Customer Segmentation

What Is Customer Segmentation?

Nowadays, the abundance of data and the advances in machine learning and big data applications reduce the need for top-down segmentation of customers. However, smart customer segmentation based on commonalities help companies better address customer needs to provide the right experience and divide resources efficiently.

Why Is It Important to Have a Good Customer Segmentation Model?

Market segmentation enables businesses to reach the consumers that would most benefit from or enjoy the company’s products or services. Companies can either concentrate their marketing on the most effective channels or reach out to dissatisfied former customers.

What Internal Data Should I Have for a Good Customer Segmentation Model?

A good model should use data collected from customer registration, transaction information, and previously completed qualitative or quantitative studies. In particular, customer registration and past transactions data should be inspected through the lens of a company’s specific product. For example, age and gender is very important data for a clothing company, but life stage less so.

What External Data is Essential for a Good Model?

Since segmentation is an issue of demographics, census data and public records are valuable sources of data. However, private surveys and questionnaires also contain important information.

What External Data May Prove Useful for a Model?

Additional external data includes cookies and web analytics tools. Academic studies on demographics and behavioral also help immensely.

What Are the Main Challenges of this Use Case?

The main challenges of customer segmentation are the dynamic nature of some segmentation characteristics (e.g. place of residence, life stage, etc.) and the difficulties of managing the large amount of data the model uses. An additional difficulty lies in assigning segments; many data providers offer pre-made segments but these may not suit your customer base.

Finally, even after useful customer segments have been assigned, selecting the best marketing campaign for them remains an issue.

Interesting Case Studies and Blogs to Look Into

HBS Digital Initiative: MetLife: A Case Study in Customer Segmentation
Community Colleges of Spokane: Case Study 2.1: Lego’s Market Segmentation Strategy

Tangible Examples of Impact

Twilio is paying $3.2 billion to acquire Segment, a technology startup … used for marketing and other applications that benefit from customer identification and segmentation.

Tech Crunch: Twilio confirms it is buying Segment in an all-stock deal