Customer Segmentation

The ability to segment customers is a crucial part of any ecommerce brand’s marketing and retention strategy.   Once you segment your target market into various groups, you can then customize programs and products to meet their needs.  Who doesn’t want to feel like a favorite brand “gets them”? [without being creepy, of course].  You can also identify any at-risk customers or opportunities to upsell or cross-sell to existing customers. In a nutshell, personalized programs are the cornerstone of great customer experience.

In this article, we’ll cover the following:

  • What is customer segmentation

  • Why segmentation is important

  • What makes a segment viable

  • 8 Questions Segmentation Can Answer

What is Customer Segmentation

Plainly stated customer segmentation the ability to group your customers into buckets based on shared similar characteristics so you can better tailor your products and services to meet each segment’s needs. There are numerous ways you can segment customers.  The key is to align your segmentation strategies with your business’ demands and your customer ’s needs.

Why Segmentation is Important

There are millions of ecommerce websites on the market today – a great customer experience will set you apart.  To provide your customers with a personalized experience – it stands to reason that you need to know who your customers are.  Segmentation is the natural first step in realizing that vision.  

Management consulting firm Bain & Company, clearly outlines, the advantages of segmentation:

“Customer Segmentation can be a powerful means to identify unmet customer needs. Companies that identify underserved segments can then outperform the competition by developing uniquely appealing products and services. Customer Segmentation is most effective when a company tailors offerings to segments that are the most profitable and serves them with distinct competitive advantages. This prioritization can help companies develop marketing campaigns and pricing strategies to extract maximum value from both high- and low-profit customers. A company can use Customer Segmentation as the principal basis for allocating resources to product development, marketing, service and delivery programs.”

To put it more succinctly, and put a marketing focus on the benefits of segmentation, “Segmentation helps you send the right message to the right person at the right time.”

If we unpack those quotes, it becomes evident that segmentation is a powerful tool because it directly impacts your bottom line. You can use segmentation to:

  • Increase Conversions with Personalized Content: It stands to reason that if you know who your customers are and where they spend their time – you can create targeted messaging, pricing, and advertising campaigns and deliver them via relevant channels. Therefore, increasing the chance of targets becoming prospects, and prospects becoming customers.
  • Increase Customer Retention with Need-Based Segmentation: Gain a deep understanding of different customers’ needs – cohorts that require extra attention and have a high churn rate; cohorts that generate the most repeat purchases, etc., and help alleviate their specific pain points. Target them with personalized communications, products and services.
  • Increase Profits with Optimized Marketing Spend: Use cohorts to identify your loyal customers that are generating the highest CLTV. Find out which campaigns, marketing channels, and product categories keep them coming back – and invest your money and energy in strategies that will deliver results.

What makes a viable segment

Segments are not all created equal.  If you are new to thinking about segmentation in a strategically structured way, you may have that moment that almost every entrepreneur or data geek has had at one time or another, that OMG moment when you realize, “I can slice and dice this data a million ways – this is awesome.”  Well, hold on there for a second.  Just because you can, doesn’t mean you should.  There are a few questions you’ll want to ask yourself before you decide if a segment is viable.  

Gretchen Garrett, an editor at HBR outlines six guiding principles and criteria for what constitutes a useful segment.  

  1. Identifiable. You should be able to identify customers in each segment and measure their characteristics, like demographics or usage behavior.
  2. Substantial. It’s usually not cost-effective to target small segments — a segment, therefore, must be large enough to be potentially profitable.
  3. Accessible. It sounds obvious, but your company should be able to reach its segments via communication and distribution channels. For example, it’s not helpful if you identify a segment you can’t reach.
  4. Stable. For a marketing effort to be successful, a segment should be stable enough for a long enough period to be marketed to strategically. For example, lifestyle is often used as a way to segment. But research has found that, internationally, lifestyle is dynamic and constantly evolving. Thus, segmenting based on that variable globally might not be wise.
  5. Differentiable. The people (or organizations, in B2B marketing) in a segment should have similar needs that are different from the needs of other people in other segments.
  6. Actionable. You have to be able to provide products or services to your segments. One U.S. insurance company, for example, spent a lot of time and money identifying a segment, only to discover that it couldn’t find any customers for its insurance product in that segment, nor was the organization able to design any actions to target them.

Now that you have a good sense of what makes a viable segment, we’ve listed out eight ways you can build segmentation strategies that fit your needs.  LimeLight’s segmentation tool allows you to pull criteria from a variety of dimensions quickly, but whatever ecommerce platform or spreadsheet you are using you should be able to bucket an array of segments to build strategies that work for you. 

8 Questions Segmentation Can Answer

Is my marketing campaign producing results and converting leads?
By tracking visitors to your site by a specific campaign and analyzing purchases from made during that period, you can assess how well you are converting and if you need to tweak your messaging or target market.   You may also discover that visitors/prospects need a bit more from the first visit to first purchase.

Segment:  Group contacts by date of the first touch, and then look at customer acquisition over X time. You can then see the success of each campaign over time.  [In LimeLight you can quickly select “campaign” and “successful order” in the segment dashboard to view this figure over time and identify opportunities].

Who are my most profitable customers?
These are the customers you want to nurture.  You can award these customers with perks: free shipping, increased support, maybe even a freebie.  Reward them for their loyalty!

Segment: Sort your customers by revenue and select a percentage that you are willing to offer perks to.

Who are my at-risk customers?
What percentage of your customers are churning? If you find that you are leaking customers, you may need to invest in retention – maybe give your lifecycle marketing campaign a boost.  Is your content fresh? Does it speak to current customer needs?  What type of customers are you losing? New? One time? Loyal?

Segment: Group customers by the time between orders.  Identify outliers that are outside the normal range between purchases.

How can I increase my conversions?
There are a variety of different strategies and areas for increasing conversions.  A basic strategy is to see if you have a large percentage of email ‘open rates’ but very low conversions.  If the answer is yes, it might be time to surprise prospects with special offers or discounts and test the impact on your conversion rate.

Segment: Use your email marketing tool to identify which customers are opening emails but not purchasing.

Do I have a high percentage of shopping cart abandonment?
If you do, you are not alone. The good news is that about 60% of the 4.6 trillion dollars in lost sales due to shopping cart abandonment is recoverable.  You’ll want to dig into this and segment by types of customer, cart size, total cart value and product type to develop strategies that align with each segment.  For instance, you will want to treat a first-time abandoner different than a repeat customer and if you are finding that abandonment occurs for orders over X amount maybe a free shipping program or discount is to incentivize close.

Segment: Segment out customers by in cart with no sale and add repeat vs. first customer or cart or product size.  Treat each differently. [humble brag: LimeLight’s segment tool lets you do this with a simple click of the button].

Is this customer a repeat purchaser?
If this is a repeat customer, are you personalizing messages to them and acknowledging their loyalty? Maybe you can target them with a coupon or discount to share with friends to help spread the word. You could also try A/B testing various offers to different sub-segments and see which works better!

Segment: Sort your customers by revenue and select a percentage that you are willing to offer perks to.  You will also need to decide your criteria for what is a frequent customer (x orders per month/year).

Do specific product categories or features keep people coming back?
Optimize your marketing spend and promote the products that sell! Your product team can track which features customers often use and which features are underused to build better products that are more tailored to their needs.

Segment: Find your repeat purchasers, and then segment the purchases by product categories.

What is the ideal pricing for my product(s)?
Some customers are more price sensitive than others. Understand which customers are motivated more by price vs. customers that are motivated by value. That way you can create customized prices for each segment and optimize your profit margin.

Segment: Group customers by demographics (geography, income, education level, occupation, etc.)

Divide and Conquer

Segmentation does not have to be complicated to deliver results.  At the most basic level, you have potential customers, active customers, at-risk customers and lapsed customers. As the previous examples point out, strategies for personalizing a stand out customer experience involve a lot of common sense [and a dash of empathy].  View your business from your customer’s vantage point, and you’ll be rewarded with a passionate and loyal customer base.


Segmentation Strategies To Increase Your Marketing ROI!

The days of “one size fits all” are dead. Customers today expect customization and personalization. But you can’t create personalized content, services, or products if you don’t know who your customers are and you don’t understand their needs… which is why we created a new tool called Segments!

In this webinar, you’ll learn 3 ways to segment your customers:
– Targeting your prospects
– Targeting your most profitable customers (with highest CLTV)
– Targeting your least satisfied customers (with highest churn)

Plus we’ll share examples of how to leverage cohorts to deliver personalization at scale. These include advertising, promotional messaging, pricing, and more!