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80/20 Rule of Customer Segmentation: How to Grow Your Revenue by Targeting The Right Customers

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At some inflection point of growth, it becomes impossible to intuitively know your customers, let alone decide which ones to focus on.

“Customer segmentation is the process of dividing customers into groups based on common characteristics so companies can market to each group effectively and appropriately.” — definition of Customer Segments according to Shopify encyclopedia.

According to recently released B2C Sales and Marketing Data Report, in 1st Quarter 2020 companies that invested in data quality and consumer segmentation were able to improve marketing results by an average 74%. At the same time, companies that did nothing about consumer segmentation either didn’t grow or saw negative growth. After surveying over 300 B2C companies, from medium size with annual revenue of 10MM-25MM to fortune 500 companies’ results were relatively the same: these that invested in data and consumer segmentation were growing and these that did not — were striving. What was even more interesting — smaller companies that implemented ‘do it yourself’ relatively basic data enhancement / consumer segmentation techniques reported higher ROI than businesses that went more ‘traditional route’ and engage data enhancement / data append agencies. It turned out that the “Pareto’s principle” (also known as the 80/20 rule) is a bread and butter of marketing segmentation and worked for 100% of the businesses that participated in B2C Sales and Marketing Data Survey.

In this article we will go over techniques and tactics to kick start consumer segmentation. We will also go over specific examples and we are hopeful that these insights will help your business not only to find the right path and save time / money but also to avoid some of the common mistakes and pitfalls.

What is customer segmentation?

Segmentation is the process of dividing customers into separate categories based on common criteria. There are many methods marketers use to segment customers. Below please find a short list of customer segmentation techniques that proven to work for over 90% of the businesses:

  • by volume of purchases
  • customers who have made repeat purchases (will help to establish loyalty and improve engagement)
  • by geographical location — geo segmentation allows to divide customers into groups by region, district, city, etc.. This segmentation allows you to find out which area is the most effective.
  • by products and services. Here you need to research the most interesting products for the client and apply certain marketing moves
  • marginality is the result of all these indicators, a classic analysis of the customer base.

6 Main Types of Customer Segmentation

It seems obvious that one size is not going to fit all customers. The main question that most of the businesses are wrestling with — how to identify 20% of their main customers in order to make marketing strategy the most effective and achieve 80% of the result with minimum effort and cost.

Classification of clients according to the groups helps to save money on customer acquisition. Depending on the segmentation criteria, we have identified 6 main categories of segmentation:

  1. Geographical segmentation that depends on the place of residence of the customers. You can select a separate group of people who live in the same city, district, country, or region.
  2. Demographic segmentation is the division of consumers by gender, age, status, nationality, or religion.
  3. Socio-economic-division by income, education, type of activity.
  4. Psychographic depending on the lifestyle and personal characteristics of clients. How they spend their free time, what they are interested in, what houses they live in, what interior design, etc.
  5. Segmentation on the solvency of the customers.
  6. Behavioral segmentation classifies consumers based on their knowledge, attitudes, and reactions to the product. The attitude to the product can be negative or positive. A big role is played by what emotions the product causes in a person. Depending on this, there are subspecies of behavioral segmentation:
  • the circumstances of application — by the origin of the idea of making a purchase.
  • Based on the benefits. For example, for some clients, Smoking is a necessity, for others-an image
  • Based on the status, it determines whether the product is used regularly. According to this criterion, the following categories of customers are distinguished: non-users of the product, former users, potential users, novice users and regular users.
  • Based on the intensity of consumption, weak, moderate and active consumers of the product are identified.
  • Based on the degree of loyalty, the consumer’s commitment to a brand is determined. There are regular consumers, casual consumers, those who can switch to another brand, “non-consumers” with a positive or negative attitude to this brand;
  • Based on the stage of readiness to purchase, consumers who are informed or do not know anything about the product are divided into buyers who have shown interest, and those who want or do not want to buy the product.

3 Segmentation Methods

The easiest way is to divide customers into 3 groups:

  1. VIP customers who often use the company’s services or buy a product and make the most profit.
  2. Regular customers — those who buy periodically and each time they need to be convinced that they should buy from you
  3. “Problem” customers. These customers can bring good revenue, but they are more troublesome than the previous two groups. You should not write off such clients, but keep in mind that they require an individual approach.

VIP clients also need a special, respectful and at the same time trusting approach. You need to encourage them to buy again, to do this, you can offer them a loyalty program, regularly inform them about promotions and advertising offers, congratulate them on their birthday and support their interest in every possible way.

This is the easiest way to segment clients. Keep in mind that each group has customers who are potentially ready to move to another group, and you can influence this by segmenting them correctly.

10 Steps Essential For Maintaining Healthy Customer Database

How to maintain a client base and what steps should be taken to segment clients:

  1. You need to make a list of all your clients. The most convenient format is an electronic client database. Filter the list based on how much profit the client brings you. Starting with the largest and ending with the smallest.
  2. Classify clients by their main characteristics, depending on your needs. For example, by territory, gender, age, and interests.
  3. Divide all customers into demographic groups, because most of the demand for certain products is determined by their place of residence, age, and level of education.
  4. Divide your customers by region. Determine the area, city, or entire country, depending on the product you offer. Take into account the population density and climate of the territory.
  5. You can combine people into one segment using the principles of psychographics. Thanks to social networks, you can learn a lot about a person’s lifestyle, personal qualities and preferences.
  6. Study the customer’s purchase history. Divide people into segments, depending on the frequency and characteristics of the products consumed.
  7. You can also divide customers into segments, depending on the benefits of certain products to the consumer.
  8. Don’t assign one consumer to multiple segments at the same time. This will reduce the effect of marketing initiatives.
  9. Analyze which segments bring you the most profit and invest marketing funds in them accordingly. If the value of a segment is low, don’t spend a lot of money on it.
  10. There are many segmentation services and tools available on the Internet. Use them to speed up the painstaking segmentation process.

After you have identified the main segments based on the specified criteria, you need to determine the profile of consumer reaction to your product. That is, to make an analysis and description of each segment. People from the same segment should treat the product equally in terms of the advantages found in it, respond equally to advertising and to the cost of the product. Then this segmentation can be considered successful. You can find out the reaction of consumers using social surveys and questionnaires.

The correct segmentation should look like this:

  1. Customers in the same segment respond to the product in the same way.
  2. You can give a clear description of customers in a single segment.
  3. The segment has a large number of clients in order to justify advertising costs and bring profit.
  4. You can use ads to change the behavior of segment members.

In Conclusion

In order to grow a business, it is imperative to know your customers and to identify a “killer” marketing technique that will appeal to your consumers. In order to do so you will have to start adopting some of the consumer segmentation tactics described in this article. If you’ll be looking for additional insights or datasets that will help you to jump start consumer segmentation — don’t hesitate to visit datasetsDB.com

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