Customer segmentation is a strategy for grouping customers based on similar characteristics like location, market, demographics, or value. It helps sales organizations identify commonalities among those accounts and can provide insight on which businesses to devote time and resources to, allowing them to focus their efforts where they will be most effective.
Using a customer relationship management (CRM) tool can help you define customer segments and keep track of sales opportunities. Salesforce Essentials is a powerful CRM for small businesses which makes it easy to organize and manage customer segments. Plans start at $25 per month, per user, with a 30-day free trial available. Visit Salesforce for more information.
How Customer Segmentation Works
Customer segmentation works by breaking down your customers into groups, usually based on characteristics like size, location, customer persona, or other criteria that help you identify common needs. To create segments, a business should start by looking at their existing customers and researching the similarities and differences among them. For example, do some spend more and others only make infrequent purchases?
As you do this research, you and your sales team can start to see patterns and common traits among customers that make sense as a group. You might have a segment that all generate a similar amount of revenue, or another type of segment that represents your highest-valued customers. These characteristics can help you to see how to add value to those relationships and design sales strategies that work for different types of customers.
Those segments then help inform your specific sales strategy. Since different customer segments have different needs, buying patterns, and even buying processes, identifying customers according to the group they fit in can help to streamline your sales strategy by allowing you to focus your efforts on what is most effective.
6 Types of Customer Segments
There are a variety of ways to group your customers into segments. Which you choose depends entirely on your customer base, as well as your specific sales team objectives and goals. The following list is meant to help provide an overview of the different ways you can identify groups of customers and create segments that you can address with your sales process.
Here are six customer segments to consider:
1. Revenue or Number of Employees
One of the most common ways to segment customers is to group them by size. Similar sized businesses often face similar challenges. For example, small business customers face different types of issues than mid-market or enterprise customers. Creating customer segments by size allows you to gain an understanding of those challenges and tailor your sales approach accordingly.
Usually, segmenting by size is done based on revenue or number of employees. There are certainly other ways of measuring size, but those two best capture the differences in types of customers. You might classify companies with many employees across the country as “distributed,” while those with a small number that primarily operate out of a home base as “centralized.” Each helps you quickly understand common needs among those customers.
2. Lifetime Value
Other than size, value is maybe the most common type of segment. Of course, businesses don’t usually say they are grouping customers based on their value to the company directly, but there are all types of examples such as airline frequent flier programs. On their face, those programs are designed to reward loyalty, but the reason they do that is that the more valuable you are to the company based on your spend, the more they’d like you to stick around.
3. Customer Persona
While a customer persona is a fictionalized representation of a group of customers, it is also a customer segment. Formalizing groups that align with your target customer personas allows you to be intentional about focusing your selling efforts on the unique makeup of your different customer types.
These customer segments are based on character traits, needs, demographics, and specific pain points that are common among groups of customers, and are represented by a single profile, known as a “persona.” For example, you might have a segment for a middle-management marketing persona, and another for a C-level executive.
4. Geographic Area or Territory
Segmenting your customers by territory means that you group them according to their geographic location. Creating territories allows you to focus your sales efforts based on the businesses in a given area. Using territories is one of the more general types of customer segment because the only thing the businesses have in common is their physical location, but is still a valuable tool for analyzing trends and opportunities across different areas.
Another way to create customer segments is to divide your customers by their specific industry. Your customers that are retail locations have different needs and challenges from your customers who are doctors or attorneys. That’s true even if they are purchasing the same products and services because their business and customers are different.
6. Product or Service
One final way to segment your customers is by the specific products or services they purchase from you. For example, you may have one segment of customers for whom you provide lawn care and maintenance services, and another that you provide snow removal. In that example, you may also have a third segment for which you provide landscape design and installation. Each segment has different needs and your sales process will look different.
Customer Segmentation Principles
In addition to understanding the types of customer segments you might create, there are a few principles that can help guide the process. These aren’t meant to be steps in a process, but rather best practices you should consider when breaking your customers into segments. Each of these will help you create the most useful customer segments for your business, which helps you improve your overall sales performance.
Here are a few principles and best practices to keep in mind:
Deciding on Broad vs Specific Segments
Depending on the overall size of your customer base, there are likely to be more than one way to group customers into segments. In fact, it’s actually common to have an individual customer fit into more than one segment based on the specific trait or commonality you are considering. For example, you might have a customer that fits into your small business segment, but is also a high-value customer relationship.
In that case, those two segments are not mutually exclusive, they are just based on a different variable. Both types of segments can be useful in helping your sales team manage the relationship and maximize their sales activities. Whether you choose to primarily focus on more broad segments (size of the business) or specific traits (value or persona) is a decision you should make on what is most helpful to your sales team and sales process.
Pro tip: CRM software can make it easy to manage different customer segments by creating lists or utilizing tags to identify which segment a customer is a part of. Salesforce Essentials, for example, allows you to create custom fields that you can use to define segments, which then allows you to sort and organize your customers. Visit Salesforce for more information
Tailor Your Sales Efforts
Once you’ve created customer segments, you should adapt your sales process based on the unique qualities and needs of each segment. If you have two segments, one for small businesses and one for enterprise companies, your sales team should have a clear understanding of how to approach each segment differently.
For example, when I was a sales account executive, I was responsible for managing a specific geographic territory, but within that area, there were customers from a range of segments. Those included small businesses, mid-market companies, and enterprises. Understanding the differences in how businesses in each segment managed their purchasing and decision-making was crucial to a successful sales process.
Remember That Every Customer Is Unique
It might seem counterintuitive in an article about customer segmentation, but keep in mind that every customer is unique. That means that while there are similarities among customer segments, individual customers–whether businesses or individuals–have challenges specific to their situation and circumstances. Customer segmentation should, therefore, only be used as a starting point in understanding your customer’s needs.
Who Should Use Customer Segmentation
Customer segmentation is a valuable tool for both business-to-business (B2B) sales teams, as well as companies that sell directly to consumers. In both cases, it can be helpful to have a clearly defined grouping of your customers that highlights the similarities within segments, as well as the difference between them.
A few examples of who should consider segmenting customers include:
- Businesses with a distributed customer base: If you find that your customers are distributed across a wide range of locations or industries, creating customer segments can help make your sales process more manageable.
- Retail: Customer segments help retail businesses better target the types of ads they send customers based on their stage of life, income, and family circumstances.
- Professional services firms: Businesses that primarily provide professional services (legal, accounting, etc.), can benefit by tailoring their customer approach based on the types of services a customer needs, along with their specific circumstances.
- B2B sales teams: In general, businesses that primarily sell to other businesses benefit from customer segmentation as it allows them to target their sales efforts at the right customers, which leads to a higher close rate and increased revenue.
Though these are a few examples of the types of businesses that benefit from customer segmentation, the reality is that any business with more than one customer can start to evaluate how their customers are similar or different and adapt their sales process based on those differences. In fact, starting to think about creating customer segments while your business is small is a great way to establish a best practice that will continue to benefit you as you grow.
Benefits of Customer Segmentation
Creating customer segments helps your business better understand who your customers are, and makes it easier to focus your sales activities where they are most effective. As a result, your sales team can better address specific customer needs, which results in more profitable sales. These benefits can be seen by any business that takes the time to segment customers in a way that makes sense.
A few of the specific benefits of customer segmentation include:
More Efficient Sales Process
By identifying similarities among customers, and grouping them accordingly, you can more strategically dedicate the right resources to the right customers. This can help your sales team be far more efficient in developing and handling customer relationships, which leads to a greater return on their efforts. Since customer segmentation can help create more manageable sales portfolios, your team can spend more of its time engaging with the right customers.
More Effective Cross-Selling
Creating customer segments also allows you to identify common needs among similar customers, which can help your sales team suggest relevant products and services in addition to the original sales opportunity. Known as cross-selling, this can be a valuable way to increase sales revenue for individual customers, which benefits both the sales team and the entire business.
Increased Customer Retention
Because customer segmentation allows you to better focus your sales efforts, it results in better customer retention over the long term. That’s because your sales team is able to provide the right products and services, which not only meets the immediate need you customer has, but results in increased trust that you have their best interests in mind long term. It’s far less expensive to keep your customers than to find new ones, meaning this helps reduce expenses.
Higher Customer Lifetime Value
All of these benefits tie into creating customers with a higher lifetime value. That simply measures the expected value to your business over the lifetime of the customer relationship. By identifying the common needs of groups of similar customers, you can intentionally focus your efforts on their specific needs, which results in greater customer satisfaction and longer customer relationships, both of which lead to long term value.
Tools to Create & Manage Customer Segments
Most sales organizations use either CRM or marketing automation tools to create customer segments because of their ability to handle a large number of contacts and easily identify commonalities. While there are other tools that can be beneficial, we’ve included a few that can help you get started.
Here are a few tools you can use to create and manage customer segments:
Who it’s for: Small businesses that want enterprise-level capabilities in a more accessible software tool designed for smaller teams
What it costs: $25 per month, per user, for up to 10 users
Sales Essentials is a powerful CRM that includes contact management, sales pipelines, deal management, and mass email features. Because Essentials is built on Salesforce’s Lightning platform, it is a much more intuitive and user-friendly interface compared to the Classic version. That makes it easy for small businesses to manage their contacts and segment them into groups that make sense.
The Essentials plan includes lead capture, a mobile app, and access to the Salesforce App ecosystem, which means that you can easily connect Salesforce to a variety of tools that make managing your customer segments simple and intuitive. That includes marketing automation and email tools like MailChimp or Constant Contact, or analytics tools like Tableau which provide insights into your customer information. Visit Salesforce for more information.
Who it’s for: Small Businesses looking to send email campaigns to specific customer segments.
What it costs: Free up to 2,000 contacts.
MailChimp is an email automation tool that makes it easy to organize and segment customers based on criteria like interest, activity, and landing page submissions. It also lets you easily create beautifully-designed email messages to send to your customer segments. While not as powerful as some dedicated marketing automation tools, MailChimp allows you to segment your audience into lists and track when emails are opened as well as what links your readers click.
MailChimp is a simple-to-use email tool that is free for up to 2,000 email contacts. It includes the ability to create multiple audiences and send up to 12,000 emails per month using professionally designed templates. It also integrates with many popular sales tools including HubSpot, allowing you to track email engagement within their CRM. Visit MailChimp to sign up today.
Alternatives to Customer Segmentation
In addition to customer segmentation, there are a variety of ways to group and identify commonalities among the leads and customers your business interacts with. Each has different benefits and is worth considering as a part of your overall customer relationship management strategy.
Here are a few alternative options for segmenting your customers:
Market segmentation is similar to customer segmentation, except that it divides a group of potential leads or prospects into smaller groups. Using these groups or segments, a business can then create targeted marketing messages that are designed to address a unique set of needs or challenges.
Behavioral segmentation is a specific method of grouping your customers based on their activity and behavior. For example, you might segment customers based on buying patterns, recent high-value purchases, or their purchase frequency. This is similar to grouping customers by value, but considers a range of actions your customer takes in order to identify common characteristics across a segment.
Assuming Every Customer Is the Same
Finally, it’s worth mentioning that another alternative to segmenting your customers is not segmenting your customers. This is usually only a last-resort option if you don’t have the resources or capabilities to create customer segments. If the only commonality you can identify is that all of your customers are purchasing something from your business, it could be helpful to take more time to look at the differences in the types of customers you serve.
Customer Segmentation Frequently Asked Questions (FAQs)
How do I know which type of customer segment to use?
Creating customer segments is a strategic decision that helps you make better decisions about how to manage relationships with each type of customer. It’s also OK to have multiple “types” of customer segments. You can segment customers based on size, or value, or persona, or all three. The best choice is the one that helps you better accomplish your team’s specific sales goals.
Who is directly responsible for creating customer segments?
Often this responsibility falls to either your marketing team or your sales planning team. If you own a small business with limited resources and a small team, there’s also a good chance that it falls to you. That’s OK, it doesn’t have to be complicated. Simply ask yourself what different types of customers have in common and whether it makes sense to group them as you create sales strategies for each.
Bottom Line: Customer Segmentation
Customer segmentation is a valuable tool for sales teams that want to tailor their sales process according to the specific needs of their customers. By identifying both similarities and differences among their customers, these businesses can be intentional about adding value and building relationships that address the challenges their customers face.
CRM software can be a valuable tool for defining and managing different customer segments. Salesforce Essentials, for example, allows you to create contact profiles with information about each customer and tag customers based on their segment. Salesforce Essentials starts at $25 per month, per user. You can also sign up for a free 30-day trial.