Why Your Assumptions About Customer Segmentation Might Be Wrong

Some business owners have a 'been there, done that' attitude towards customer segmentation. They have collected data, grouped their customers into segments based on age, income, geography or purchases. They occasionally create offers based on their customer segmentation and that is pretty much it.

Unfortunately, these business owners have no idea how much they are limiting the profit potential of their own business by this base line customer segmentation approach.

Think Of Your Customer Segmentation In The Shape Of A Pyramid

You want to start segmenting in a 'top down' approach - based on customer profitability (not customer spending).

You want to approach customer segmentation based on specifics of behaviour NOT generalities of demographics.

You want to start small. Create your customer segmentation, implement a few strategies, test them and adjust accordingly.

You want to include unmet needs and future potential as part of your customer segmentation.

As you can see, each of these approaches requires a kind of 'top down' approach. Start with specifics. Once you get them right, the flow on effect will move easily down your customer segmentation pyramid. Let's look at each one a little more closely.

Segment Based On Profits, Not Sales

Your most profitable customers are your most valuable customers. They are a unique segment that deserves special attention and nurturing. And once you get into the habit of customer segmentation based on profitability you will find that will change the kinds of offers you create and even the kinds of customers you attract. Both will increase in value and overall worth.

Past And Present Behaviour Are The Only Reliable Response Gauge

It is unwise to assume anything based just on demographic. You are better off creating customer segmentation around observed patterns of behaviour, past responses to campaigns and current behavioural trends. RFM (recency, frequency and monetary) is a useful acronym that will help you segment customers based on what they ACTUALLY do rather than what you imagine they might do.

Start small, start specific, start now

Don't wait for your customer segmentation to be perfect. Once you have some meaningful segments (based on a combination of profitability, behaviour, purchase history and other criteria relevant to your business) create small, meaningful offers. Put them out there. Measure the response you get. Dig a little deeper into each segment. Adjust the offer. Try again. Businesses don't fail by trying. They fail when they fail to do anything at all.

Listen, look and anticipate needs

This step is more sophisticated but well worth the effort. For example, a real estate agent has two choices about how to treat the renters on their books. Right now, they are most likely in the lowest profit making segment. But renters become buyers. What customer segmentation strategies could you put in place that focuses on renters in their late twenties who will be looking to buy within a few years?

Customer segmentation golden rule - only put customers in ONE segment

There is nothing that makes a customer feel so invisible as to receive marketing communications that are either not relevant to them or multiple marketing material clearly targeted at two different customer segments.

It is worth taking the time to ensure your customer segmentation allocates each customer to one relevant segment.

It is much easier to manage customer segmentation when you have effective CRM solutions in place. That way you can track behaviour, purchases, profitability and create clean, logical customer segmentation that makes sense not only to you but to your staff.