Customer segmentation is a marketing activity where customers and prospects are grouped together according to one or more common characteristics.

Customer segmentation allows a software-as-a-service (SaaS) company to identify the primary need of a particular group of prospects, so they can craft a marketing message that resonates with the group. This tactic can increase the chances that subscribers would sign up for the service.

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Read More about “Customer Segmentation”

Customer segmentation makes marketing and advertising campaigns more targeted and effective. Essentially, it helps you create the right message for the right audience. 

4 Types of Customer Segmentation with Examples

There are several ways to segment customers, but these are the four major ones.

what is customer segmentation

Geographic Segmentation

Grouping your customers based on location is one of the most common customer segmentation methods. Determining customer location helps you better understand their needs and preferences to offer them the right products and services. SaaS companies often use IP geolocation to obtain user location and use the data to craft marketing and advertising campaigns. IP geolocation is a noninvasive way of obtaining location information.

Demographic Segmentation

Another common way to segment customers is based on demographics, including age, marital status, sex, education level, occupation, income, and nationality. Different people have varying needs and preferences, and organizations need to target various demographics with different campaigns.

A SaaS company, for example, can segment its customers according to their job. They would then develop different marketing approaches targeting human resource (HR) personnel, C-suites, and other professionals who use its product.

Psychographic Segmentation

While demographic segmentation deals with physical and tangible characteristics, psychographic segmentation focuses on emotional and mental attributes. For example, customers can be grouped according to their lifestyle, personality, and values.

A marketing campaign targeting C-suites, for example, may not yield positive results until you further segment them into psychographic groups. The SaaS company may discover that C-suites who care about carbon footprints are likely to use their products.

Behavioral Segmentation

This type of segmentation categorizes customers based on their behavior. SaaS and other companies can segment customers according to their online shopping habits. What did they recently buy online? When do they usually check out their carts? How often do they open an application or visit a website?

Customer segments can be based on one or more of the above-mentioned characteristics.

What Are the Benefits of Customer Segmentation?

Companies implementing customer segmentation may see several benefits, including:

1. Product and service quality improvement

Market segmentation may uncover areas in your products, services, or company that need improvement. You can then make necessary adjustments to ensure you meet customers’ needs.

2. Discovery of untapped markets

After segmenting your customers, you may discover niche markets that can also benefit from your products or services. As a result, you can tap additional income streams.

3. Increased customer loyalty

Delivering the right message will make customers feel that you care about them and know their needs. That helps with customer retention and builds loyalty.

4. Cost-effective marketing and advertising campaigns

Sending a generic advertising message to a broad audience is costly. You end up paying for ad clicks that do not necessarily convert to sales since the person does not fall into your target market. However, if you segment customers, you can focus your ad budget on people who are really interested in your product.

5. More insights to make other business decisions

Aside from shaping marketing and advertising strategies, the data you gather from customer segmentation can help you come up with better pricing and product development strategies.

What Are Customer Segmentation Software?

Customer segmentation software aid companies in classifying customers based on specific traits to learn more about their customer bases. Understanding consumers as best as you can helps you serve them better.

You can give them more personalized customer service. Or craft more targeted marketing campaigns, thus increasing retention and enticing other potential consumers. A popular example of such an application is a customer relationship management (CRM) platform that correlates various data (e.g., age, location, occupation, etc.), making it easier to turn insights into action.

Your choice in customer segmentation software depends on:

  • The kind of data you want to gather
  • The business applications you already use
  • The hardware you have
  • How many users will utilize it

The customer segmentation software should be capable of getting and processing the data you want, compatible with all your existing systems and programs, and able to scale easily as more users are added to the mix.

Only a fraction of a business’s overall audience ends up purchasing a product or service. Customer segmentation helps determine which group of people are more likely to buy.