Why Segment Customers in Analytics?

By Jeff Sauro

Customer segments enable you to understand the patterns that differentiate your customers. However, collecting and analyzing data just to understand patterns and differences is not useful unless you’re going to do something with the information. Analyzing customer segments enables you to customize your products, services, prices, and marketing strategies to better increase profitability and customer satisfaction for your segment. Some of the valuable results of segmentation enable you to effectively:

  • Identify the most and least profitable customers. All customers are not created equal. An examination of revenue by customer segment usually reveals that a minority of customer segments is responsible for the majority of profits. This is called the Pareto Principle.

    Identifying more profitable segments allows you to focus your efforts on keeping these customers happy while increasing their purchases. What’s more, segmenting can reveal underserved customers for whom specially designed and marketed products or services can be created.

  • Improve marketing focus. Segments often have different interests, values, tastes, and reasons to purchase what you offer. Vastly disparate segments may not respond to the same marketing messages or campaigns.

  • Predict future purchase patterns. Knowing that certain customers are more likely to purchase other products based on past purchases helps with planning and marketing. If you’ve ever watched a show on Netflix or purchased a book on Amazon, then you’ve seen the value of segmenting to predict and encourage future purchases.

    This practice is called predictive analytics.

  • Build loyal relationships. Fully meeting the customers’ expectations through customized service and uniquely designed products at a price they can afford helps build customer loyalty. Loyal customers are more likely to do business with you again and recommend you to their friends and colleagues.

    In addition, segmentation may reveal what kinds of incentives cause each segment to choose your business over the competition over and over again.

  • Price products differently. Why lose money by reducing prices if some customers aren’t motivated by price? By acquiring an in-depth knowledge of customer motivations and gauging how much they are willing to spend (price sensitivity), you can develop more effective pricing strategies.

  • Develop better products and customize products or service features. Segmentation provides the knowledge you need to tailor your products and services to maximize your profits within each segment:

    • Do you lose sales because your product lacks prestige for the target segment?

    • Is the product’s large number of features making its price prohibitive?

    • Are customers more interested in the competition’s products because it has better features?

    • Do you need to develop a whole new line of products?

    Properly customizing products for each segment becomes easier as more understanding of the target segments is acquired.

  • Create personas. A persona is a fictional person who represents the characteristics and goals of a customer segment. Personas are used to help make better product development and marketing decisions.

This list is not exhaustive. The advantages of segmentation depend on the type of product or service you offer. Once you become more acquainted with the process of segmenting and researching your customers, you will find which ones apply to your business and possibly discover other unexpected advantages. For now, identifying a few objectives and positive outcomes is a good place to start.

One of the first steps to take in customer segmentation is to think about what makes sense for your organization. Is the gender of a customer something that determines what products he or she buys or is it the time of purchase? Or is gender just a proxy for another important variable?

For example, an online sports website typically has men purchasing shirts and jerseys most of the year. During the Christmas shopping season, however, the gender balance shifts to women. Is that because women start appreciating sports around the holidays or are customers purchasing gifts for the men in their lives? Gender in this case is just a proxy for the time of purchase.

As another example, airlines want to segment their customers by how frequently they fly. A customer who flies once a year for pleasure is different from a customer who flies over a hundred thousand miles a year for business.

The occasional traveler spends a lot less money with the airline, less time on the website and with customer service, but also has different needs and expectations. Email marketing and promotions should be tailored differently to both types of travelers. While airlines, like most companies, want to retain as many customers as possible, some segments are more valuable in terms of annual and lifetime revenue.

It is helpful to decide what you want to know about your customers before starting. While the type of product or service determines the customer attributes that are worth segmenting, there are some fundamental attributes most organizations should be familiar with. These are key areas on which data should be collected.