Market segmentation – a quick guide

Customer segmentation results in groups of customers that look or act similarly

Knowing your customer is one of the cornerstones of any business. This post is for you if you want a basic understanding of how to do market segmentation and, taking that one step further, create customer personas for your business.

This is one of a series of blogs intended to assist you in growing your online business. To prepare to create a winning e-commerce website, you need to address 4 key elements.

4 elements to create a website for growth

4 elements needed in great website design

In related posts, we discuss the other elements:

  • How do you establish and align business, digital marketing and website goals?
  • Mapping customer journeys helps identify potential improvements in how you interact with your customers, whether via your website or other initiatives.
  • Creating a brand style guide ensures that every message you put out there about your company is consistent.

Let’s dive right into this post.

What is market segmentation?

Market segmentation is the process of dividing your existing and potential customers into groups with similar characteristics. Customer segments are clusters of customers that have similar needs in terms of your products, behave similarly when they buy from you, or have similar communication preferences.

Diagram showing customer segmentation into groups with similar needs

Why is market segmentation important?

The most effective way to sell to customers is to meet their needs. You unfortunately cannot meet every customer’s individual requirements, but you can focus your attention on groups of customers that have similar ones.

There are a few key things you can do better if you understand your different customer segments. You can:

  • Identify the most and least profitable customers and treat them differently
  • Better focus marketing efforts on different segments
  • Develop products suited to specific segments
  • Price products differently and appropriately for different segments
  • Train your organisation to better serve customers based on their needs
  • Build loyal relationships with customers
  • Create personas to help partners and employees understand the different segments

How do customer segments translate into customer personas?

Once you’ve categorised your existing and potential customers according to pre-defined criteria, and grouped them into more or less homogenous groups with similar needs and behaviours, you have created customer segments. Then you can take that one step further by creating customer personas to represent that segment.

Customer personas are more than just a brief summary of your target customers. They are fully developed, thoughtfully cultivated portfolios that help you better understand:

  • Your buyers’ needs;
  • Their knowledge of your products and services;
  • How they consume media;
  • Which communication channels they prefer;
  • Who influences their buying decisions; and
  • How they will respond to different messages.

While most businesses develop buyer personas, many of them make the mistake of building so many details into the persona’s backstory that they miss the bigger picture. To be truly useful, the focus should be less on personal habits and more on the motivating factors that influence how they:

  • Decide what they want
  • Convince themselves that they deserve it
  • Make a plan to get it

Personas can be as simple or as complex as you want them to be. What’s important is that you build them using real customer data gathered over time, combined with interviews with current or prospective customers.

How to segment your customer base and build personas

Step 1: Gather data

You need to gather as much data as possible about your customers. You can do this:

  • Using historical sales data;
  • Through your web analytics software, such as Google Analytics;
  • Through your social media analytics;
  • By running surveys using the analytics data already gathered; and/or
  • By interviewing customers directly.

You will use this initial information to look for patterns that point to clear and relevant criteria for your business to use as a basis for segmentation.

Step 2 : Clarify your criteria

While demographics are useful to an extent, they are outdated as a basis for creating personas. It’s far more relevant today to cluster customer segments around online purchase behaviour or needs/problems specific to your product.

Bear in mind too that your core market segments should be unique to your business. So consider using only criteria that help you understand your customer’s behaviour related to your specific products.

The diagram below gives an idea of the kind of information you are looking for.

Market segmentation criteria

Digital sharing: MasterCard identified 5 types of digital sharers:

  • Passive users: Sceptical of the internet and spend the least time online
  • Proactive protectors: Make full use of their privacy settings to guard their private information
  • Solely shoppers: Use the internet for product research and clever purchasing
  • Open sharers: Most digital of all consumers and expect benefits for sharing their information
  • Simply interactors: Not very tech-savvy, but the most dedicated social networkers

Once you have gathered your data, and clarified your business-specific criteria, group your findings in segments on a spreadsheet. Aim to cluster customers that act similarly based on your criteria. Although you may need professional statistic analysis if you have large amounts of data, you know your customers and have a good chance of uncovering patterns yourself and creating some hypotheses.

As you build up data on different characteristics or behaviours, patterns of possible relationships between the profiles of customers and their needs will become clearer.

At this stage you should have roughly shaped segments (hypotheses if you will) outlined in a spreadsheet.

Step 3: Conduct further investigation to confirm your data

Now that you have an idea of some potential customer segments, it’s time to get out there and interview a small sample of customers, or prospective customers, who roughly fit the profiles you have so far.

If, for whatever reason, you cannot establish a face-to-face, telephonic or Skype interview, you may want to recruit customers for an interview or survey while they are interacting with your site. There are many low-cost Voice of Customer tools, such as Hotjar, available for this.

Once they’ve agreed to the process, arrange for a Skype call or web meeting to conduct your interview. Draft a short discussion guide beforehand to make sure you’re asking everyone the same questions, but keep most of the questions open-ended to allow users to express their opinions. Some examples might be:

  • Why do you buy product x?
  • What do you enjoy most about our products?
  • How do you choose which brand/book/product to buy?
  • Why would you not buy our product?
  • What annoys you about the process of buying xyz?
  • Through which channels would you prefer to hear about new products or specials?
  • Which competitors would you consider and why?

The aim of this step is to gather data that can validate (or invalidate) your hypothesized segments and also build a deeper understanding of their needs and behaviours.

Step 4: Refine your market segments

Once you’ve conducted your interviews, update your spreadsheet with any new information, adding depth to the personalities and buying styles of the various customer segments. You may even find you need to make changes to your segments as a result. Try not to create too many different segments though, unless it’s very clear that each group is reasonably large and that differentiating them is important to the success of your business.

The results at this stage may look something like this:

Examples of customer segments for an online book company a sport shop and a car dealer

Step 5: Create your personas

You’re finally ready to create persona frameworks (and micro personas if need be) that can be used to describe your customers. There are many great tools available to help you do this. Some of the best ones include:

Xtensio: This is a free buyer persona creator tool that you can use to build as many personas as you like. Highly recommended for individual business owners.

Userforge: This is one of the most flexible tools available to collaboratively develop comprehensive user personas. Highly recommended for teams

Both your segments and persona comparison should be handed to your web design company in order for them to create a winning website for you.

The result of the persona work will look something like this:

Customer Persona Comparison for a fictitious online bookstore:

Online books customer persona comparison

Each persona will have a detailed profile explaining their needs and preferences, much like the two examples below.

School mum Mary customer persona

Empty nester Eric Customer Persona

Using a tool that works for you, create a persona like the one above for all your customer segments.Depending on how much data you have available, each profile may be more or less detailed. As you discover more about your customers, you can always add to their personas, and it’s a good idea anyway to refine them periodically.

The bottom line

Many business owners assume they already know who their customers are and what they want. If you’re planning to grow your business, it’s truly worthwhile to check your assumptions with some thorough research on your market segments.

Remember that you’re aiming to understand how your customers use your products, their buying behaviour on your website and their preferred communication channels. So be sure to build your personas around these attributes, especially as you will need them for the next step of mapping your customer journey.

Please let us know of any tools or tricks you may have found useful in segmenting your customers?

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