What is customer segmentation?

Customer segmentation is a process of grouping customers by characteristics, needs and behaviours. The goal is to find customers who offer the most loyalty, are less price-sensitive and can become your best clients.

“The idea behind customer segmentation is that different customers have different needs. The complexity comes from how you tailor your offerings for maximum impact,” says Ajay Sirsi, Director at the Centre for Customer Centricity at York University’s Schulich School of Business.

Sirsi says it’s vital to find out which customers you’ll most need to target: customers that will give the company back a return on all the sales and marketing resources you put into attracting them to your product or service.

“Don't go after customers who either don't value what you're offering or are not willing to pay for it,” says Sirsi. “Ask yourself, ‘What return am I getting?”

He says segmentation is all about whom you will target.

What are the 4 types of customer segments?

Demographic

Business-to-consumer (B2C)

• Gender
• Age
• Race
• Sexual orientation
• Family size
• Education level
• Income

Finding out whether your customer is middle-aged or a teenager will provide different clues on their spending and lifestyle habits.

Business-to-business (B2B)

• Type of business
• Number of employees
• Rent or own their commercial space

A business looking to sell new shelves would see the needs of a high-end watch store very differently from those of a vintage clothing shop.

Geographic

• Rural
• Urban
• Suburban
• Mountainous or flat
• Far from city centre
• Close to key areas (such as ski hill or beach)

A customer who lives far from water is less likely to buy a paddleboard or a canoe from you than one who is just minutes from a lake. But if you sell commuter bicycles, proximity to water won’t be a big factor.

Behavioural

• Purchase history
• Product use
• Brand interaction

If you sell vacation packages, a family that books a resort getaway every winter would be a better target segment than one that drives a couple of hours to a cottage each summer.

Psychographic

• Beliefs and values
• Goals, interests, attitudes and opinions
• Past times and hobbies

A business traveller would not need a coupon for a free night of childcare. A vacationing couple with kids, on the other hand, would likely want it.

The advantages of customer segmentation

Customer segmentation can be an important cost-saving tool. Identifying your target market will save the time and money it takes to chase potential customers who might not buy from you.

“Without customer segmentation, businesses waste their resources,” says Sirsi.

He gives the example of a Vancouver baby B2B shoe company.

“The CEO said to me, ‘We don't segment our customers.’ We have 3,000 and we treat them all the same.’”

He says that kind of thinking led one of their salespeople to regularly drive two hours into the BC interior to visit a store that would only buy a couple of pairs of shoes a month. That, Sirsi says, takes away time from servicing a customer who buys 100 shoes a month.

“With limited resources, you've got to allocate your resources for maximum impact,” says Sirsi, who adds that segmentation is not just for businesses but can be applied to government and nonprofit organizations, as well. “They also need to allocate resources wisely.”

Customer behaviour: a key segment

Sirsi says segmenting your customers by demographics is easy to do, but it’s ineffective for determining which ones are most valuable to your business.

“A better way to segment customers is by behaviour,” he says.

“If I go to the grocery store and scan with a loyalty card, they know how much, how often and what I've purchased. A smart grocery store will then send me coupons for whatever I like to buy, whether it's pasta sauce or dog food.”

He says purchase behaviour tells you a lot about your customer.

“If you know their purchases, you can then say, ‘This group of people, they’re the high spenders.’”

He says demographics do not predict behaviour or need, giving the example of two people who are the same age but whose behaviour, needs, likes and dislikes are completely different.

“You could have one person who is unhealthy, preferring junk food and sitting on a couch. But another person of the same age who loves fitness, going out, walking and hiking and has a gym membership.”

While behaviour is key for most businesses, geographic segmentation can play an outsized role for many B2B companies. This would be the case for a company that values customers in proximity so they can avoid high shipping costs.

Dividing a group by geography can make a difference in assessing a customer. Sirsi gives the example of a hospital in downtown Toronto and one in Northern Quebec with two very different needs.

“The hospital in downtown Toronto aims to be the world class leading hospital in, say, cardiac health and has completely different needs than a regional hospital whose only goal is to get patients in, process them and get them out.”

He says salespeople make the mistake of going to physicians in both of these very different hospitals and assuming that since both are in the cardiac care field their needs must be the same.

Different levels of customer segmentation

Segmenting your customer base means discovering which customers are more valuable than others. For Sirsi, that means using purchasing behaviour data. Once you’ve grouped customers by volume and frequency of purchases, he suggests categorizing them in descending order of importance to your business.

A-Customer

Part of an exclusive group of your most loyal customers. You are likely their only supplier of your type of goods or service and they appear to be price-insensitive.

Action: Allocate most of your marketing and sales energy to these clients, provide them with special offers and make them part of your in-person visits.

B-Customer

Part of a group that regularly buys from you but with much less volume than your A-customers. They tend to be more price-conscious.

Action: Check in on them through email and less frequently than your A-customers.

C-Customer

Part of a group that buys with less frequency and less volume than your A- and B-customers.

Action: Have online ordering available to them and use automatic sales tools such as email campaigns.

D-Customer

Part of a group that rarely buys from you. Your company is one of many brands they buy from.

Action: Same as for C-customers.

How to conduct customer segmentation

You can start your segmenting by asking your sales reps, tech support and other client-facing team members about their observations. You can also look at the data you already have on your customers.

Look at segmenting by the four variables (demographic, geographic, behavioural and psychographic). Sirsi says you can also cluster into a group by needs.

Conduct market research, which need not be formal and expensive.

“It can be small focus groups or conversations with your customers. It can be simply observing your customers,” says Sirsi. “What do they value? How do they spend their time? What are their attitudes towards different things?”

He says these simple conversations, along with behavioural and other segmentation variables, will quickly tell you about your customers’ needs and the groups they belong to.

Next step

Boost your success in a new environment by downloading BDC’s free guide, Revving up Your Sales.