Customer Segmentation

Customer Segmentation is a method to categorize customers into groups based on certain parameters such as age, interests, behavior, geography, etc. Customer segmentation is one of the primary most important methods employed by marketers around the globe for targeting specific users for a product or service. This also allows marketers as well as businesses to communicate effectively only the information that is relevant for specific user types.

Quick details: Customer Segmentation

Structure: Structured

Preparation: Statistical data, Segmentation parameters, Product/ Service propositions

Deliverables: Customer Segments

More about Customer Segmentation

At its most basic, customer segmentation involves segmenting customers into distinct groups based on their needs that a single product or service can satisfy and buying characteristics of the groups of people.


Process and types of Customer Segmentation

The process to categorize i.e. segment the customers is to first decide the data to be collected. After collecting all the data about the participants or users, this data is analyzed to segment users into clusters of those that are similar in some respects.

There are four broad types or characteristics that customer segmentation is based upon in a B2C setting – demographic (age, race, religion, gender, family size, ethnicity, income, education level), geography (location of home or work), psychographic (social class, lifestyle and personality characteristics) and behavior (spending, consumption, usage and desired benefits). In a business setting where the method is employed when designing for business users – vertical and horizontal segmentation techniques become more relevant. In vertical segmentation, researchers segment specific industries, domains or job titles within that industry. In horizontal segmentation, researchers segment one job title across industries and organizations.

VerticalTo address the needs of user types based on industry or domain.Takes into account the needs, behavior of users in a specific industry.Certain user specific challenges may get missed when looking at all users within an industry.
HorizontalTo address the needs of user types based on job profile irrespective of industry.Takes into account the needs, behavior of users across the board who are performing the same task, activity or work.Certain industry specific exceptions may turn out to be difficult to collate the findings.

Advantages of Customer Segmentation

1. User/Human Centered

The method takes into account the user needs, behavior and other factors that can be used to create a design that has the user at the center of it all.

2. Details can be controlled

Depending on the data collected initially from the users, the one that is used to segment participants into groups, the level of details can be planned, managed and controlled by the researcher.

3. Applications

Customer segmentation can be employed and is employed by researchers, product and service designers, marketers and business in a number of ways to create something new, fill a gap in the market, target potential customer or to elicit action from existing customer base.


Disadvantages of Customer Segmentation

1. Segmentation Type Dependent

This method is so specific to the segmentation type that if the choice of segmentation criteria were incorrect, the grouping will be incorrect affecting the final intended result from the activity.

2. Time-consuming

Creating segments is a time consuming and elaborate process. Time is required to first recruit users, research them, and then segment them.

3. Recording Exceptions

Every user may have different needs, behavior, goals and prioritizing which needs, behavior patterns and goals should be part of the segmentation criteria and which shouldn’t is a huge task in itself. Also, segments should incorporate exceptions or extreme user descriptions to cover all aspects of users one is designing for.

Think Design's recommendation

The purpose of customer segmentation is to target those segments of users for either developing new products, positioning existing products, augmenting products or communication. It then goes unsaid that there is implicit or explicit value attached to each segment. Choose your sample size to justify quantitative results.

Customer segmentation could become the basis for your next product development and the stakes are high. For this very reason, it is an activity of critical importance to your business. Hence, we recommend that this is planned and executed with the same criticality as it is going to be used for. Evaluate all your options before boiling down to your segments; at all costs, avoid swaying towards segments that are too obvious!

Let’s say for instance, we want to segment customers in the context of a Financial Services company. An obvious approach is to segment by demographic or economic segments such as:

  • Demographic: Students, Early professionals, Middle managers and so on
  • Economic: Segmentation by annual household income
  • SEC: By Socio Economic Classification more about this

However, by employing the very obvious methods above, you may be segmenting your users in a very similar way to your competitors; and if you plan your products with this as your base, you are likely to develop similar products as that of your competitors thereby lacking differentiation. On the other hand, if you employ different metrics for segmentation that are not-so-obvious, you are likely to chance upon your next big innovation. Some of the possibilities:

  • Behavior: Geek, Digital-Cynic, Promiscuous and so on
  • Experience needs: Transactional, Value seeker, Image seeker and so on
  • Loyalty index: Flirt, Promiscuous, Loyal and so on
  • Maturity: Novice, Expert and so on

Choose your segmentation metrics based on what is the service/ product we are going to design for and what could constitute a right segment for us to develop our product. By doing so, you will be in a much better position to cater to your real customer needs than the assumed needs based on demographic or economic segmentation.

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