Driving Customer Sales and Loyalty - Customer Segmentation

Classifying things is a natural human activity.  We look outside the window and classify the weather into sunny, cloudy or raining.  We watch football and classify the players into the defenders, the midfielders and the forwards, as well as into the two teams.  We classify friends and colleagues into generations.

We do this because it makes it easier to think about them.  We know what we might do on a sunny day, without going into the detail of just how sunny.  We know what is expected of a defender in football.  We know what we think of the music of Generation Y.

These are informal examples of what statisticians and marketers call segmentation.  They are segments based upon our experience and we use them because they are useful. 

When faced with new problems, particularly in marketing, data can help us define segments.  This is often used to better target marketing, both to reduce costs and to improve effectiveness. 

Benefits of Segmenting Customers

Think of a company that wants to grow their business and is investing in marketing to achieve this.

One approach is to send a generic mail-out to all of their prospective and current customers.  However, customers are not all the same. Sending the one message to all may only appeal to a small proportion of the customer base and have little return for the effort.  In some cases the effect of a wrongly worded email might even be negative.

This is where customer segmentation can help. By grouping customers, we can understand them better and produce specific messaging for each segment. For example, in the case of an electronics company,

  • 20-30 years old with low income – Promotion of cheaper, more tech savvy gadgets.
  • 70-80 years old from a high socioeconomic area – Promotion of more expensive, premium technology products that will enable them to maintain their independence.

By segmenting a customer base into smaller groups, companies are better positioned to:

Develop more targeted marketing – Tailored and personalised messages;

Develop products – Specific products for each customer segment; and

Understand their customers – Further analysis and market/customer research can be undertaken on key acquisition and retention groups.

Developing Customer Segments

Not all information in a large data set will be valuable in determining segments.  Unless the purpose of the segmentation is considered, there is a risk that the segments will not be actionable and will be commercially meaningless.

Meaningful segmentation involves understanding what is to be achieved and how the segments will be used. The analysis of available data must keep these in mind.  By understanding what you are trying to achieve, customers can be segmented into meaningful groups that will be recognisable, understandable and marketable.

Segmentation Can Help your Business

Effective customer segmentation has a number of benefits that include:

  • Increased sales;
  • Reduction in cancellations;
  • Lower administration costs; and
  • Higher return on investment for marketing activities.

Data Analysis Australia has a team with significant experience in developing customer segmentation to drive business decisions and outcomes.

For more information on how Data Analysis Australia can help you to develop and use customer segmentation, please contact daa(at)daa.com.au.