Why You Should Segment Your Customer Base

You’ve probably heard of large businesses segmenting the market, and maybe it sounds a little nefarious, like fat cats in a boardroom illegally colluding to carve up a market.  (Pro tip:  Don’t do that.)  But that’s not what we mean.

When we talk about segmenting the market or segmenting your customer base, what we really mean is analyzing all of the potential customers in your market and putting them into groups based on some observable characteristics.  Those characteristics might include income, frequency of likely purchases, marital status, etc.

So why would you want to segment your customer base?  Because when you group your customers that way, it may help you decide which groups are worth going after.  Unfortunately, not all customer segments are created equal, and some might not spend much money on your products, and they may cost an inordinate amount to reach through marketing and frankly be a little difficult to deal with.  If you lost money every time you interacted with a certain type of customer, then you’d probably stop marketing to that type of customer, wouldn’t you?  In contrast, if you could find a group of customers who’d spend a ton of money on your products and would wonderful to work with, then you’d go after that type of customer all day long.

Segmenting your customer base can also make it easier for you to figure out which products to offer.  People have all kinds of different tastes and preferences, and if you try to offer something designed to please everyone, then you might end up not pleasing anyone, and that’s a one-way ticket to a going-out-of-business sale.  Figure out exactly what each group of customers wants and then design your products with those smaller groups of customers want and then you’ll stand a much better chance of getting and keeping customers.

Finally, segmenting your customer base may help you predict the most effective ways to market to that particular group.  For example, are you trying to reach aging Millennials and Gen Xers?  Then Facebook may not be the worst strategy in the world (at least for the moment…).  Or are you trying to reach Gen Z?  Then you might want to skip Facebook and head over to TickTock.  Whether we’re talking about social media, television, Internet advertising, or billboards along someone’s commute, when you’re marketing, you have to hunt were the ducks are, and that means figuring out where roughly homogenous groups of your customers are likely to be and then reaching out to them with messages that resonate with them.

We’ll have more to say about how to segment your customer base and what to do with the results in future posts, but for now, here are the four main ways that you should think about segmenting your customer base:

1. Demographic/Firmographic Factors

The first group of characteristics that you can use to segment your customer base are demographic and firmographic factors.  The primary distinction is that if your customers are individuals, then you’re going to use demographic factors, and if your customers are businesses, then you’re going to use firmographic factors.

Demographic factors are just what you’d expect:  Things like age, income, sex, marital status, ethnicity, etc.  The point here isn’t to try to use all of them but rather to find the ones that are most helpful to you in predicting buyer behavior.  For example, you may find that married couples with young children are much less interested in your tiny, upscale, trendy new restaurant and more interested in the larger, family-friendly pizza place with the extra long booth tables down the street.  So focus your efforts instead on the demographic segments who are more likely to be interested in your offering and target them.

We do pretty much the same thing when our customers are businesses, but then we call these characteristics firmographic factors, which are basically demographic factors about a company.  For example, think of company size in terms of headcount and revenue, years in business, industry, etc.  If you’re offering premium services with a really high margin, then it’s probably safe to assume that a small business with low revenue and narrow margins is going to be shopping around a little more than you’d like.  In contrast, a larger business with money to burn might want a little more hand-holding and white-glove service than the discount provider down the street is willing or able to offer.  Think about which segment you’re best able to serve and focus on them.

2. Geographic Factors

Geographic factors can mean cities or states, as we might expect, but don’t forget to broaden your horizons.  Geographic factors can also include regions of the country or types or characters of places, like urban, suburban, exurban, or rural.  Again, the key here is to find factors that are relevant to predicting tastes and preferences.  For example, urban customers might be more interested in the services of a high-end custom tailor, but a shoe repair store might find that its customers come from all over.  As before, segment based on these factors if they help you, and don’t if they don’t.

3. Psychographic Factors

Psychographic.  Now there’s a five-dollar word you can use to make people think you’re obnoxious…  But we digress.  Psychographic factors are the touchy-feely factors, like personality traits, values, attitudes, and interests.  All kinds of factors fit into this bucket, and we could never list them all, but here’s a good rule of thumb:  What kinds of things would you ask someone about if you really wanted to get to know what makes that person tick?  Those are psychographic factors.

Psychographic factors are great to think about when you’re designing your brand and your products because they give you insight into what might motivate your target customer to get off the couch and buy whatever it is you’re selling.

4. Behavioral Factors

The group of segmenting factors are behavioral factors.  These are things like purchasing habits, spending habits, and use cases.  How often is a customer likely to buy your product, and under what circumstances are they most likely to do so?  How do they use it?  What kind of value are they trying to get out of it?  Do they have characteristics that might make it easier or more difficult for them to use your product?

Behavioral factors are sometimes said to be the holy grail of segmenting because you might find one that is extremely predictive of whether or not someone will buy your product.  If you find a behavior factor like that that no one else is paying attention to, then you can take advantage of it and own that particular segment.  But make no mistake, all of these factors are ones that you should constantly be thinking about.  They’re all things that can help you get to know your customer better, and that’s the first step to serving your customer better.