Customer Segmentation for Startups and Small Businesses | Startups.com

What is customer segmentation?

Customer segmentation is the process of dividing a large group of customers into smaller groups, based on certain characteristics. It’s also sometimes called “market segmentation.”

Why is customer segmentation important?

Customer segmentation is important because it helps companies market more effectively to their customers. If you want your marketing budget to go as far as it can, it’s essential that you know who you’re marketing to and what they respond to when it comes to advertisements.

For example, if your company had a customer base that included both 14-year-old boys and 45-year-old men, you wouldn’t use the same marketing techniques with the two groups, would you? But you can’t even know that you have those groups to market to in your customer base until you do customer segmentation.

Customer segmentation also lets companies create personalized marketing materials, which customers generally respond better to than broad, impersonal marketing. Think about the difference between a targeted Facebook ad and a junk mailer that you get in your mailbox. Which one are you going to spend more time with? Which one is more likely to get you to buy something?

Another benefit of customer segmentation is it can help companies upsell, cross-sell, and identify new products. Once you have a firm grasp on the categories your customers fall under, it’s a whole lot easier to know what also you can sell them.

Figuring out your target market

Before you can segment your customers, you have to get data on your customers. That data is gathered via surveys or purchasing information or even telephone or face-to-face interviews. Regardless of the method you choose, you have to make sure you have that data first, so spend some time determining what the best information gathering method might be for your company.

One good way to get this information is to define your target market.

1. Follow the data

Sometimes, defining your target market takes care of itself. If you’re building a B2B product for an ultra-specialized industry that only a handful of companies work in, your target market is that handful of companies.

Other times, the organizing principle that unites your target audience may be a little less clear. So how do you go about defining your target market in those cases? One good way is to turn to social media and to analytics tools. Who’s already following you on social? And you can use tools like Google Analytics to understand who is coming to your website. Quantcast also has great tools that are free to figure out who is coming to your site.

2. Talk to people

Another tried and true way to get to know who your target customers are and what matters to them: talking to them.

In our age of big data and quantitative reasoning, we’ve all been trained to assume that data reigns supreme. But sometimes there really is no substitute for getting on a call, or even sitting across a table from them with a cup of coffee, and asking them what their pain points are.

This brings us to the one major pitfall you absolutely want to avoid: Defining your target market without going outside of the company or team. This is a trap we’ve seen startups fall in all too many times. Some founders become so fixated on who they want their target market to be, they forget to check and confirm that that’s who their target market actually is.

And more often than not, when you go that route, what you wind up with is not a target market at all. It’s a Frankenstein fever dream of a phantom creature that you think is your target market.

Trust us: real target markets are way better than fantasy target markets. They’re a lot easier to sell to.

How do you segment customers?

There are four categories of customer segmentation:

1. Geography

Geographic customer segmentation is pretty basic: You put your customers in categories based on where they live. So, for example, a company focused on New Yorkers might put their customers into categories of Queens, Brooklyn, Manhattan, the Bronx, and Staten Island.

Your geographic categories could be as narrow as a street or as broad as country. But if you’re going to use geography for your customer segmentation, make sure your product is one that benefits from this type of segmentation. So, for example, Walmart might choose to advertise bathing suits in Southern California in January, but not in the Midwest. People in one of those geographic locations is going to want bathing suits year round, but people in the other are going to be like, “Why are you showing me bikinis?? It’s negative 15 degrees out!”

2. Demographics

In B2C businesses, demographic segmentation is about splitting up your customers based on identifiable demographic characteristics, including but not limited to race, ethnicity, age, gender, religious, education, income, marital status, and occupation.

Demographic segmentation can be extremely useful. For example, an airline might choose to target different groups, based on age. While college students might be more likely to fly during spring break, young parents may be less likely to travel during that time but more likely to travel over the holidays. Knowing those demographic differences can really aid in targeted advertisements.

Be careful about some of those demographics, however, as targeting groups based on race, for example, can bring up charges of racial profiling. Also, excluding groups based on certain characteristics is also illegal.

In B2B businesses, demographic segmentation might cover company size, industry, role, how long employees have been working for a company, number of employees, company location, and more. For example, a startup working to help other startups with advertising might first target only startups and then further segment the group into startup founder and marketing team members.

3. Psychographics

The next category of customer segmentation is psychographics. In this category, you’re looking at characteristics like lifestyle, values, social class, personality, and more.

“Psychographics, or what's going on in the mind of your perfect buyer, is an effective qualification method,” business strategist Jason Kanigan says. “What problem or key problem situations are they in, what emotions are they feeling, that they badly want to get out of--that you can fix?”

It’s much more difficult to segment your customers based on psychographics than it is to segment them based on geography or demographics, because psychographics are less obviously tangible and not as commonly tracked by third parties. In order to segment your customers based on psychographic information, you’re going to need to dig deep into a customer persona.

4. Behavioral

When you’re doing behavioral segmentation, you’re dividing your customers into groups based on their usage, loyalties, awareness, occasions, knowledge, liking, and purchase patterns. So, for example, Lyft will send out offers to customers who haven’t used their app in awhile, but won’t send the same offers to people who are regular users. That’s segmentation based on loyalty, which falls firmly under the “behavioral” category.

How do you use segments?

Once you’ve successfully segmented out your customer, what do you do next? You market to them! Take those segments and develop a marketing strategy that will help you reach each customer segment effectively.

If you’re like, “And how am I supposed to do THAT?” here are some marketing tips from serial entrepreneur and marketing expert Michael Kiel:

1. Use Facebook ads to target your ideal customer.

You can effectively boost your Facebook posts with as little as $10 per day, or you can easily launch and test an ad campaign with a few more clicks. You should also set up remarketing on Facebook and only pay when someone actually clicks on your ad. This provides more exposure for your brand across the web at a very low cost compared to alternatives. With the number of monthly global social media users expected to expand to 3.02 billion by 2021, this is one of the easiest things you can do to reach a huge audience in a short amount of time.

2. Claim your listings on Yext — especially if you have multiple locations.

Yext is a platform that is tied to several business listing websites, and it will allow you to control how your business appears online across most platforms. It also increases the likelihood that your business will show up in search results when someone is searching for local businesses on Google.

3. Leverage social media groups.

For example, create a Facebook group to provide your target audience with valuable blog posts and other articles you’ve written without looking too sales-y. This will position you as a thought leader in your industry and a trusted source for advice. In fact, one study discovered that businesses with blogs bring in 126 percent more leads than those without. It’s also a great idea to partner with online influencers in your industry and encourage your employees to share company content across their social networks. For B2B companies, it’s also smart to leverage LinkedIn as often as possible.

4. Advertise strategically online.

If the cost per click of Google Ads is too expensive, try Bing Ads. It’s usually much cheaper, and there’s not as much competition. In fact, the average CPC is less than $8 on Bing Ads versus over $20 for Google Ads. There’s also less search volume, so keep that in mind if you’re trying to run ads around search terms that don’t have a lot of volume.

5. Hire an external marketing team.

A modern marketing team typically consists of a variety of professionals with different specializations. If you were to hire a team in-house, you’d at least need a content marketer, a social media marketer, and an email marketer — and you would be looking at spending tens of thousands of dollars a month. Overhead alone for a lead generation-focused marketing team can be over $13,000 a month.

For a much lower cost (not to mention fewer hiring headaches), you can simply hire a marketing agency that employs all of these specialists. Just be sure to properly vet a marketing agency by asking for examples of its work and success stories of businesses similar to yours.

Helpful tools for customer segmentation

There are some great free and low-cost tools available online that are invaluable for customer segmentation. Here are some ones that we love.

1. Google Analytics

Google Analytics is perhaps the most effective analytics tool out there — and it can give you a lot of info. It’s free and available to anyone who has a website. It also not only collects data, but actually segments it out for you via the “add segment” tab that’s on every page. You can choose to segment based on Users (New, Returning, Traffic Sources), Demographics, Geography, Device and Conversion Behavior.

2. Kissmetrics

Kissmetrics is a great option for ecommerce companies, at it focuses on the actual actions that users take, rather than page views. They also offer A/B testing and conversion funnels, which are great tools for any marketer.

3. Optimove

Optimove goes beyone just collecting information and actually provides you with actionable insights based on customer behavior. There focus is on B2C companies and they’re great for ecommerce.

More information on customers and marketing

Why Are Customer Personas So Important?

The Secret to Defining Your Target Market

7-Step Guide to Building a Content Marketing Strategy

How to Make Customers the Focus of Your Marketing

How Startups Can Build Effective Buyer Personas