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What is Customer Segmentation?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 04 November 2016
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Customer segmentation is a practice that involves dividing a customer base into groups for the purpose of separating out different kinds of customers. This practice allows companies to market to particular subsets of the market, and to develop products with certain types of customers in mind. This can increase profitability and help companies identify strengths and weaknesses in their overall business strategy.

There are a number of ways to break up a customer base. In customer segmentation, each individual segment should contain fairly homogeneous customers who are distinct from those in other groups. The company can look for common ground demographically, identifying people in similar areas and of similar ages. It can also break customers up by values or by other metrics, such as psychological response to advertisements and promotions. The process requires conducting surveys to understand the market as a whole in order to narrow down the customer base for customer segmentation.

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With customers broken up into groups of similar individuals, the company can identify the needs and concerns specific to each area of the customer base. For example, a telecommunications company might learn that it has some customers who are primarily concerned with getting cheap basic phone service, while others may want features on their phone accounts, and others want highly stable and reliable service and are not concerned with cost. Trying to address the customer base collectively would result in not meeting the needs of one or more market segment. Creating customized services and campaigns aimed at specific segments will result in happier customers overall.

Customer segmentation can be a valuable strategy for developing retention campaigns, working on product development, and creating marketing campaigns to attract new customers. It can also reveal valuable information about the way different groups of people interact with and think about a product. This information can be used to more accurately target customers and improve business practices. It can also help companies develop price points and use their marketing funds in more useful ways.

In customer segmentation, companies recognize that customers fall into a number of different categories that cannot easily be lumped together. Finding those categories and separating them out will allow companies to serve all of their customers more effectively. It can also maximize profits and increase overall market share. People who are not currently customers may hear recommendations from other customers who feel like the company provides personalized service and may be persuaded to switch loyalties.

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comfyshoes
Post 3

Sneaker41 - I noticed that more luxury car manufacturers are offering lower priced car models to attract more customers.

I also wanted to add that banks do this too. Many large banks like Bank of America are using banking customer segmentation models in order to service various types of customers within the same bank.

Bank of America offers investment vehicles for customers considering market based securities. They formed a partnership with Merrill Lynch that offers brokerage services in order to develop Bank of America’s wealth management business and attract customers with additional investment needs.

This is a growing market that many banks want to tap into.

sneakers41
Post 2

Bhutan - Those are good points. I wanted to add that customer segments can also include demographics.

You can profile potential customers by considering a different demographic.

For example, Mercedes Benz traditionally targets upscale customers but now seeks a middle class clientele for its C class series which is considered their entry level series.

This allows consumers of a considerably different demographic than traditional Mercedes Benz customers to not only consider this brand as an option but to continue to remain a Mercedes Benz customer even after their first purchase.

Most of the other luxury car companies also followed in order to grow their market share and enhance their profitability.

Bhutan
Post 1

Customer segmentation strategies include marketing to customers in a different area of the country. It can also include targeting buses and subway lines if you want to attract more commuters and billboard advertising if you seek to attract more drivers. You may also consider a customer segmentation model that focuses on trade journals for a more industry specific clientele.

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