How to drive

profits with
customer
segmentation
A beginner’s guide to breaking down your
market into targetable groups
 Table of 3 Introduction

contents
5 Why segmentation?

8 5 steps to build your business segments

9 Conduct preliminary research

11 Define how you want to segment your market

13 Design and field your study

17 Find useful customer segments

21 Test and iterate

23 Conclusion

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 Introduction Every product needs a target audience. Market segmentation identifies subsets of a market
based on demographics, needs, priorities, common interests, or other psychographic or behavioral
criteria to better understand and communicate with that audience.

Segmentation can be as simple as splitting your potential market into age ranges or as complex
as dividing your audience based on subtle behaviors, values, or beliefs.

To be truly useful, segmentation should enable you to target core groups of your potential
customers with precision. Practically speaking, segmentation enables you to:

Boost demand with messaging that resonates more with your market

Grow your customer base by understanding what drives purchase behavior

Increase revenue and profitability by discovering which customers will pay a premium for
your product

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 So how do you get started? In this e-book, we’ll show you how to design a
useful segmentation study in five steps:

1. Conduct preliminary research 4. Analyze results

2. Craft segments 5. Test your results

3. Design and field your study

Divide your market into

meaningful segments.
See at a glance key Segment Membership

characteristics for each

segment to make your COUPONERS
42 Driven by sales and events. Are driven by value
marketing more impactful. and are most likely to wait for big event to spend.

ENVIRONMENTALISTS
Driven by products and solutions that have
70
minimal impact on the environment. Are willing
to pay a premium for these services.

FREE SPIRITS
104 Most likely to make impulse buys based on
great displays.

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Why segmentation?
 Why Segmentation is crucial for success. Organizations that understand their customer segments had
10% higher profit than organizations whose segmentation missed the mark over a 5-year period,
segmentation? according to Bain & Company. In the same study, 81% of executives say market segmentation is a
critical element for increasing profits, yet only 25% believe their companies use it effectively.

81%
OF EXECUTIVES
SAY MARKET
SEGMENTATION
IS CRITICAL

25%
FEEL THEIR
ORGANIZATIONS
DO IT WELL

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 Better segmentation Here’s what great segmentation looks like:
is better business
Electronics retailer Best Buy remodeled a group of its stores and trained store clerks to focus on
its five customer segments. Stores that implemented those changes reported sales growth
above 9%, more than double the growth rate of stores that didn’t remodel and train.

Automaker Mercedes Benz used market segmentation to target a younger buying group with
a more affordable model, advertising during the Super Bowl and other prime-time ad slots.
The result? The company’s campaign captured a younger demographic (an 11-year drop
compared to previous campaigns), had more than 300,000 models of the car built in the online
portal, and garnered record web traffic.

Credit card giant American Express created additional card options for their rewards points-
driven segment. These cards have become some of American Express’s most popular and
profitable products.

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5 steps to build your
business segments
 5 steps to build ST E P 1 C O N D U CT P R E L I M I N A RY R E S E A R C H

your business Before starting your segmentation study, you’ll want to get to know your customers more in

segments depth. The easiest way to learn about your customers? Talk to them. In addition to some casual
conversations, we recommend sending a survey that asks open-ended questions to a small group
You don’t need of customers.
a complicated
If your organization is a medium-sized retail company with several locations, your survey might
segmentation study to
get useful results. We’ll look something like this:
walk you through the
steps to build your first
study: from learning more
about your customers, to
fielding a segmentation
study, to solidifying
useful segments.

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 These questions let your customers speak for themselves about what they value rather than you
making an educated guess about what drives them. This initial survey usually reveals details about
your customers that you may not have considered. For example, they may be environmentally
conscious, or maybe many of them drive long distances specifically to shop at your store.

This initial discovery step is important, so if you can offer gift cards or store discounts as
incentives to respond, it will help you get better data back more quickly.

We recommend you send your survey to a representative sample. If your target market is large,
you may want responses from 300 or more respondents. If your market is smaller, you may want
to send it to a group of your customers. You’ll gain a much better idea of the questions you want
to ask for your broader segmentation study. Many marketers and researchers will read each small-
sample response individually for context, but text analysis software tools can also help you analyze
feedback more rigorously.

L E A R N M O R E A B O U T Q UA LT R I C S T E X T I Q

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 ST E P 2 D E F I N E H OW YO U WA N T TO S E G M E N T YO U R M A R K E T

Based on your preliminary research, next determine how you want to segment your market.
Segmentation falls within four primary categories including: demographic, psychographic,
firmographic, and behavioral. There isn’t one perfect approach to segmenting your market.
Demographic and firmographic segmentation are typically the easiest, while psychographic and
behavioral tend to yield the deepest and richest insights. So segmentation is as much an art as
it is a science. We recommend that you base your segmentation strategy on your preliminary
research as well as your instincts.

DEMOGRAPHIC (B2C) FIRMOGRAPHIC (B2B) PSYCHOGRAPHIC (B2B / B2C) BEHAVIORAL (B2B / B2C)

Definition Classification based Classification based Classification based Classification based

on individual attributes on company or on attitudes, aspirations, on behaviors like product
organization attributes values, and other criteria usage, technology
laggards, etc.

Examples Geography Industry Lifestyle Usage Rate

Gender Location Personality Traits Benefit Types
Education Level Number of Employees Values Occasion
Income Level Revenue Opinions Purchase Decision

Decision You are a smaller You are a smaller You want to target You want to target
Criteria business or you are business or you are customers based on customers based on
running your running your values or lifestyle purchase behaviors
first project first project

Difficulty Simpler Simpler More Advanced More Advanced

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 Common segmentation strategies

Select one category as a basis for your segmentation (i.e. demographic / firmographic) and use
your other categories to describe your segments (behavioral and psychographic).

Geographic segmentation — While geography is technically a subset of demographics, many

organizations segment based on geographic location. In our retail example, we may choose to
use geographic segmentation to better understand how to target potential customers based on
whether they live in certain postal codes, or in rural or urban areas.

Demographic / Firmographic — This is one of the simplest ways to segment your market,
because consumers often buy products and services based on demographic factors like income
level, location, and more. In our retail example, we may want to segment our customers based
on gender, age, or income level.

Psychographic segmentation — This type of segmentation takes into consideration a

consumer’s values, opinions, and similar factors. With our retail example, we may consider how
our customers’ lifestyles impact their shopping habits.

Behavioral segmentation — A customer’s behavior can yield rich insights about how or why they
purchase goods and services. With retail, we may segment based on a shopper’s willingness to
spend more during a sale.

For retail, you could segment based off of purchase behavior and then use demographic factors
such as age, location, and income, as well as psychographic factors like values, lifestyle, and
personality, to describe your segments.

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 ST E P 3 D E S I G N A N D F I E L D YO U R ST U DY

For a segmentation study, make sure all your answers are quantifiable. This means that you can
easily understand the value of a specific variable.

Demographic and firmographic questions

To keep your survey short and measurable, we recommend asking 5-10 multiple choice
demographic or firmographic questions. With our retail example, some of our questions may
include the following:

Gender

Age

Household income

Geographic location (postal code)

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 Example demographic
questions

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 Psychographic and behavioral questions

Ask a mix of psychographic and behavioral questions. We recommend no more than 15

questions for this portion of the survey. The easiest way to quantify these types of responses is
by using a matrix.

Psychographic questions

In our retail example, one of your questions may look like this:

15
 Behavioral questions

Your behavioral questions may look like this:

For statistical significance, we recommend capturing at least 1,200 responses. This will enable
you to have confidence in your results and further explore the nuances in each of your segments.

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 ST E P 4 F I N D U S E F U L C U STO M E R S E G M E N TS

After you’ve gotten your responses, analyze your data to create useful segments. Use these rules
of thumb:

Aim for four or less. One of the primary goals of a segmentation study is to make your market
manageable. We’ve found that when you have more than four segments, they become hard to
analyze and manage.

Be creative. Segmentation is both an art and a science. This means you should try different
combinations of your data to see if they yield interesting results.

Take your time. This is the most time-intensive step, but it’s important to invest your time on
this step since this will yield the most valuable results. While it’s tempting to just go with your
initial result, taking the time to truly evaluate your segments will pay off in the long run.

So how do you go about segmenting your data? There are a number of methods that you can use.

Manual analysis

If you lack statistical software and the know-how to build statistical models, the easiest way
to segment will be to manually go through your data. Since behavioral and psychographic
segmentation tend to require more sophisticated tools, this method is the easiest when evaluating
demographic, geographic, or firmographic segmentation.

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 Based on this data, one INCOME

possible segment is
those with income over
Male
$50,000. A more specific Less than
$20,000 Female
segment would be men
with income between
$50,000 and $75,000.
$20,000 -
$49,999

$50,000 -
$75,000

More than
$75,000

0 1 2 3 4 5 6 7 8 9 10 11

NUMBER OF RESPONSES

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 Statistical analysis

The most effective way to segment your market for any category is using cluster analysis — a
statistical analysis tool to group your data into groups, or clusters.

You can use traditional statistical modeling solutions like R, Python, or SPSS to tease out your
segments. These types of solutions often require extensive data expertise, so if you don’t have this
expertise yourself, you may need to bribe your favorite analyst to help.

However, statistical analysis is more approachable than ever. Software solutions like Stats iQ
from Qualtrics make complex cluster analysis approachable, even if you don’t have technical or
statistical skills. Look for a solution that can handle a wide range of variables, rank the importance
of each variable, and present your results in easy-to-understand language.

S E E H OW I T WO R KS W I T H I Q

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 Example cluster analysis
results with Stats IQ.
Variable Importance

SATISFACTION

ENGAGEMENT

CHILDREN

IMPORTANCE: MUSIC

IMPORTANCE: WEATHER

AGE

IMPORTANCE: SHOPPING

IMPORTANCE: NEWS

REGION

IMPORTANCE: INFORMATION

IMPORTANCE: COOKING

0.00 0.25 0.50 0.75 1.00

Cluster Summary

CLUSTER 1 Respondents are mostly high Satisfaction.

CLUSTER 2 Respondents are mostly high Engagement and low Satisfaction. They also tend to be Children in home.

CLUSTER 3 Respondents are mostly high Satisfaction and high Importance: Music.

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 ST E P 5 T E ST A N D I T E R AT E

Your segments are only valuable if they can drive actions that lead to positive outcomes. Use the
following tests to gauge the effectiveness of your segments.

Measurable — Measurable means that your segmentation variables are directly related to
purchasing a product. You should be able to calculate or estimate how much your segment will
spend on your product. For example, one of your segments may be a couponer, who is more likely
to shop during a promotion or sale.

Accessible — Understanding your customers and being able to reach them are two different
things. Your segment’s characteristics and behavior should help you identify the best way to
meet them. For example, you may find that a key segment is resistant to technology and rely on
newspaper or radio ads to hear about store promotions, while another segment is best reached on
your mobile app. One of your segments might be a male retiree who is less likely to use a mobile
app or read email, but responds well to printed ads.

Substantial — The market segment must have the ability to purchase. For example, if you are
a high-end retailer, your store visitors may want to purchase your goods but realistically can’t
afford them. Make sure an identified segment is not just interested in you, but can be expected
to purchase from you. In this instance, your market might include environmental enthusiasts who
are willing to pay a premium for eco-friendly products, leisurely retirees who have can afford your
goods, or successful entrepreneurs who want to show off their wealth.

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 Actionable — The market segment must produce the differential response when exposed to
the market offering. This means that each of your segments must be different and unique from
each other. Let’s say that your segmentation reveals people who love their pets and people who
care about the environment have the same purchasing habits. Rather than have two separate
segments, you should consider grouping both together in a single segment.

Market segmentation is not an exact science, it takes multiple iterations to get it right. For
example, you may find that segmentening off of psychographics isn’t giving you useful results and
that segmenting off of behaviors produces outcomes that are both useful and pass each test.

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Conclusion
 Conclusion Great market segmentation gives you the insights you need to understand your market more
effectively and craft compelling sales and marketing strategies for each of your segments.

While deep segmentation analysis has seemed out of reach for many organizations, software
solutions and tools make these rich insights available to anyone.

G E T I N TO U C H

Want to see how it works? Want more information on how to get started?

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