Let’s start with a quick definition – customer segmentation is the process of dividing your customers into groups with similar behaviors or attributes that are relevant to how you market, build products, and offer services.

In my video about what customer segmentation is and why you should care, I use a pizza story analogy. Imagine for a moment that you are fulfilling your life long dream of opening a pizza store.

You begin by surveying people in the neighborhood to find out what they want. You find that there are two groups: Meat Lovers who want sausage and pepperoni on their pizza and Vegetarians who want onions, mushrooms, and peppers.

If you don’t segment your customers, then you’d mistakenly make just a Supreme pizza that has everything everyone wants: sausage, pepperoni, onions, mushrooms, and peppers. But unfortunately, you’ve made something that no one wants.

If you do segment your customers, then you’d correctly offer a Meat Lovers pizza and a Veggie Pizza.

By segmenting pizza eaters, you found two groups of individuals that have similar preferences within the groups (homogeneity) but different preferences between the groups (heterogeneity).

There are a couple of other important call outs.

The differences between the groups should be meaningful

In the pizza store example, segmenting customers by those who like the color yellow and those who like blue isn’t relevant. Those differences won’t let you provide different products or services that are relevant to your customers.

So segmentation is about finding relevant differences not just any differences.

Create segments that you can actually target

You may find a segment that would be amazing to target and create a product or solution for, but if you can’t find a way to market to them or do it at a reasonable cost, then it’s useless.

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For example, you find out that people who like anchovies on their pizza will pay more than any other segment. There’s a meaning difference (topping preference) and you can charge them more (i.e. make more profit) so they seem like an excellent segment. However, you also find out that there are so few anchovy lovers that the cost to market to them makes it a financially losing proposition.

How to do segmentation for your small business

Big companies have fancy software that helps them segment large sets of data to create customer segments. But as a small or local business, that isn’t really feasible or necessary.

Start by spending time with your customers and finding out:

  • what’s important to them,
  • what their pain points are,
  • and what their preferences are.

With that info, you’ll often find that natural groupings begin to emerge. For example, you may find with your pizza shop customers that there are:

  1. families who have pizza as a regular dinner time meal
  2. businesses who like to cater their lunches with pizza
  3. teenagers who throw big parties with pizza

With that info, you can:

  1. offer a family sized pizza with boxed juices for kids
  2. offer full catering services with side dishes, plates and utensils
  3. offer 3 foot long pizzas (perfect for parties) and soda

Hope this helps. Happy segmenting!

For more videos like the one in this post, check out my YouTube channel.

(Cover photo courtesy of Mr. Wang via Albumarium.com)