Retail companies are often mired with different decision-making process. Into the bargain, they require data support to make the process less painful. Here is where customer segmentation types help in enabling more powerful and more actionable insights on customers.
Under this context, the customer base is divided into smaller segments to help retailers in better understanding and targeting of customers. This, in turn, helps businesses to set efficient goals.
Segmentation is one of the key strategies for any successful retail organization.
So, what exactly is customer segmentation and how do we achieve its full potential?
Let’s plunge into some major customer segmentation types and strategies to understand how they are helping the businesses across the globe.
Customer Segmentation Types
Behavioural segmentation focuses more on customer habits than the demographics for segmentation. It is one of the major direct output-driven strategies as well.
This type of customer segmentation includes behaviour patterns like:
- First-time purchasers
- Outlier customers
- Active but not engaged
- Lapsed customers
Loyalists are the best customers a retail company can ask for. After the initial acquisition cost, not much of the investment is required. They are also the type of customers who are more vocal about your products and services.
Loyalists could also act as your brand ambassadors. They are not only more likely to refer friends but also spread good word of mouth about your company.
Therefore, loyal customer segment is very important for any customer-centric organization.
As the name suggests these are the new customers.
The reason why they are important is that once you have incurred the cost of acquisition, you would ideally want to retain them as much as possible.
New customers are also essential to help the company monitor change in buying behaviour or new upcoming trends
An outlier customer is one who has either higher than average spending or lower than average spending.
These are the people who may or may not be a loyalist.
Some might have the potential of generating a high revenue while on other hand the below-average spenders are the customers which pose the opportunity to cross and upsell.
Active But Not Engaged (May Lapse Soon)
These type of customers are who are regular in buying from your organization but they do not respond to communications offers, etc.
The churn is higher for these customers hence they should be dealt with care. Loyalists and/or active customers moving into this zone are likely a warning signal to the marketing team, indicating that something is surely broken in the firm’s customer engagement strategy.
The customers who as per the business definition have not made any purchase or interacted with the company as categorized in this segment.
Deep understanding of this segment helps the firm to not only correct past mistakes but also understand the causes of churn.
Another advanced approach to behavioural segmentation is RFM
RFM stands for Recency, Frequency, and Monetary, and is core to advanced behavioural segmentation.
- Recency- when did customer purchase recently (Days, months etc.)
- Frequency- how many times a customer purchases (once a week, once a month etc.)
- Monetary- How much a customer has paid to the business (average of absolute over a period or lifetime)
But there is a catch here, companies need to be aware of creating the buckets of RFM. A customer might be a high-value customer but has a very low frequency and vice versa.
Demographics are the characteristics which offer basic information on your customers and are often considered one of the more general types of segmentation. Demographic segmentation includes gender, age, income, education, occupation etc.
Other demographic segmentation variables may include:
- Marital status
- Primary language spoken
Psychographic segmentation focuses on inner or qualitative traits.
It separates consumers into groups based on shared psychological features, including subconscious or conscious beliefs, motivations, and priorities and this helps the organization to explain and predict consumer behaviour against a particular brand or service.
Psychographic segmentation variables include:
- Habits, hobbies or interests
- Values and opinions
- Personality or attitude
- Social status/ Tech savviness
Psychographic attributes are difficult to measure and monitor. They usually require dedicated studies by specialists. An insightful book relating to this is Martin Lindstrom’s Small Data.
In his book, he explains the criticality of doing right customer studies in the right set up which could otherwise lead to entirely different interpretations.
In his words,
“If you want to understand how animals live, you don't go to the zoo, you go to the jungle.”
― Martin Lindstrom, Small Data: The Tiny Clues that Uncover Huge Trends
Geographic segmentation is the process of segmenting customers based on their actual physical location. This is essential in getting better ROIs on promotions.
This helps not only by grouping customer needs based on geography but also in improving promotion deployment strategies.
Geographic segmentation variables can include:
- Population density
In addition to the above, many custom segments are also created, like an area or a neighbourhood etc.
In a nutshell, just by knowing your customers and responding to their needs and making it central to all your decision-making could do wonders for your business.
Embrace all the discussed customer segmentation types and take your game up by a notch.
If you need help getting started with customer segmentation, feel free to write me a line.
So there you go! Happy Segmenting!