What is customer segmentation

Segmentation: The dividing of a market’s customers into subgroups in a way that optimizes the firm’s ability to profit from the fact that customers have different needs, priorities, and economic levers.

For companies looking to effectively scale their customer base, it is inefficient to simply use a one-size-fits-all marketing approach for a diverse group of customers.

Customer segmentation attempts to divide and classify the customer base with respect to various parameters to identify the best performing subgroup of customers and then target customer segments most similar to our best performers.

Customer Segmentation: An Important Marketing Strategy

Through customer segmentation, a company can target specific groups with marketing campaigns tailored to their needs and in a way that will resonate with the targeted segment, but not necessarily other segments.

Customers are commonly segmented based on various parameters, namely:

  • Needs – depending on what kind of products will satisfy the customers
  • Spending behaviour – based on their spending behaviour like high spenders, value for money seekers etc, how often the customer makes purchases etc.
  • Monetary value – how much revenue does the company make from these customers
  • Recency – how recent are these customers, how often do they make purchases
  • Demographics – the age, gender, ethnicity, religion of customers, etc.

The many benefits of customer segmentation

Through customer segmentation, the marketing strategy used to target different segments can be optimised by:

Identifying the optimal channel for marketing to the customer segment – catalogue, phone, email, flyer, etc.
Marketing products to the segment which will be of interest to them
Leverage pricing options depending on the spending habits of the segment
Focusing marketing resources on most profitable customers to improve ROI

One popular and perhaps the most effective method (according to a study conducted by Libai, Narayandas and Humby in 2002) that companies use to segment their customers is based on a parameter called Customer Lifetime Value and aims to identify most profitable customers.

Customer Lifetime Value of a customer is the total revenue generated from the customer over a lifetime of purchases and deducting the costs incurred in customer acquisition, while also accounting for the time value of moneyBy segmenting customers based on CLV, an organisation can target its most profitable customers resulting in maximisation of marketing ROI.

CLV segmentation shifts the focus from targeting customers to leveraging marketing resources to target themost profitable customer segments.

Oyster CDP from Express Analytics combines the advantages of CLV based segmentation along with indicators of behaviour and demographics to identify the most profitable segments for marketers. This approach leads to the maximisation of RoI on marketing spend.

Start Using Oyster CLV based segmentation Today!

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