5 Customer Segmentation Tips to Improve Sales

Customer segmentation provides numerous benefits, but if done improperly it can do more harm than good. Here are five tips for successful customer segmentation.

Segmenting customers and prospects to improve sales and marketing results may seem commonplace. But done incorrectly, segmentation can be a more than waste of valuable marketing dollars, it turn customers off to the point of defection.

By splitting customers into the right segments, companies can better target their customers with the correct marketing information, closing more sales and thus increasing their clients' value in the process. Moreover, by tailoring communications and services based on customers' behaviors, needs, preferences, and value companies are able to deliver a better customer experience, helping decrease the risk of churn.

The economic downturn and ensuing fiscal difficulties has made it essential for companies to know their customers' value and ensure that they're targeting different customers differently-providing the right information at the right time to the right customers. According to Wilson Raj, global product marketing manager for customer intelligence at SAS, segmentation is one of the steps that companies can take to "future-proof their business."

Furthermore, as more companies increase their use of marketing automation, having the right segmentation structure becomes even more crucial, says Dan McDade, CEO of PointClear. Tools that automate processes like lead nurturing reduce human interaction during the marketing stage of the purchase process. Consequently, segmentation can establish the buying persona and predetermine what information prospects and customers will receive and how much attention will be given to each.

According to Simge Alpagrun, manager at Peppers & Rogers, when executed properly segmentation can have four main benefits:

  • It creates a single definition of which customers are high-value and which must be managed cost-consciously. This aligns all the business units within an organization to the same vision and objectives.
  • It improves planning because decision-makers know which customers are value creators and must be treated on a one-to-one basis and which are value destroyers and should receive limited attention.
  • Segmentation improves the efficiency of sales activities since the target group is defined better, more analytically and more objectively.
  • It integrates the channels an organization uses to provide a seamless and consistent customer experience since each channel is treating the same customer with the same degree of priority.

However, in their zeal to segment, some companies approach segmentation incorrectly. This can lead to overlooking prospects who have high potential and alienating existing customers by over-contacting them. Alpagrun says that when done incorrectly segmentation can create inefficiencies, waste time and effort, give confusing or conflicting messages to the same customer, lead to lack of alignment between different parties in an organization, and improperly measure and define success within the organization. "Unless companies spend time and energy to put the correct segmentation measures in place, they might be faced with poor results," says Tim Watson, Emailvision's UK operations director.

Even if the ultimate aim is to improve sales, segmentation should go beyond that to focus on building customer relationships, Raj of SAS says. "It's not just about contacting customers, but also involving them in the brand," he says. Ultimately, increased sales should be the result of an enhanced customer experience and a stronger customer relationship.

Most companies already have mountains of customer data that they can use for segmentation, so they can kick start the process relatively easy. To avoid segmentation going awry, experts give the following advice:

  1. Create a holistic picture: While most companies have copious data available, often it's siloed in different departments, giving a skewed picture of customers that can lead to incorrect segmentation. The goal is to have a holistic picture of each customer, allowing companies to target him with the most suitable information and giving each client the attention that his value requires, without overspending on less valuable clients.

One of the areas where companies tend to over-segment is determining the cost equation of a customer. For example, a customer who spends a lot of money might not be the most loyal client. On the other hand, someone who only spends a small amount per week might have a bigger influence pool, making him a more important brand ambassador.

Moreover, proper segmentation can determine whether a customer fits into more than one segment. SAS's Raj says a customer who seeks discounts might be willing to pay full price for particular items or at certain times and unless this is taken into consideration, companies risk losing money by only targeting that customer with promotions.

  1. Start small and grow: One of the major mistakes that companies make is creating sophisticated segmentation models that aren't necessary. Watson of Emailvision says that even among major retailers that have complex segmentation models built on vast databases, some started small and grew over time. Raj says companies can start with as little as customers' names and addresses. Although these two data points might not look like they could provide a lot of information, they're a good starting place. For example a customer's name, especially the last name, can give an indication of a person's ethnicity or cultural background, while the address can give some insight into his socio-economic status. "It's not an exact science, but a good starting point," Raj says.
  1. Create cross-channel segments: A common oversight that companies make is failing to determine whether a segment is actionable in numerous channels. "Today's customer is experiencing the brand in multiple channels," Raj says. "Businesses are under pressure to be relevant and active in all channels and segmentation should take into account the different channels that are applicable to the target segment, offering him value through as many channels as possible." For example, a male customer who's in the market for a pair of black shoes might do his research online before walking into a store, and footwear vendors need to see both sets of data.
  1. Build segments on research not guesses: Company executives might have a hunch of what the right segments should be, but they're not always correct. "This inkling can drive the process of getting insight, but is not enough on its own," Watson says. He argues that segmentation is painstaking, diligent work that requires analyzing scores of data. Watson recommends starting by brainstorming the potential variables that determine the segments before digging deeper into the data to reinforce this information. "It's the marketer's job to define the segments, but it's the customer who puts himself in a particular segment through his behavior," he says.
  1. Test the segments: Once the segments have been selected, they should be tested to make sure they improve marketing and sales results, not detract from them. PointClear's McDade says that many companies make the mistake of not doing enough testing. Watson recommends having a permanent control group to test whether customers were assigned to the correct segments and that the marketing spend is having a positive effect on those groups.

When done properly, segmentation can help companies focus not only their energy, but also their resources on their most valuable customers. "A company with a million customers should concentrate its message on the high-value customers, who have already shown value or are emerging stars," Watson says.