insights you uncovered to determine your value proposition and what sets you apart from competitors. Survey data on customers’ behavior, needs, or opinions will also help reveal the best way to and reach your audience. From there, you can improve your positioning using the 4 Ps of marketing: product, price, promotion, and placement. 

Focusing on a specific group of customers who are willing to buy your product will allow you to build marketing campaigns that are personalized and effective. The STP strategy helps you create messaging, branding, and packaging that appeals to their specific needs and expectations.

Surveys offer a quick, cost-effective way to create a solid customer segmentation strategy, target your customers, and get market insights for your next product launch. Whether you’re a big company or a startup from your kitchen, you’ll get a better understanding of who your customers really are, what they need, and how you can better serve them.

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