Understanding Customer Segmentation
At its core, customer segmentation involves dividing users into distinct groups based on shared needs that a product or service can address, along with their buying characteristics.
Process and Types of Customer Segmentation
The process begins with identifying the data to be collected. Once gathered, this data is analyzed to cluster users based on similarities.
In B2C contexts, segmentation is typically based on four key dimensions:
- Demographic: Age, gender, income, education, etc.
- Geographic: Location of home or work
- Psychographic: Lifestyle, personality, social class
- Behavioral: Usage, spending, consumption, desired benefits
In B2B contexts, vertical and horizontal segmentation are more relevant:
- Vertical segmentation focuses on industries, domains, or job roles within a specific sector. It captures industry-specific needs but may overlook individual user nuances.
- Horizontal segmentation focuses on similar job roles across industries. It highlights common tasks and behaviors but may miss industry-specific differences.
Method
Purpose
Advantages
Disadvantages
Vertical
To 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.
Horizontal
To 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-centered approach
Considers user needs and behaviors to inform design decisions.
2. Controlled level of detail
The depth of segmentation depends on the data collected and can be managed accordingly.
3. Wide applicability
Useful across product design, marketing, and business strategy to identify opportunities and drive engagement.
Challenges of Customer Segmentation
1. Dependent on segmentation criteria
Incorrect parameters can lead to ineffective grouping and outcomes.
2. Time-consuming
Requires effort in data collection, analysis, and clustering.
3. Handling exceptions
Accounting for diverse user needs and edge cases can be complex and resource-intensive.