The Importance of Customer Segmentation and How-to on Shopify

Customer segmentation is a crucial marketing strategy that divides a customer base into distinct groups based on similar characteristics. This article explores the concept and practical benefits of customer segmentation for businesses.
Nov 09, 2023
The Importance of Customer Segmentation and How-to on Shopify
In the diverse and ever-changing landscape of the market, businesses are constantly searching for strategies to not only understand their customer base but also to effectively communicate and cater to their different needs. One critical strategy is customer segmentation, a process that involves dividing a customer base into groups of individuals that are similar in specific ways. But what exactly is customer segmentation, and how can businesses benefit and implement it? This article provides a deep dive into the concept and practical applications of customer segmentation.

1. What is Customer Segmentation?

Customer segmentation is the practice of partitioning a customer base into discrete groups that have common characteristics. This division allows companies to target specific audiences with high precision, tailoring their marketing efforts, product development, and services to meet the unique needs of each segment.
Segmentation serves two primary purposes: targeting the external market and personalizing communications with existing customers. The former is a critical component of the STP (Segmentation, Targeting, Positioning) strategy, a well-established concept in marketing. However, this article will concentrate primarily on the latter, which is the specialty of Retentics.
When segmenting existing customers, there are several methodologies that businesses can employ.
the example of segmentation chart from Retentics
the example of segmentation chart from Retentics

Event-Based Segmentation

Event-based segmentation is highly dynamic, focusing on how customers engage with a business's online presence. It categorizes customers based on specific interactions, such as recent purchases, website visits, or responses to marketing campaigns. This method is extensively employed by many SaaS providers to automate on-site promotional offers, capitalizing on users' immediate actions.
What sets event-based segmentation apart is its acute attention to a user's direct interaction with the website—be it product viewing, adding items to a cart, or proceeding to checkout. These interactions are good indicators of customer interest and intent, making them valuable attributes for segmentation. Harnessing this information allows businesses to enact timely marketing tactics, such as sending a personalized discount offer to a customer who is exhibiting buying signals but has yet to complete a purchase.
Through this approach, event-based segmentation proves invaluable for creating immediate and relevant marketing responses that align with a customer's online journey, enhancing the likelihood of conversion at critical moments.

Rule-Based Segmentation

Rule-based segmentation is a direct and methodical approach in which customers are categorized according to predefined rules established by a business. These rules are often rooted in demographic information such as age, gender, or income levels, as well as subscription status or distinct purchase behaviors.
In the context of subscriptions, a company might introduce enhanced benefits as an incentive to boost subscriber numbers, or it may craft different marketing messages to distinguish between subscribers and non-subscribers, thereby creating a more personalized communication strategy.
Moreover, examining purchase behavior offers another robust avenue for segmentation. A case in point from our professional repertoire involves a company that segments its customer base by the regularity of its orders. They define a loyal customer as someone who places orders on a consistent monthly basis. This classification enables them to curate specialized services or rewards aimed at nurturing and sustaining customer loyalty.

RFM-Based Segmentation

RFM-based segmentation leverages three critical customer data points — Recency, Frequency, and Monetary value — to categorize customers effectively. This approach considers how recently a customer has made a purchase (Recency), how often they make purchases (Frequency), and the total amount they have spent (Monetary value).
The sophistication of RFM-based segmentation is significantly enhanced with the integration of Artificial Intelligence (AI). AI algorithms can analyze vast amounts of transaction data to detect patterns and nuances in customer behavior that might be missed by manual analysis. By doing so, AI aids in the precise calculation of RFM scores, thereby segmenting customers with a high degree of accuracy.
For example, machine learning models can predict future customer value by looking at historical RFM data, identifying which customers are likely to become high spenders and which ones might dwindle in value. This allows businesses to proactively adjust their marketing and service efforts.

2. What are the Benefits of Customer Segmentation?

If a business treats every customer as having one behavior or personality, the approach might seem efficient. However, it may fail to consider the varying needs of customers, resulting in dissatisfaction among many. In this context, the benefits of customer segmentation are vast and impactful. By recognizing the unique aspects and behaviors of different customer groups, businesses can:
  1. Improve Customer Experience: Tailored marketing messages resonate more with customers, potentially increasing satisfaction and loyalty.
  1. Enhance Marketing Effectiveness: Segmentation allows for more targeted and effective marketing strategies that are likely to result in higher conversion rates.
  1. Increase Revenue: By focusing on the most profitable segments or by upselling to those with potential, companies can significantly boost their income.
  1. Optimize Product Development: Understanding customer needs can drive innovation, leading to the creation of products that are more likely to succeed in the marketplace.
  1. Efficient Use of Resources: Segmentation ensures that marketing resources are not wasted on the broad, less interested audience, but are instead focused on segments with higher potential returns.

3. How to Create Customer Segmentation

To develop a customer segmentation strategy, it's essential to collect and analyze diverse customer data types to gain a comprehensive understanding of your distinct customer groups. Below is a detailed methodology for segmentation based on its type:
For event-based segmentation, it is essential to determine which rule significantly differentiates your customers' behaviors. Although you might start with a hypothesis, it needs to be verified through testing. For example, you might hypothesize that if a customer does not make a purchase within 30 minutes of adding an item to their cart, the likelihood of them completing the checkout is very low. While 180 minutes may offer a more accurate timeframe, it could also be too late for effective targeting. Therefore, identifying the optimal timeframe is crucial before proceeding with segmentation.
A rule in rule-based segmentation can be based on various factors but should be meaningful to the business. Segmenting customers into different age groups, for example, enables targeted communication in varying tones that resonate with each group. However, distinguishing between customers who place orders monthly and those who order bi-weekly may not yield actionable insights.
For RFM-based segmentation, businesses frequently employ AI to calculate the Recency, Frequency, and Monetary values for each customer, especially when dealing with large datasets that require pattern recognition. This segmentation is often integral to loyalty programs as it inherently accounts for the actual value each customer brings to the business. Segmenting customers into a certain number of groups based on these values allows companies to tailor their marketing and rewards programs effectively.

4. What Are Some Ways to Use Customer Segmentation?

The real value of customer segmentation is realized through its application across different areas of a business. Here are some ways to use customer segmentation:
  1. Personalized Marketing: Craft personalized messages and offers that appeal to the distinct needs and desires of each segment.
  1. Customer Retention: Identify at-risk customers and reach out to them with special offers or loyalty programs.
  1. Pricing Strategies: Adjust pricing based on the purchasing power and price sensitivity of different segments.
  1. Distribution Channel Optimization: Choose the most effective channels for reaching each segment, be it online, in-store, or through third-party retailers.
  1. Product Development: Design or modify products to better satisfy the particular demands of a target segment.
the examples of target segment from Retentics
the examples of target segment from Retentics
In conclusion, customer segmentation is not just a beneficial tool; it’s a necessity in a modern marketing strategy. Retentics primarily utilizes RFM-based AI segmentation for B2C e-commerces, where the AI even decides the most effective number of segments for each business. In an era where customers expect personalized attention and companies compete in a challenging environment, segmentation can provide the competitive edge that propels a business to success. With Retentics, any business can create more meaningful interactions with its customers, leading to increased retention, heightened loyalty, higher revenues, and, consequently, a stronger market presence.

written by. Zack Lim
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