Segmenting Customers by the Five W’s
Segmenting customers can seem daunting: Where do you start and how do you segment? While the answer depends on your goals and products, it can be helpful to think in terms of the five W’s (who, where, what, when, why, and how) when segmenting.
1Who are your customers?
At the most basic level, you should know the demographics of your customers. Characterizing customers based on demographics is the simplest and easiest way to start segmenting. Demographic questions are not subjective: They give you real, verifiable information about your customers.
The core who demographic subjects include: gender, age, income, education level, occupation, marital status, and dependents.
Knowing these basic demographics is interesting in itself. The figure displays two core demographics, gender and age, for a photography company. The data came from 4,000 responses to a customer survey.
When analyzing demographic customer data, one strategy is to understand where your customer segments are disproportionate relative to the total population. In comparing this age distribution to the latest U.S. Census data, the age groups from 25 to 60 represent a higher percentage than the general U.S. population.
While this age range is a bit wide, it can still narrow the focus of marketing activities and product strategies to this age range. It may also suggest to the company that there is an underserved market for younger and older photography enthusiasts.
2Where your customers live.
Knowing where customers live isn’t just an exercise in placing pins on a map. Instead, it’s about understanding the geographic diversity or concentration of your customers. It helps with locating better business locations, decreasing delivery time/distance, and so forth. If most of your customers live far away from your physical location, you may decide to open a new location that is closer to them.
Geographic attributes can include: rural versus urban, domestic versus international, city names and market size, regions and states, and zip codes.
The figure shows the locations of customers who participated in a study, which enabled the company to see the urban concentration and geographic diversity of the participants.
3What have customers done, what are they doing, what are they thinking, and what are they likely to do?
In thinking about the what, you should think about past, present, and future. The easiest place to start is the past. What have customers done that distinguishes them? If helpful, think in terms of recency, frequency, and monetary value (revenue and profits) for segments: most recent purchase, total number of transactions, product experience, total revenue and profit, and so on.
From the answers to these questions, you learn how your customers interacted with your business in the past, and who your best customers were. Comparing this data with the data from other W’s, you will be able to identify the characteristics of your least and most profitable customers.
For example, the figure shows the amount of experience customers have with a software product used for drawing and design. The responses from almost 2,000 customers reveal that most customers have more than ten years of experience using the product.
Understanding the context, goals, and motivations of customers will help you to identify gaps in product features and opportunities for improvement. Use segmenting to define key areas such as motivations, experience level, and goals.
A customer who uses only a few features of a software product has different needs than a power user who uses all the functionality. Power users may be more interested in new features and upgrades than the more occasional or novice user.
Look to identify attitudes and psychographics that differentiate lifestyles, values, technology, personalities, overall product satisfaction, and investing habits.
These questions are more subjective than objective, but are nonetheless fundamental. For example, if a majority of your customers typically wait until all their friends have a technology before making a purchase (tech laggard) then marketing that emphasizes cutting-edge technologies won’t be appealing.
You also want to think in terms of long-term relationships and the lifetime value of a customer. Using a combination of surveys and past behavior can help you estimate the likelihood to recommend to friends and the likelihood to repurchase.
This helps you identify the customer segments with whom you can reasonably expect to benefit from long-term relationships. Identifying loyal customers is instrumental in keeping them. Offering perks such as discounts when using your company-brand credit card, participation in sweepstakes, or free products and services for their loyalty is an effective way to get customers to choose your company over the competition.
4When do you have customers?
There are often significant differences in the types of customers you have, based on when you measure: Christmas shopping versus other times of the year, weekends versus weekdays, after a major life event, daytime versus evening, or around periodic activities.
5The why is pretty obvious, isn’t it? The customer wants or needs what you have to offer!
Customer segmentation can help answer many business questions. Among those include: What are your customer segments and how are they defined? How many distinct groups do you serve — and how are they different? What customer segments deliver the most revenue and profit? What products and services appeal to which customer segments? How can you tailor communication to better address customers’ needs? Which consumers tend to shop/interact exclusively online and why? How and where should you leverage your customer loyalty program further?
6How do customers interact with the product or service?
Knowing how customers already interact with your business gives insight into what can be improved and what is already working to its full potential.
It isn’t essential to collect every one of these attributes about your customers: Some may not apply and some may not make a huge difference. It all depends on the kinds of products or services you offer and the goals you have in mind.
Are you looking for an optimal store location to reach wealthy clientele? Focus on geographical and demographic questions to identify where the well-to-do segment of your customer base resides or shops. Use your judgment and knowledge of your own business to pinpoint the attributes that are the most meaningful to your study.