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How to Conduct Customer Segmentation Research in 4 Simple Steps

Nov 10, 2021
Animation figures looking at customer segmentation profiles with magnifying glass

Imagine you know everything about your target customer: Who they are, what interests them, what motivates them to buy your product, which needs your offering satisfies, and the moment they’re most likely to purchase your product or service.

With this much information on your customers, you’d know exactly how to engage with your audience and attract them to your brand. You could seamlessly align your offerings and messaging with what you know your customer wants– and capture those conversions with ease.

Sounds enticing, no? This is what customer segmentation research does at a scalable level.

Instead of catering to each individual or the entire market, customer segmentation allows you to break down your target customers into manageable groups and optimize your strategy (and ROI) for each audience.

In fact, according to a study by Bain & Company, businesses that successfully tailor their offerings to specific segments can benefit from a 10% higher annual profit growth than those that do not. Read on to learn how.

What is customer segmentation?

Customer segmentation is the process of dividing your target market (potential customers) into groups based on shared characteristics. For example, you can segment customers based on their needs, behaviors, lifestyles, or other attributes that may impact their purchasing behavior.

All these characteristics can be broken down into five main categories: demographic, psychographic, geographic, behavioral, and firmographic. We’ll discuss them in more detail later.

By identifying audiences with shared qualities, companies can more effectively target these groups by tailoring their products, marketing, and sales efforts to the needs and interests of specific segments.

Why is customer segmentation important?

The better you understand your customers, the easier it is to sell to them. Creating effective customer segments helps you gain unique insights on how to capture your audience’s attention, increase sales, and keep your customers happy.

Here are some of the many benefits of customer segmentation:

  • Create stronger marketing and advertising messages. Customer segmentation allows you to cut out generic messages and appeal to your audiences on a personal level. Having a detailed understanding of customer groups allows you to create more effective, tailored campaigns that your audience will resonate with.
  • Attract high-quality leads. Well-targeted messaging helps you draw in ideal consumers who are most likely to purchase your product or service. This boosts ROI and helps you form stronger relationships with customers who are highly interested in what you have to offer.
  • Pick the best channels. Segmentation research helps you identify which channels (social media, email, website etc.) are the most effective for reaching specific audiences and when to use them.
  • Increase brand awareness and brand loyalty. Customers are faced with thousands of product choices and advertisements every day. Tailoring your offers and messaging to their individual needs helps you break through the noise and makes customers feel that you understand and value them. This means they’ll be more likely to recognize your brand and keep coming back.
  • Develop better products. Customer segmentation isn’t all about marketing. This deep understanding of customer needs can also be used to ideate and develop products that cater to specific audiences and more effectively resolve their pain points.

Animation of small people with arrow pointed at big target

4 Steps to Customer Segmentation using Survey Research

So, how do you identify your customer segments? We’ve gathered everything you need to know in these four steps to customer segmentation research.

Keep in mind that the research process may look slightly different for each company. How you segment your customers may depend on how much you already know about your target market and the goal of your study, but the process will look the same.

Let’s dive in.

Step 1: Learn How to Define and Describe Customer Segments

If you’ve done some digging on customer segmentation, you may have heard of the four types of customer segmentation research: demographic, psychographic, geographic, and behavioral. Firmographic is another category that sometimes makes this list. These categories cover all the different ways you can define and describe your customer segments. Here’s what they mean:

Demographic

Demographic segmentation refers to the grouping of customers based on demographic characteristics. This includes variables such as:

  • Age
  • Gender
  • Income
  • Occupation
  • Education
  • Ethnicity

Demographics are one of the simplest ways to segment customers, but also the most generalized. For example, if you chose to segment solely based on a demographic characteristic such as gender, you might be making a broad assumption that individuals who identify as for example, female, all have the same needs and preferences.

Instead, it’s best to use demographic characteristics in addition to other segmentation variables to describe and understand your segments.

Psychographic

Psychographic segmentation refers to the breakdown of customer groups based on internal, psychological characteristics that may influence their buying behavior, including:

  • Attitudes and beliefs
  • Values
  • Personality
  • Interests
  • Social Status
  • Lifestyle

Psychographic segmentation variables allow you to dive deeper into your audience’s preferences and the motivations behind their purchase behavior. This helps you build unique customer segments based on more descriptive characteristics related to their daily life and personality, so you can appeal directly to their values.

Geographic

Geographic segmentation refers to the segmentation of customers based on the region that they live and work in, and the characteristics of that location. This includes:

  • Location (country, state, province, zip code)
  • Climate and Topography
  • Language
  • Culture
  • Time Zone
  • Population density (urban, suburban, rural)

Like demographics, geographic segmentation is relatively easy to implement. It can be especially useful–even essential–for companies that have customers around the world or a specialized product that appeals to certain climates or cultures.

For instance, McDonald’s creates targeted messaging and food items based on their segments’ location and language, for example, those who live in Hong Kong versus Mexico.

Behavioral

Behavioral segmentation is the grouping of customers based on their behavior patterns through their interactions with the company. Companies using behavioral segmentation typically segment customers based on their past purchase behavior (timing, usage, frequency) or stages in the buyer journey.

This strategy is useful for businesses that have internal data on their customers, as they can identify which actions are most likely to lead to a purchase based on previous patterns. They can then learn how and when they need to communicate with customers to help reach a conversion.

Pair this with the three other types of segmentation listed above and you’ll have a holistic understanding of who your customers are, how and when they make decisions, and what keeps them coming back.

Firmographic

Firmographic segmentation is similar to demographic segmentation but has to do with characteristics that describe a company or organization, which can be useful for business-to-business (B2B) customers.

This includes attributes like company size (revenue and/or the number of employees), industry, legal status (Corporation, LLC, Non-profit etc.), or any other characteristic that would help a company distinguish the different organizations they are targeting.

Using multiple types of segmentation to understand your audience

Reviewing the different segmentation categories can help you brainstorm what kind of questions you want to ask your audience, and how you will define or describe your segments. We recommend testing more than one type in your segmentation research.

That way, even though you pick only one segmentation characteristic to define your segments, you can use other segmentation variables to describe those segments in more detail.

For example, we have found that using psychological segmentation to define your segments gives you the deepest insights into your customer groups, but that it’s not enough to fully understand your audience. That’s why we gather additional data on demographic, geographic, or behavioral characteristics to further describe the segments and gain a holistic understanding of each group.

–But let’s not get ahead of ourselves.

Animation of small figures looking at big checklist survey

Step 2: Start with Preliminary (Exploratory) Research

Before jumping into the deep end, it’s important to start your customer segmentation process with preliminary research. The easiest way to do this is with a customer segmentation survey. Surveys allow you to quickly collect deep qualitative and quantitative data on your target audience.

The first step is to design and field an exploratory survey to get initial insights into your customers’ needs, preferences and interests. This will help you identify what characteristics or qualities might be important differentiators for your customer groups. Furthermore, the findings from this stage will provide the inputs for your main study (more on that later).

We recommend sending your survey to a small yet representative sample of your target market. This could be anywhere around 300-500 respondents depending on the size of your target audience and the extensiveness of your study (you’ll reach a larger sample size in Step 3).

Your exploratory survey questions should allow customers to communicate who they are and their interest in your product/service using their own natural voice. One of the best ways to do this is using open-ended questions.

For example, if you are interested in defining segments based on psychographic variables, you could include questions like:

  • What words would you use to describe yourself as an individual?
  • What words, moments, experiences, or sensations come to mind when you think about {product or service category}?
  • What are the most important features you look for when purchasing {product or service}?
  • What are your expectations for this {product or service}?

If you have already conducted research on your target market, you can also use those findings to help guide the type of questions you want to include. However, we recommend using a variety of questions that address a range of segmentation characteristics, especially those you haven’t yet explored.

Oftentimes, the insights will surprise you– revealing crucial segment differentiators you might not have considered.

Step 3: Conduct Your Main Segmentation Survey

Now that you’ve collected your preliminary data, you’re ready to take your research to the next level.

In this step, you’ll test hypotheses and themes revealed in the exploratory study to solidify which characteristics are significant differentiators for your target segments. In other words, in Step 2 you found out what was important, and in Step 3 you’ll find out how much or to what extent those characteristics are important.

Let’s say, for example, you’re conducting segmentation research and your target market is sneaker wearers. Your team wants to target and group customers based on their values, so you included psychographic segmentation questions in your exploratory study.

In Step 2 you asked respondents: What words would you use to describe yourself as an individual?

In your analysis, you’re likely to find themes in the way that respondents answered this question. Let’s say responses fell into five noteworthy consumer categories: competitive, stylish, environmentally conscious, and adventurous. You can now test to what extent these qualities distinguish your segments. For example, you can ask a follow-up question in the main study such as:

Please indicate how important the following values are to you:

{Using a Likert scale from ‘Extremely unimportant to ‘Extremely important’}

  • Personal achievement and accomplishing goals
  • Protecting human beings and the environment
  • Presenting myself well, looking good
  • Having fun, seeking new experiences

This question allows you to dive deeper into your consumers’ values and the analysis will reveal whether they are distinct enough to differentiate your target customers. However, this is only one piece of the puzzle, it’s important to include other follow-up questions to test and support this hypothesis– along with any other characteristics you’re researching.

As you can see, the insights from your exploratory research are an essential guide for your main study questions. If you skip this preliminary step, you risk losing valuable time and resources by testing hypotheses or characteristics in the main study that turn out to be irrelevant or too vague.

Photo of multi-colored figurines segmented into the right color groups

Step 4: Analyze and Identify Customer Segments

Once you’ve collected data from your main study, it’s time to dig into the results and start forming your customer segments. Creating customer segments is an artistic process as much as it is scientific, so take your time with this step and keep an open mind when analyzing the data.

Statistical analysis tools can help you identify which variables are significant and which ones are not, but you will also need to lean on your intuition to help create meaningful segments that make sense for your business. Don’t worry, this is the fun part!

Here are some tips to help you create effective customer segments:

  • First, use the data to identify what’s most important. Look for the variables that are the biggest differentiators, and then work your way into the details.
  • Make sure that your segments don’t overlap. Creating unique segments is crucial for building targeted campaigns and offerings.
  • Be skeptical. As you’re developing your segments and crafting your customer stories, see if there are additional, similar questions in the survey that you can use to validate your conclusions– the patterns in the data should stay consistent.
  • Make sure your segments tell a story about your customers. Remember these are actual human beings that you are trying to understand and describe.
  • Aim for a manageable number of segments. In our experience, if you have too many segments, it can make it harder to optimize your strategy and clearly differentiate between customer groups.
  • Validate results with pricing studies. Once you’ve identified your target segments, you want to ensure that your audiences aren’t just interested in your product but willing to pay for it. Pricing studies help you measure exactly how much each segment values your product so you can set your pricing and offers accordingly.

Note: If you don’t have much experience with the statistical analysis behind customer segmentation (I.e. cluster analysis), we recommend working with a market research platform and team that can help you turn your data into valuable customer segments.

Make customer segmentation easy with GroupSolver®

At GroupSolver®, our AI technology and expert team can help you eliminate the nuances of customer segmentation and reveal meaningful customer segments with ease. From multinational retailers to global technology companies, we’ve helped companies all over the world uncover deeper insights into their target audiences far beyond traditional demographics.

See your customers’ stories come to life with our real-time visual insights and interactive platform. Request a quick walk-through on how it works and read about how we broke through traditional segmentation for a global tech giant.

 


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