What Is Customer Segmentation?

When you build and develop your product or service, you as a founder should always think about which customer segments to target. Who is your ideal customer and where to find it.

Customer segmentation is the process of dividing customers into groups, based on characteristics defined by the product owner. Such segmentation helps you:

  • Prioritize your efforts and focus
  • Market to each group effectively and appropriately

Depending on your product nature, you may decide to segment your potential customers by different factors. For example, in B2B marketing, it makes sense to segment by:

  • Industry
  • Company size
  • Location
  • etc.

In the case of B2C marketing, it is more likely to segment customers by demographics, including:

  • Age
  • Gender
  • Marital status
  • Life stage
  • Income
  • Location
  • Education

What Are The Benefits Of Segmenting Customers?

As I already mentioned, customer segmentation mostly helps with your marketing efforts. By having a good idea who your exact targeting customers are, you can specialize your message and make it talk to that segment.

  • Targeted messages
  • Select the best channel to communicate with a given segment
  • Focus on most profitable customers
  • Better understand your customers’ needs
  • More accurate upsell and cross-sell strategies
  • Understand how to improve your customer relationships

How To Segment Customers?

I will present here one method, called SPA method, which I learned when I was part of the HUB101 incubator program.

The SPA stands for Size, Pay, Access.

The idea behind it is to have an easy methodology to define which customer segments you should start addressing. In addition to that, the SPA method can help you prioritize your marketing efforts for each of the customer segments you are aiming to address.

The easiest way to do this is to create a table. It needs to have 4 columns. Title the columns like this:

  • The first column will have the customer segments – “Customer Segment”
  • The second column will have a number representing the Size of the segment – “Size”
  • The third column will have a number representing the paying ability + the pain a given segment needs to solve – “Pay”
  • The fourth column will have a number representing the accessibility of that segment – “Access”

Keep in mind that the numbers you put in the table cells need to represent your understanding and your case. This means for example, that for someone who already has an audience in a given customer segment, it will be much easier to access that audience, vs someone who is just starting.

The numbers you put in each cell of the table are in the range 1-3. You may decide to go even more detailed, if you wish, and have numbers between 1-5 or even 1-10, but I think the 1-3 ranges are working pretty well. Here are the definitions for the different numbers:

  • Size
    • 1 – Range of 100+ customers
    • 2 – Range of 10’000+ customers
    • 3 – Range of 1’000’000+ customers
  • Pay
    • 1 – No ability to pay or no pain (problem doesn’t really exist)
    • 2 – Either able to pay or pain exists
    • 3 – Able to pay and pain exists (actively looking for a solution)
  • Accessibility
    • 1 – Weeks (you will need weeks to get to the decision maker)
    • 2 – Days (you can get to the decision maker within a few days)
    • 3 – Hours (you already are talking to these customers and it is a matter of few hours to get to the decision maker)

You can see how these numbers may be different for different people, as I said earlier. Especially for the Accessibility value – it depends on how many conversations you already have had with customers in that customer segment or how comfortable and successful you are with doing whatever it takes to get to the decision makers.

To get to the total Score number, you need to multiply the numbers for a given customer segment:

Total Score = Size x Pay x Accessibility

Example

In the case with my startup service, I was planning to offer it to Coffee shops, Restaurants, Dentists, and Professional trades (electricians, plumbers, painters).

I was thinking to start with coffee shops and restaurants. That seemed to be the no-brainer marketing approach since similar services were already being offered to these segments and I was aiming to offer a better service which was easier to use by customers.

As you can see, after doing the SPA exercise, it was obvious that I needed to focus on Dentist first. This showed me that it is an underserved market and I feel more comfortable getting to talk to owners of dental practices than restaurant owners.

Do Customer Segmentation With Care

There are different ways to do customer segmentation and different methods that can help you do it. Each segmentation carries its own benefits and drawbacks. Choose the one you feel most comfortable with and represents your marketing needs.

Customer segmentation is a universal approach and can benefit startups in different stages. In fact, it is not limited to startups, big companies are using it too.

Proper definition and efficient use of customer segmentation will help you narrow the groups of people you need to reach and make your marketing much more efficient, which will drive up conversions and revenue.


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