Customer Segmentation: A Step-By-Step Guide In 2021

Introduction

When in expansion, companies need to focus their marketing on segment marketing examples of a specific segment of customers who form a subset of their existing customers. In order to scale effectively and efficiently, the customers who are the target group are identified through customer segmentation of the existing customer base and targeted in the marketing strategies.

1. Customer Segmentation & Why it Matters
2. Explore B2B Customer Segmentation Schemes
3. Benefits of Customer Segmentation
4. 5 Steps to Customer Segmentation

1. Customer Segmentation & Why it Matters

Customer segmentation is hence identifying subsets of potential customers with discreet group characteristics for segmentation of the market, which are then targeted with economic and competitive products. Such divisions are possible based on the needs of the customer (Ex: A single product rather than multiple products) and buying points (Ex: SMS responses, sales channels, marketing channels etc.). The 3 main types of customer segmentation strategies in the market are 

• A needs-based approach that accounts for customer needs to be expressed of a product/service.
• A prior approach wherein characteristics that are publicly available are used (Ex: company size, industry etc.) in customer targeting. Note that the same size or industry companies may have different needs.
• Value-based method using differentiators like economic value or group of customers possessing the same economic value level in various segments for targeting under customer segmentation analysis.

2. Explore B2B Customer Segmentation Schemes

While dividing the market into its various segments or market needs, there are 6 segmental schemes in customer segmentation that are available in how to do customer segmentation categories. However, customer segmentation framework segmentation may not be valid until the go-to-market strategy, customers’ needs and values and the value proposition of the company etc., are aligned with the group characteristics and make a significant and meaningful differentiator. Most customer segmentation examples of business schemes depend on variables like the company’s goals, objectives of segmentation, stage of operations, etc., to use customer segmentation under the following heads in their research on the market segmentation process.

• Specific needs and uses.
• Reach or geographically segmented base.
• Company size based on the number of employees, revenue generated etc.
• Subdivisions into customer served, sub-industry/industry category, industry/ sub-industry served etc.
• The methodology used in the process of level of market segmentation, the delivery model of the product, its packaging or product format, the special technology used in the processing and so on.

3. Benefits of Customer Segmentation

When customer segmentation is done with proper market research, the company can accrue several business benefits enumerated below.

• Marketing message focus: Besides product improvement, the best segments can then be targeted with marketing messages that are customized and focused on the features that cater to the customer needs and the quality- based features of the product’s inbound interest.
• Product improvement: Once the company knows from the insights of analysis the who, why and when of buying decisions of the customer, it can define market segmentation and focus on bringing the best product that satisfies the customer’s individual needs. It also helps ensure professional services, better customer support, and a better product experience.
• Higher revenue quality: Wrong segmentation always means more time and resources to maintain and sell. Factors like or lower up-sell potential, higher churn rate etc., are results of wrong segmentation in a customer class. Avoiding these errors can mean better revenue quality and higher revenues that increase overall profits and margins achieved through proper customer segmentation.
• Higher percentage opportunities: Customer segmentation provides the organization of sales with opportunities requiring lesser time, better win rates, more lucrative opportunities, and better revenue channels in the identified segment targeted as a successful segment.

4. 5 Steps to Customer Segmentation

Step 1: Set up the project for customer segmentation: 

Preparation with direction and focus is critical in the set-up process where one needs to identify the following.  Namely, 

• Segmentation objective and the strategic business goals that should be addressed.

• The stakeholders, like teams, departments, and senior staff from all departments etc., are impacted and form the bases for market segmentation.

• Define project scope based on inputs like customer % for analysis, outputs like % of segments analyzed, other parameters like time spent, resources used at each stage and the project as a whole.

• Define expected deliverables like the organization of output, format, etc. These are critical factors that can affect the expectations of the deliverables, which can also be listed as the output presentation’s key findings and deliverables.

• Work plan creation: Here, one needs to draw up the macro outline and a constructive stage-wise work-plan outlining the methodology, basic stages, steps to be undertaken, project timeline etc., which should be approved after review by all stakeholders.

• Executive Team Buy-in: This is a critical factor for a transparent go-to-market strategy and should include the segment focused upon, the best current segment of customers, review of outputs, inputs, and methodology used in customer segmentation. Ensure the customer list is developed and define customer value and quality. 

Step 2: Customer Data Analysis: 

• In this step, using the best current-customer segmentation method, one develops the criteria to measure the value of the customer base and its individual customer sets. It includes two critical processes, namely ‘Segmentation Hypotheses’ identifying meaning what characteristics make the company qualify as a good customer and external/internal sources and data-fields identification, that prioritize and test the hypotheses.

Step 3: Collection of Data: 

This step is cumbersome and builds using customer segmentation tools a full-list of methods that can use the identified customer characteristics based on their value proposition and are typically procured from recommendations or inputs from the company’s staff, customers, competitor research, experts, etc. It is essential to be comprehensive as often the factors of differentiation can lie beyond the schema used regarding size, type of industry, geographical region etc. care should be taken to manage the data, ensure its quality, seek proxy data-sources etc., providing a comprehensive list of hypotheses.

Step 4: Prioritization and Analysis: 

There are 5 steps of customer segmentation included here, which in brief, are

• Using data analysis to get the variables relevant for hypotheses validation.
• Doing analysis based on Tree-based Clustering and Regression Analysis validation on the segmentation tree.
• Executing Composite Segmentation.
• Validating segmentation to form homogeneous and distinct sets of high-value customers.
• Evaluating segmental target-ability, value, size of best segments.

Step 5: Presenting and Incorporating Feedback: 

The final step in customer segmentation is the application of customer quality measurements to the identified segments and sets of aggregate customers identified. One can then make the final presentation of the report to the stakeholders.

Conclusion

The method of best-current-customer segmentation has several benefits. Using it, one can sell more products and product value to a set of well-defined and researched profitable customer base and thus scale business growth efficiently. It includes all steps required from generating leads to product development and revolves around finding the right customer segments for each product.

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