What is Customer Segmentation?  

Customer Segmentation and Profiling

Customer Segmentation and profiling is the first step before we decide on how to retain, satisfy and maximize their profitability.


What is Customer Segmentation?


Customer segmentation firstly has to define on what do we mean by the customers, and also what should be and should not be done in customer segmentation.

‘Customer is the king’ is stated by almost every head of business. Another way to look at this statement- ‘customer is the king, but shareholder is the emperor’. Finally share-holder interests take precedence over the customer. We acquire, serve and retain the customer to give the best value to share-holders. This basically tells us to be smart on how we deal with the customers, so that we maximize our sales and minimize our costs.

Customer Segmentation & Profiling runs across all initiatives and domains of Customer Relationship Management. Customer segments vary in terms of CRM objectives you want to achieve. For example a highly satisfied customer may not be a high potential value customer, OR high potential value customer could also be a high-risk customer.

Customer Segmentation Business Objective:

To have effective segmentation & profiling of customers to enable business get maximize customer value and satisfaction, by offering relevant products and services.

Key Business Questions:

What are different customer segments, relevant to business?
How each of these customer segments drives my Strategic objectives?
Which customer segments are more important for me and will give me higher return for my investments?
What actions I have to do for each customer segment to improve their satisfaction OR value?
How to achieve customer segmentation?
Which of my customers have affinity to which of my product groups?

Who are the customers?

  • Customer here is not only an existing customer, but also your potential target segment. While you profile both the entities, the segmentation and profiling approach is quite different.
  • In case of existing customers, you have far greater detail on their demographic and socio-politico profile. You also have the profile on their purchase pattern with you. This allows you to develop a better judgment on their characteristics and also on their projected purchase behavior.
  • In case of prospects, you will have sketchy data, and one has to do segmentation using some level abstraction.

Within the potential customers, there are following distinctions which will guide your segmentation approach:

  • Currently served target market: Number of customers in the markets, you can serve today. (total number of target customers in the city where you office and supply chain has a presence).
  • Total addressable market: Number of customers, where you can reach, if you invest in your geographical expansion and supply chain expansion.
  • Total market: Number of customers, for which you don’t have the products as of today, but they belong to your industry segment.

What is Customer segmentation and what it is not?

Customer segmentation is essentially creating the groupings of customers, with each grouping OR tag, prompts a specific strategy OR action from the organization vis-a-vis that grouping.

There can be multiple grouping classification

  • Income-based
  • Current value based
  • Social strata based
  • Demography based (age, sex..)

A customer can belong to multiple groupings, However, he cannot OR should not:

  • Belong to the competing grouping within same classification (same customer belonging to two income groupings).
  • Belong to conflicting groupings (high value group and low-income group at the same time)

Maintain Balance and don’t overdo customer segmentation:

Like the dimensions in a cube, one can only manage to a certain level of complexity. Segmenting customers into hundreds of different segments will make it counter productive.

Avoid doing segmentation, which does not have any specific organization action:

After some iteration, an organization realizes the segments which are relevant to its strategy. If you have a customer segment, which does not invoke a ‘different’ action OR strategy, you should either merge that segment into other segments OR question the value of the segment.

Customer Segmentation KPIs

It’s difficult to have mathematical KPIs on how well the customer segmentation is done. It’s more to do with the feedback of various stakeholders and experience with the success achieved on assumptions done with the customer segmentation. For example, if sales experience shows that a given customer segment is not having the ‘differentiated’ response (other segments are buying the product as much as the given segment), it will not be termed as successful.

The areas where you can judge the effectiveness of the segmentation:

  • Quality of data used for segmentation.
  • Differentiated response of the segment vis-a-vis expectations.
  • The number of customers in a given segment vis-a-vis actual numbers