Tips for Strategic Customer Segmentation

Monday, 23. March 2015

Customer segmentation is an important tool for strategy development and positioning of a company. Dividing a market into discrete customer groups that share similar characteristics helps companies to identify unmet customer needs and tailor their products and services to satisfy these needs in an appealing and unique way setting themselves apart from the competition. Customer segmentation not only enables companies to better understand and serve their customers, but also to retain them in the long-term.

Here are some tips on what to keep in mind when carrying out strategic customer segmentation:

  • Define customer segments based not primarily on sociodemographical, but psychographical and behavioral characteristics.

    Today, we live a global network society which is in constant flux and where traditional social and cultural norms are being challenged and becoming increasingly irrelevant. People are freer than ever to choose how to live their lives. This individualization and pluralization of lifestyles is reflected in an increasing individualization of consumer behavior. Consumers wish to differentiate themselves from one another in their use of products and services and are increasingly demanding from companies customized solutions to satisfy their individual needs.

    Therefore, sociodemographical factors, such as location, age, gender, marital status, household size, education, occupation, income, and so on are less and less suitable to predict buying behavior with any degree of accuracy. What is more important are the interests, the attitudes and values of the people, and their actual behavior towards products and services (brand loyalty, price orientation, desired benefits, media consumption, utilization rate, choice of shopping channel, etc.).

  • Determine the profit potential of each of the defined segments by performing a comprehensive cost-benefit analysis. Remember, customers create different costs. Not every customer is a good customer!

  • No single strategy can satisfy the needs of all customer groups alike. Choose your target group(s) wisely and develop strategies specifically tailored to their needs. In addition to profit potentials, consider the ability of your business to serve the segment in a unique way. Set yourself apart from the competition!

  • Systematically align all business activities along the value chain to meet the needs of the selected customer group(s). Invest your resources and train your employees accordingly.

  • Customer expectations and competitive conditions can change quickly. Review your segmentation approach for relevance and timeliness on a regular basis.

Finally, strategic customer segmentation is an important prerequisite for effective price management. We will discuss this topic from a strategic point of view in more detail in one of our upcoming blog posts. Stay tuned!