Customer Segmentation Models: Strategy, Analysis & Benefits

When it comes to customer segmentation models, there is no one-size-fits-all solution. Every business is different, and each has its unique customer base.

That’s why it’s so essential to create a customer segmentation model that works for you. In this blog post, we’ll talk about how to do just that. We’ll discuss the different types of customer segments, and we’ll give you tips on how to create a model that will help you reach your target customers.

What Is Customer Segmentation? 

Customer segments are groups of customers who share common characteristics. These characteristics can be based on demographics (age, gender, location), psychographics (lifestyles, interests), or behavioral data (purchasing habits, engagement levels). Segmenting customers is a great way to target your marketing efforts and create a more personalized experience for your customers.

Customer Segmentation refers to the process of dividing your customers into specific customer segments or groups based on factors like demographic data, interests, and spending habits. By segmenting your customers in this way, you can create more targeted marketing campaigns and improve your chances of success.

What Are Customer Segmentation Models?

Customer segmentation models are frameworks used by businesses to divide their customer base into distinct groups, or segments, based on various characteristics and behaviors. This allows for more targeted marketing, product development, and customer service strategies.

Customer Segmentation Models

There are many different customer segmentation models that businesses can use.

Selecting the ideal model for your company depends on the specifics of your customer journey and the distinct types of customers you aim to target. Understanding these factors can help you choose a segmentation strategy that aligns perfectly with your business objectives.

Demographic Segmentation

Demographic customer segmentation models group people based on their demographic information, such as age, gender, income level, or education. This type of customer segmentation is used by companies that offer products and services to different types of customers (e.g., men vs. women). 

For example, a company may want to target men ages 18-35 who have an annual household income between $30K-$50K. This customer segment has the highest purchasing power for its product/service offerings. A business would then use demographic customer data to create marketing campaigns tailored specifically for those groups with relevant content about how their brand can help them achieve what matters most in life – spending more time with family members or getting out there and doing things they love.

E-commerce Benefit

The Demographic Customer Segmentation Model offers significant benefits for e-commerce businesses by allowing them to tailor their marketing efforts and product offerings to specific customer groups, thereby improving customer engagement and increasing sales.

For example, an e-commerce store called “FitLife” that sells fitness apparel and equipment can leverage demographic segmentation to better serve its diverse customer base. By analyzing demographic data, FitLife identifies its key segments:

1. Young Adults (18-25): This group is targeted with trendy, affordable workout gear and beginner-friendly fitness equipment. FitLife uses Instagram and TikTok to showcase stylish products and fitness tips through influencers popular with this age group. Additionally, they run campaigns featuring energetic content that resonates with the youthful and dynamic lifestyles of this demographic.
   
   
2. Busy Professionals (30-45): This segment is offered premium, high-performance athletic wear and advanced home gym equipment. FitLife targets them with LinkedIn ads and email newsletters that emphasize the convenience and quality of their products, along with articles on maintaining fitness in a busy lifestyle. They also highlight time-saving features and benefits, such as quick-dry fabrics and compact, multifunctional home gym setups, appealing to professionals with tight schedules.

Geographic Segmentation

Geographic customer segmentation models group people based on their location. This type of customer segmentation is used by companies that offer products and services to different types of customers (e.g., local vs. international).

For example, a company may want to target customers in the United States interested in outdoor activities because they have identified this as an important market niche. A business would then use geographic customer data to create marketing campaigns tailored specifically for those groups with relevant content about how their brand can help them enjoy the outdoors within their own country or region.

E-commerce Benefit 

The Geographic Customer Segmentation Model is vital for localizing marketing efforts, adjusting pricing and shipping strategies, and promoting region-specific deals or products. This approach helps e-commerce businesses cater to the unique needs and preferences of customers based on their geographic locations, leading to improved customer satisfaction and increased sales.

For example, an e-commerce store called “EcoHome” that sells sustainable home goods can use geographic segmentation to enhance its marketing strategy:

1. Coastal Regions (e.g., California, Florida): For customers in coastal areas, EcoHome can emphasize products designed for beach living, such as eco-friendly outdoor furniture, water-resistant home accessories, and solar-powered gadgets. Marketing efforts can include region-specific promotions, such as discounts during peak beach season, and targeted ads on platforms popular in these regions. EcoHome can also adjust shipping strategies to ensure timely delivery to coastal customers.
   
   
2. Cold Climate Regions (e.g., Northern USA, Canada): In colder areas, EcoHome can focus on promoting items like energy-efficient heating solutions, insulated window treatments, and cozy, sustainable textiles. Marketing campaigns might feature region-specific content, such as tips for staying warm and reducing energy consumption in winter. EcoHome can also offer special winter deals and adjust pricing to account for increased shipping costs during harsh weather conditions.

Psychographic segmentation

Psychographic customer segmentation models group people based on their psychological characteristics, such as personality traits, values, and interests. This type of customer segmentation is used by companies that offer products and services to different types of customers (e.g., introverts vs. extroverts).

For example, a company may want to target creative people who love traveling because they have identified this customer segment as having the highest purchasing power for its product/service offerings. A business would then use psychographic customer data to create marketing campaigns tailored specifically for those groups with relevant content about how their brand can help them express themselves creatively while exploring new destinations worldwide!

E-commerce Benefit

Psychographic segmentation allows for deeply personalized marketing strategies that connect with the core values and interests of consumers, potentially increasing loyalty and brand advocacy. By understanding the psychological traits, lifestyle choices, and values of their customers, businesses can create highly relevant and compelling marketing messages.

For example, an e-commerce store  that sells health and wellness products can use psychographic segmentation to enhance its marketing approach:

1. Eco-Conscious Consumers: These customers prioritize sustainability and environmentally-friendly products. WellnessLife can highlight its range of eco-friendly products, such as biodegradable yoga mats, reusable water bottles, and organic skincare items. Marketing efforts can include educational content about the environmental impact of their purchases, shared via blogs and social media. Additionally, WellnessLife can participate in eco-friendly initiatives and partner with green influencers to strengthen its brand image.
   
   
2. Mindfulness Practitioners: This segment includes individuals who focus on mental well-being and mindfulness practices. WellnessLife can offer products like meditation aids, essential oils, and stress-relief tools. Marketing campaigns might feature calming visuals, guided meditation videos, and mindfulness tips, distributed through email newsletters and platforms like Pinterest. Collaborations with mindfulness coaches and wellness experts can also enhance the brand’s appeal to this audience.

Behavioral Segmentation 

Behavioral customer segmentation models group people based on their behavior, such as purchase history or engagement with your website or social media channels. This type of customer segmentation is used by companies that offer products and services to different types of customers (e.g., customer loyalty program members vs. non-members). 

For example, a company may want to target people who have purchased from them before because they have identified this customer segment as having the highest purchasing power for its product/service offerings. A business would then use behavioral customer data to create marketing campaigns tailored specifically for those groups with relevant content about how their brand can help them achieve what matters most in life – whether finding ways to stay fit or saving money on groceries every month through our rewards program!

E-commerce Benefit

Behavioral segmentation allows businesses to understand customers’ non-purchase behaviors, such as browsing habits, engagement with content, and interaction with marketing channels. This understanding helps in crafting informative content and recommendations that guide customers towards a purchase, addressing their concerns and questions through tailored communications, thereby increasing the likelihood of conversion.

For example, an e-commerce store called “TechGadgets” that sells electronics and gadgets can use behavioral segmentation to enhance its marketing efforts:

1. Abandoned Cart Users: This segment consists of customers who add items to their shopping cart but do not complete the purchase. TechGadgets can send automated follow-up emails reminding them of the items left in their cart, possibly offering a discount or highlighting the benefits of the products. Additionally, addressing common reasons for cart abandonment, such as high shipping costs or unclear return policies, in these communications can help alleviate concerns and drive conversions.
   
   
2. Seasonal Shoppers: Customers who tend to make purchases during specific times of the year, such as holidays or back-to-school season, fall into this segment. TechGadgets can create seasonal marketing campaigns with targeted promotions and special deals aligned with these shopping periods. Sending timely reminders and showcasing seasonal bestsellers can attract these customers and boost sales during peak periods.

RFM Segmentation

RFM customer segmentation models group people based on their recency, frequency, and monetary value (RFM) of purchases from your company. This type of customer segmentation is used by companies that offer products and services to different types of customers (e.g., high-value vs. low-value). 

For example, a company may want to target people who have made recent purchases because they have identified this customer segment as having the highest purchasing power for its product/service offerings. A business would then use RFM customer data to create marketing campaigns tailored specifically for those groups with relevant content about how their brand can help them save money or get rewarded for their loyalty!

E-commerce Benefit 

This segmentation model allows for highly targeted marketing efforts, personalized communication, and strategic resource allocation, ultimately leading to enhanced customer loyalty, increased retention rates, and optimized marketing ROI.

For example, an e-commerce store called “StyleChic” that sells fashion apparel and accessories can use RFM segmentation to optimize its customer retention strategy:

1. At-Risk Customers: Customers in this segment used to purchase frequently and spend a lot but haven’t shopped recently. Identifying these customers early allows StyleChic to launch re-engagement campaigns. For instance, sending personalized reminders about items they’ve shown interest in, offering special discounts, or introducing limited-time promotions can reignite their interest and encourage them to return.
   
   
2. New Customers: These customers have made their first purchase recently. StyleChic can nurture these relationships by sending welcome emails with an introduction to the brand, offering a discount on their next purchase, and providing recommendations based on their initial purchase. Building a strong connection early on can help convert them into loyal customers.

> Discover this Simple Guide to RFM Segmentation that will change the way you analyze, approach, and value your customers.

Transactional Segmentation

This model classifies customers based on their previous transaction history with a company. Key factors include the number of transactions, the total amount spent, and the frequency of purchases. This type of segmentation is particularly useful for businesses looking to tailor their marketing strategies to different customer behaviors, such as targeting frequent buyers versus occasional shoppers.

For example, an e-commerce store might identify a segment of customers who consistently make large purchases every month. Recognizing this, the business could create special loyalty programs or exclusive offers for these high-spending customers to reward their loyalty and encourage continued business. By focusing on transactional data, companies can design personalized marketing initiatives that resonate with the specific buying habits of each customer group.

E-commerce Benefit

This segmentation includes factors such as the types of products purchased, the frequency of purchases, the average order value, and the preferred payment methods. This data allows e-commerce businesses to tailor checkout experiences that align with customer preferences, potentially reducing cart abandonment rates and speeding up the purchase process, leading to a smoother customer journey and increased sales conversions.

For example, an e-commerce store called “TechMart” that sells electronics and gadgets can use transactional segmentation to enhance its checkout process:

1. Frequent Buyers: These customers make purchases regularly and have a high transaction frequency. TechMart can streamline the checkout process for frequent buyers by offering features such as one-click purchasing, saved payment methods, and quick reordering options. Additionally, providing personalized recommendations based on their past purchases can encourage additional sales during the checkout process.
   
   
2. Bargain Hunters: These customers often look for discounts and deals before making a purchase. TechMart can enhance the checkout experience for bargain hunters by highlighting available discounts, applying coupon codes automatically, and displaying limited-time offers. Simplifying the process of finding and using discounts can increase the likelihood of completing a purchase.

Technographic Segmentation

Technographic segmentation model categorizes customers based on their technology usage patterns, including the devices, operating systems, or software they prefer when interacting with online businesses. Technographic segmentation helps companies tailor their digital interfaces and marketing messages to better suit the technological preferences of their customers.

For example, if data shows that a significant portion of a website’s visitors use mobile devices on iOS platforms, the company might prioritize optimizing its mobile app and marketing efforts for this specific user group. This ensures that the user experience is seamless for those customers, potentially increasing engagement and conversions. By understanding and addressing the technographic characteristics of their audience, businesses can enhance user satisfaction and optimize their digital strategies effectively.

E-commerce Benefit

This segmentation includes factors such as device type (mobile, desktop, tablet), operating system (iOS, Android, Windows), browser preferences, and tech savviness. By understanding these technological preferences, e-commerce businesses can optimize user experiences by tailoring the site’s interface and checkout process to the preferred technology of the segment, reducing friction and abandonment rates.For example, an e-commerce store called “GadgetHub” that sells the latest tech gadgets and accessories can use technographic segmentation to enhance its user experience:

1. Mobile-First Shoppers: These customers primarily shop using mobile devices. GadgetHub can optimize its mobile website and app to provide a seamless and intuitive shopping experience. This includes responsive design, fast loading times, easy navigation, and mobile-friendly checkout options like digital wallets (e.g., Apple Pay, Google Pay). By tailoring the experience to mobile users, GadgetHub can reduce friction and improve conversion rates for this segment.
   
   
2. Cross-Platform Users: These customers switch between multiple devices and platforms during their shopping journey. GadgetHub can ensure a consistent and synchronized experience across all devices by implementing features like cross-device cart synchronization and account login continuity. This allows customers to start shopping on one device and complete their purchase on another without any disruptions, reducing abandonment rates and enhancing convenience.

Value-based Segmentation

This model categorizes customers based on the economic value they bring to the company. It considers factors such as customer lifetime value (CLV), profitability, and potential for future revenue. Value-based segmentation is crucial for businesses that want to optimize their resources and focus on nurturing relationships with the most profitable customers.

For example, a subscription-based service might analyze their customer base to identify which subscribers are consistently upgrading their plans or maintaining long-term memberships. These customers are segmented as high-value due to their sustained revenue contribution. The company can then develop specialized programs, such as VIP customer service or exclusive access to new features, to retain these valuable customers and enhance their satisfaction.

E-commerce Benefit

This segmentation focuses marketing efforts on nurturing high-value and high-influence customers, potentially leading to organic growth through their networks.

For example, an e-commerce store called “LuxBeauty” that sells premium beauty products can use value-based segmentation to enhance its marketing strategy:

1. Dormant High-Value Customers: These are previously high-value customers who have not made a purchase recently. Early identification of these customers allows LuxBeauty to implement re-engagement campaigns. Sending personalized reminders about favorite products, offering limited-time discounts, and highlighting new arrivals can rekindle their interest and encourage them to return. This approach helps retain valuable customers and reduces churn.
   
   
2. Influencers and Advocates: This unique segment includes customers who not only have high purchasing value but also have significant influence within their social networks. LuxBeauty can nurture these customers by providing them with exclusive experiences, such as product previews, free samples, and invitations to special events. Encouraging them to share their experiences on social media and leveraging their testimonials can help LuxBeauty reach a wider audience organically, driving brand awareness and growth.

How to Choose the Right Customer Segmentation Model(s)

If you want help in deciding on a specific segmentation model to group your customers, you must first decide what type of customer data can bring the biggest impact on your revenue.

1. Evaluate Your Data: Identify which types of customer data (such as purchasing behavior or demographics) impact your revenue the most. Determine what essential information is missing and plan how to collect it.
2. Set Marketing Goals: Define clear objectives, such as increasing purchase frequency or reducing churn and see which segmentation model can best help adapt your strategies to the desired market segment.
3. Select Appropriate Models: For example, if your goal is increasing monthly purchases, you will look at behaviour segmentation and identify shoppers who are ready to repeat their purchases. On the other hand, if you want to decrease retention rates, you might want to segment your customers using the RFM model and set up prevention campaigns for “about to dump you” segments.
4. Implement and Adjust: Deploy the chosen model, integrate insights into marketing efforts, and refine based on performance.

How to Conduct Customer Segmentation Analysis?

Segmentation strategies should always be based on a particular goal or set of goals. For example, a segmentation strategy may focus on finding customers who are early adopters and have the potential to become brand ambassadors. While this is just one possible segmentation strategy, there are plenty more that you can choose from. But before starting, it’s important to consider the following steps of the customer segmentation analysis to ensure your approach is thorough and effective.

• Data Collection and Analysis: Begin with accurate data collection and employ analytics tools to identify patterns that guide customer segmentation. This foundational step ensures strategies are aligned with customer behaviors and preferences.
• Feedback Loop: Establish a continuous feedback loop to monitor customer responses and adjust segmentation strategies accordingly. This keeps the approach flexible and responsive to customer needs.
• Cross-Functional Integration: Encourage collaboration across departments—marketing, sales, customer service, and IT—to share insights and create a unified segmentation strategy.
• Technology Utilization: Utilize technologies like machine learning and AI to enhance the accuracy of customer segmentation, allowing for predictive insights and more sophisticated market understanding.
• Ethical Considerations: Address privacy and data protection in line with regulations like GDPR to maintain customer trust. Transparency in data usage and ensuring security are paramount.
• Customization and Personalization: Use segmentation to deliver personalized marketing that resonates with specific customer groups, increasing engagement and loyalty.
• Cost-Benefit Analysis: Conduct a cost-benefit analysis to ensure segmentation efforts are cost-effective and provide a favorable ROI, helping to optimize resource allocation.

As a business owner, segmenting your customer base is all about trial and error. You have to keep segmenting your customers until you find a segmentation model that works for your business. With that being said, segmenting your customer base is a simple process that can set your business up for success. You need to know how to go about it!

Customer Segmentation Strategy: Step-by-Step

Customer segmentation strategy is a business strategy where businesses divide their customer base into separate and distinct groups (segments). The company then determines each group’s different needs/wants and tailors its products or services to meet those specific needs. Customer segmentation strategy is often used to uncover customer insights that would not become clear from analyzing total market data.

• Identify Your Customer Segmentation Goals and Variables:

• • • Determine the type of segmentation needed (e.g., psychographic, needs-based, technographic) based on business goals like new product offerings or market expansion.
    • Examine each segmentation type to identify crucial elements that will influence marketing messages and outcomes.

• Set Up Each Customer Segmentation Project:

• • • Define clear objectives for each project using a SMART framework.
    • Involve key stakeholders including employees from relevant departments and external parties like customers and local businesses.
    • Clearly define the scope of each project to avoid overlaps and set clear targets for data sources, resources, and budget.
    • Outline expected deliverables such as segment profiles and workflow wireframes.

• Collect and Organize Customer Data:

• • • Use surveys and analytics tools to gather comprehensive customer data directly (e.g., job titles, purchase history) and indirectly (e.g., social listening on platforms where customers are active).

• Segment Your Customers Into Groups:

• • • Apply technologies like machine learning for efficient segmentation.
    • Ensure segments are accessible and aligned with appropriate marketing and sales channels.
    • Include strategies for engaging loyal customers to maximize their purchasing potential.

• Market to Your Customer Segments:

• • • Develop specific marketing plans for each segment, focusing on creating targeted content and strategies for engagement.
    • Personalize communications like emails and landing pages to make customers feel valued and understood.

• Run Regular Customer Segmentation Analyses:

• • • Regularly review and adjust segments to ensure they remain accurate and effective in meeting business goals.
    • Gather feedback from internal teams and customers to refine segmentation strategies.

• Use Customer Segmentation Tools:

• • Employ tools like Qualtrics, HubSpot, Segment, and Userpilot to automate segmentation processes and integrate data across platforms for more personalized customer engagement.

To understand your customers’ needs, you need to undertake a customer segmentation analysis. This is the first step towards understanding the specific groups that exist in your marketplace and their different needs.

> Discover the RFM based marketing strategies for customer segments and design the best treatment for each segment!

Why Is Customer Segmentation  Important?

Customer segmentation is one of the most important aspects of customer relationship management. There are many reasons why you should use customer segmentation as a business strategy. Here are some of them:

#1 Improve customer satisfaction

You can improve the quality of service by better understanding your customers’ needs and offering them what they want. With this, you will deliver products or services that meet their needs more efficiently and effectively. This is one way for your business to establish long-term relationships with its target customers. Marketing efforts are then focused on customers who are most likely to buy from you again.

#2 Improve customer loyalty

It is easier for businesses to retain current customers than attract new ones. If you know what a specific group of people needs, then it would be easier for you to offer them products or services that could make them stay loyal to your company instead of looking elsewhere when they have similar problems in life again in the future. 

Customer retention is more cost-effective compared to acquiring new customers. Segmenting customers allows you to customize communication efforts to maximize customer retention. The result is that you save money and resources to focus on other aspects of the business.

#3 Builds customer engagement

Segmentation applied to marketing strategies allows marketers to determine the best communication and engagement strategies that would be most effective for a specific group of customers. This makes it easier for them to control their communication efforts and prioritize only the people who benefit from their messages. 

They also measure how successful their communication efforts are in engaging customers toward achieving business goals. With positive customer engagement comes a good customer experience, making it easier for them to sell a product or service. Improving customer experience and engagement should be the top priority of every company.

#4 Increases customer value

A better understanding of your customers will lead you to identify which products, services, and opportunities they need the most. With this knowledge at hand, your business can prioritize its selling efforts on areas with higher profit margins or more potential customers. This ensures that you are maximizing the return on investment for each customer. 

You also have an idea of what customers are spending money on, so it becomes easier for you to recommend other products or services they might be interested in purchasing from you in the future. Customer lifetime value is therefore increased.

#5 Improve marketing ROI

Customer segmentation helps marketers analyze customer segmentation data from customers’ purchase history to identify which products or services they purchase most frequently. You can also determine which offers your target audience most likely respond to, which customers are worth keeping, and those who would benefit from a product or service offer. 

It is easier for you to measure how successful your marketing efforts were in achieving specific goals if you focus on a particular group of people rather than the whole market. Customer segmentation analysis helps improve future marketing efforts.

So, you see? Your customers’ needs should be your top priority as a business owner because you will benefit from them in the long run. Ensure that you prioritize customer engagement and satisfaction to build and maintain strong relationships with your customers. 

It would be best to focus on building customer loyalty to stay with you for a long time. Lastly, improve your marketing ROI by focusing on customer engagement and satisfaction. Customer segmentation is vital for all types of businesses because it benefits them in many ways.

#6 Prepare for new markets and forms of competition

Customer segmentation allows companies to discover market opportunities and potential threats posed by emerging competitors. When you know what a specific group of consumers wants, it would be easier to offer them products or services that they will surely appreciate – ones that could give your business a competitive advantage over others in the industry.

> Discover how to acquire and retain customers profitably for your eCommerce business.

Customer Segmentation Examples

The first step in a marketing strategy is to identify your target market. You have to figure out who your customers are and what factors affect their behavior. Whether your company is a startup or an established enterprise, defining the customer base for each of your products or services will give your marketing team a direction to follow. Here is a list of customer segmentation and profiling examples that may help you define your customer profile. 

1.  Baby Boomers

In the United States of America alone, about 77 million individuals have reached retirement age, which also makes them baby boomers. This considerable customer segment is quickly becoming one of the most sought-after and lucrative in all types of marketplace. 

Boomers with time and money to spend, but with “empty nests,” are migrating back into the workforce in record numbers- often starting their businesses. These individuals have strong buying power within their fields of expertise. If you’re looking at launching a startup in any industry, this is one customer segment that carries a lot of clouts.

2.  College Students

Like boomers, college students also possess an overwhelming buying power that marketers are eyeing every passing day. With tuition fees continuously climbing up the charts, young Americans today can’t wait to land their first jobs and start earning big bucks. This means they want all the goods and services they haven’t been able to afford yet. So the next time you see a trendy new product or service, don’t be surprised if it’s targeted at this consumer segment.

3.  Suburban Housing Market

If you’re looking for a great example of customer segmentation and profiling that goes beyond demographics, then consider the case of the fast-food market. Fast-food chains have been strategically placed in front of malls and suburban housing areas so that you can find one on almost every corner. With a population boom in the suburbs, this area represents a new frontier for the fast-food industry to conquer.

4.  Luxury Brands

Anyone with enough money to buy luxury brands probably has their staff to attend to their daily needs. This means that the customer base for these products and services are considered high net-worth individuals. If you’re looking at launching a startup in any industry, this is one customer segment that carries a lot of clouts.

Customer Segmentation using Machine Learning

Machine Learning tools like Omniconvert Reveal can look at your first-party data, find insights, patterns, and anomalies, and then use this data to segment your online store’s customers into segments.

Using an artificial model can help decision-makers to make quick, on-the-spot data-driven decisions that can benefit their business. You should definitely entertain the idea of using segmentation tools to divide your customer base into smaller segments.

Read about the shortcomings of manual customer segmentation in eCommerce and why it’s bad for your business!

Wrap up

The process of segmenting customers into specific groups is something that most marketers do, whether they know it or not. Customer analytics tools are a great way to learn more about your customer’s demographics and behavior to make better decisions when developing marketing strategies for them. 

These models will also help you find out which customers are worth the time and energy spent on sales pitches, as well as those who would be best served with coupons or other incentives. Have you tried any of these techniques? Let us know how they’ve worked for you!