5xTwo

The Importance of Customer Segmentation

Hi guys! Thanks for landing on my page and if you’re reading this, that means like myself, you’re curious about marketing.

This year, I’ve set goals for myself to embark on a more structured learning journey (which seems never ending!) to hone my marketing knowledge.

I thought it might be good to start penning down my thoughts on the *most* exciting job in the world today. Hence, I’ve decided to write a series of marketing articles. They simply reflect my thoughts at this point in time. Without a doubt, you’ll find that as time passes, perspectives change and maybe whatever I’ve written would be irrelevant by then. Who knows, right? These days, knowledge can never be absolute, especially with the breakneck speed of technological development. Did I hear the Internet of Things (IoT)? That was so 90s.

Personally, I hope that journalling my learning journey would be an effective way for me to keep track of what I had learnt all these years and if necessary, to unlearn again. Lastly, I wanted to say (here’s the disclaimer!) that the views expressed are of my personal views and they do not constitute any professional advice. If there are any inaccuracies, do highlight them – I would be most happy to take those back and rethink them.

Let’s begin the first of the series: Customer Segmentation.

What is customer segmentation?

Simply put, customer segmentation is the division of an existing customer base into smaller groups where they share similar characteristics. There aren’t any hard and fast rules to segment your customer base, really. It all depends on how you want to communicate to them.

For example, they can be grouped together with the same general profile, purchase behaviour, similar interests, etc. Let’s say if you would like to throw an exclusive, closed-door customer appreciation party for the ones who need some extra TLC (alright, it’s Tender Loving Care, not the American cable TV:)) to encourage them to adopt complementary products in a bid to increase their revenue contribution to your business. At the end of the day, the purpose of segmentation is to make marketing more targeted, so businesses can expect to reap better ROI from their marketing and CRM activities.

The need to do things smartly and effectively

Well, by classifying your customer base into different groups, you will have a higher degree of influence over them, and, the crux of marketing is to know your target audience very well. It is always a good starting point to begin with what you already have, ie your existing customer base. The very act of defining your customer base might give you new insights into the ‘same’ groups of customers you have been serving all along. You might be surprised at the fresh perspectives, and how the devil is in the details.

Also, even if you have a tiny customer base to work with, do press on and complete the initial customer segmentation exercise. My take is that, even if you don’t find segmenting your customer base efficient (given your small customer base), you’ll be thankful that you did at the initial stage of your business because further down the road, having a structured customer database sets you up for a structured and data-driven command centre to launch your marketing activities. Yeah, you can even do A/B tests. Want more marketing mojo? How about a digital campaign to test out your observation/hypothesis of changing online media consumption habits on the same segment? Thus, a well-thought out customer database is critical to proper marketing form, and this applies not just to businesses, but in any organisation.

Therefore, by segmenting our customer base, we are then able to deploy a more structured and scientific approach to marketing and when push comes to shove (in the boardroom), you can always dish out your ultimate weapon – data (remember to smile!).

Not all customers are created equal

I’ve specially selected a photo with distinct red and green subject contrast for this article to illustrate the point that not all things that are similar, are the same. If you think that an apple is just an apple, try talking to a pastry chef. Chances are, s/he will sit you down for a long lecture on how some apples just don’t make the cut for apple pies as they will be too tart, releases too much liquid in the baking process or they disintegrate too quickly with heat, etc.

A master marketer is into the details. You get the point.

What are some useful customer segmentation categories we could use?

Having a “Not-all-Apples-Are-Equal” approach to customer segmentation is a fine start for your business. So, what can we start with? To answer that question, I’ve complied my personal research into a bullet list below:

Common segmentation variables for business-to-consumer (B2C) marketing:

1. Age
2. Sex (it can be gender, depending on the type of product you are selling)
3. Locality
4. Education level
5. Occupation type (employee, self-employed, businessperson)
6. Income bracket
7. Social memberships (also denotes their spending power)
8. Types of products/services purchased (from your business)
9. General interests (sports, health, social causes etc)
10. Transactional (Recency, frequency and monetary value of transactions)

Seeing the need to classify related characteristics, I’ve further grouped them into a more detailed system below here: Points #1-3 can be further grouped into basic demographics, #4-7 can form wallet size (ie what is their spending capacity).

Common segmentation variables for business-to-business (B2B) marketing:

1. Organisation size by sales turnover
2. Organisation size by number of employees
3. Geographic reach
4. Product class
5. Type of organisation – Listed, private, government, non-profit
6. Market capitalisation (or listed companies)
7. Types of products/services purchased (from your business)
8. Transactional (Recency, frequency and monetary value of transactions)
9. Payment (ie when does the company receives payment?)
10. Date (ie date of customer’s last payment)
11. Business memberships

On business memberships: We can also infer certain customer attributes from their memberships or professional affiliations from business associations or networking groups. A good example would be the Fortune 500 membership where the largest 500 US corporations are ranked by their total revenue for their respective fiscal years. Since I’m based in Singapore, I’ll throw in a local example: Singapore 1000, where the top 1000 Singapore corporations and Small and Medium Enterprises (SMEs) are ranked and grouped together by their annual financial performance.

Final thoughts

Well, that’s about it on customer segmentation. If you haven’t got around to start segmenting your customer base, well, it’s never too late. The key to good segmentation is to possess a sense of curiosity and marketing thinking so that one can harness effectively the power of marketing (especially direct marketing) and analytics.

My advice would be to start now: DIY, engage a marketing consultant, or even commission curious folks in your organisation to start looking into ways to segment your customer base – you’ll never know what you might find.

So, go for it!