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Segmentation is Dead, Long Live Segmentation

I was going to title this post – Segmentation is Dead! And in a lot of ways, it should be. But, there is money to be made in segmenting your customers. Read on and we’ll explain how to segment profitably in your business.

Each of your customers is an individual and deserves to be treated like one. Which why I almost started this post talking about how segmentation is dead.

Here’s the rub. You cannot afford to build your business focused on the preferences of every single customer (unless you have some really big customers). Yes, you can remember (using your CRM system) that Mr. Reynold’s likes his feather pillows and chocolate chip cookies, but you are not going to pick the location of your hotel or design your hotel interior based on one client’s preferences. That is where customer segmentation is still a very valuable tool.

What is segmentation? The technical definition is the subdivision of a market into discrete customer groups that share similar characteristics. Why segment your customers? The original purpose of segmentation is to discover customers whose behavior can be changed or whose needs are not being met. Unfortunately, customer segmentation seems to have lost sight of its original purpose.

Most likely, you have lots of different customer types. If you are a hotel, you have business travelers and vacation travelers. You can also segment by sex, age, frequency of hotel stays or likelihood to use the mini-bar. You can segment by “psychographics” and assign cute terms to each segment like “high-tech harry” or “joe six-pack”. Each of these “customer groupings” is a segment and each has different preferences. Each segment will respond better to different marketing approaches. Some segments will be more profitable than others.

The key to profitable segmentation is to focus your segmentation on a planned strategic outcome. For instance, has your hotel noticed an increase in customer defections to a new hotel down the street? Then you need to segment based on who is defecting and who has remained loyal. By understanding the needs and desires of the customers who are staying versus those who are leaving, you can reach each of them in a way that will work. Approaching the stayers and defectors in the same way just won’t be effective.

Imagine you are the owner of a car dealership. You find that a small segment of your customers are highly profitable because they trade their cars every twelve months and are dedicated users of your service department. Of course, you’d like to attract more of these customers. This is a great reason to segment out this highly profitable customer base and find out what makes them tick. This will allow you keep this customer segment even happier and to attract more like them.

Similarly, you probably have customers that drive their cars until the wheels fall off (like me). This customer segment is not nearly as profitable, but could you still reach them and make them incredibly loyal customers? Probably. What if you tracked the types of cars they buy and reached out to them when you have a great, lightly used vehicle in stock that they might like?

Customer segmentation can be an incredibly useful tool if you use it right. Always have a strategic purpose behind your segmentation and remember that people’s preferences change. You have to keep asking them what they want. We’ll talk more about that in future posts.