The Building Blocks of Customer Segmentation

Why knowing exactly who your most valuable customers are — and how you can actually reach them — is the key to success for any digital acquisition strategy

In part one of our Digital Economist blog series, we laid out a four-step game plan for building and executing on digital customer acquisition strategies that, as a first priority, drive revenue and profitability. Now, it’s time to take a deeper dive into each of those steps, starting with the basics of customer segmentation.

Simply put, the purpose of customer segmentation is to understand who your most profitable customers are and identify a means for targeting and reaching them. Without a clear definition of your customer segments, you could inadvertently go down the wrong path as you begin to shape your value proposition, optimize your conversion journeys, and measure the success of your digital customer acquisition efforts.

Unlike in digital marketing, where reaching anyone who generally fits the “persona” of your target customer can be considered a win, as a Digital Economist the primary focus of customer segmentation is to create a distinct strategy for weeding out the “good” customers from the “bad.” In other words, you must build a strategy that allows you to differentiate, isolate, and then hone in on only those customers who have the greatest likelihood of becoming your most profitable customers over time. And it’s this focus on profitability that tends to get overlooked via more traditional approaches to customer segmentation.

But this exercise shouldn’t be done within the confines of your marketing team. Why? Because it’s a process by which you not only identify the specific traits associated with your most profitable customers but also determine the specific channels through which you can target, reach, engage, and convert those customers with precision (and success). To do this, you need to look beyond marketing alone and collaborate with both your finance and sales teams. You want to look at the revenue and transaction data directly related to past marketing campaigns. Looking at the data in this way (i.e. from multiple angles and data sources) provides you with quantifiable proof as to exactly which customer segments will have the highest potential for generating lifetime value (LTV) for your business in the future.

Based on our experience, we’ve developed what we like to call the three primary building blocks of a successful customer segmentation strategy:

  1. Determining the profitability signals associated with customers that you would ultimately deem a “best fit” for your business.
  2. Building customer segments that bring those profitability signals to life in personalized, business-relevant, and real-world ways.
  3. Identifying specific audiences on digital media that mirror your customer segments, providing you with a platform for continually testing and targeting those segments with relevant marketing messages, all in an effort to drive conversion and generate greater lifetime value (LTV).

This all sounds simple, right? Let’s take a closer look at how these work hand-in-hand.

Profitability Signals

Before launching any customer acquisition program — digital or otherwise — you need to be obsessively clear about what makes certain customers attractive to your business (vs. those that aren’t). These are what we call profitability signals, which typically fall into two primary categories: business attributes and customer attributes.

Think of business attributes as “prerequisites.” They help you define specific parameters around the traits associated with your most profitable customers and allow you to weed out the customers who simply don’t fit the bill, immediately. Traits like “has a desktop computer,” “values privacy,” or “has sensitive information to protect” are good examples of this. Customer attributes, on the other hand, are demographic traits like age, location, and annual income.

Combining behavioral-driven business attributes with demographic-driven customer attributes allows you to paint a clearer picture around who your most profitable customers really are.

This may seem like an obvious or straightforward first step, but it’s not simply an exercise in identifying a series of desirable attributes. You’ve got to drill down deeper than that. The goal here is to create a precise customer profile that, from a purely economic point of view, will tell you which customers will buy more and buy more consistently over time. The clearer and more defined your profitability signals are, the more relevant your customer segments will be to your business. This is the key to optimizing your LTV/CAC (customer acquisition cost) ratio over time.

Customer Segments

Now it’s time to synthesize all those profitability signals into something that you can really latch onto. This is where developing customer segments come into play.

Customer segments are basically a distillation of profitability signals into “personas” that can be sliced and diced in multiple ways — or, more simply, groups of customers having common profitability signals. For example, further developing the example above, you might come up with following customer segment: “self-made small business owners in ‘Main Street’ America.” Also, depending on the nature of your business, you’ll end up with three or four core customer segments that can give your profitability signals a more actionable dimension.

The purpose of building customer segments is to give the traits associated with your most profitable customers real-life “identities” that can be targeted with precision. This also helps transform profitability signals into something marketers can actually wrap their heads around.

Audiences

Creating customer segments is merely a way to personify your most profitable customers. Unfortunately, you can’t just plug in “self-made small business owners” into Google Adwords — as convenient as that would be — and then wait for your customers to pour in. You need to go one step further. In the world of digital customer acquisition, you have a plethora of digital media channels to choose from for targeting and reaching your most profitable customers. As you evaluate those channels, you need to stay laser-focused on only those channels where audiences (i.e. real, living, and breathing humans) exist that mirror your customer segments. Using the example above, the best way to reach “self-made small business owners” might be to hone in on the following audiences that live within these channels:

  • Email: Reaching small business owners through bank and lender databases
  • Programmatic: Bidding on display media targeted to local business news content
  • Broadcast: Buying spots to play during business-related talk radio and podcasts

Once you’ve pinpointed your audiences across various digital media channels, the next step is to build marketing campaigns that encourage potential customers to take some sort of action.

This notion of “context is king” couldn’t be any truer in the game of customer segmentation. Your marketing message must be relevant within the digital media context it lives in order to get potential customers to follow through with a conversion-based action. Fortunately, with digital marketing, you have limitless opportunities to refine and optimize campaigns — from the creative itself to the calls-to-action — to generate the highest conversion rates possible. That’s why you must be clear about who your most profitable customers are, as this will ultimately determine how you end up marketing to them.

5 Foolproof Steps for Customer Segmentation

Now that you know the primary building blocks of any customer segmentation strategy, it’s your turn to apply these concepts to your own business. There are a few ways to approach this. For example, if you intimately know who your ideal customers are inside and out, build from there. However, for businesses that have never created a true customer segmentation strategy of their own, the best place to start is by looking at your customer data. Since this tends to be the case for the majority of businesses we work with, for the purposes of this blog post, let’s start our five-step customer segmentation journey there:

  1. Get the data. Identify what data sources you have within easy reach first. Whether it’s Google Analytics or a combination of sources — for example, those tied to your marketing campaigns — be sure to get a lay of the land. Second, don’t forget to bring your CRM (sales) data into the mix, so you can more clearly connect the dots between marketing KPIs and sales.
  2. Identify what performance means to you. For most businesses, the conversion step of a customer making a purchase will be your key success metric. However, from the minute a customer engages with your brand through any digital media channel, you must be able to track exactly where customers drop off or when they decide to take a specific (conversion-based) action. Understanding conversion (or the lack thereof) from all of these angles will give you a more solid understanding of what performance looks like at every touch point along the customer journey.
  3. Slice and dice the data. Start by segmenting the data across age and gender, as those are typically the most readily available variables on any analytics platform, and then layer on the relative conversion rates for each of the subsets you’ve isolated. The goal here is to create a simple and clear picture of performance at more granular level.
  4. Segment with data-driven insights. Start by asking yourself two questions: 1) What customers do you have the most of and 2) Who are your best customers (i.e. who are your customers with the highest conversion rates)? This is essentially an assessment of overall audience size vs. relative conversion rate (for each age/gender data subset). As a starting point, you’ll want to focus on the largest audience with the highest conversion rate — and then fill in gaps from there. The goal here is to evaluate how well your website and marketing campaigns are working as well as why they are encouraging specific actions. It’s important to note that context also matters as you evaluate this data. Why might certain age groups index higher for your business than others? Are there other offline ways that customers can engage with your business — and how might that skew the data around certain conversion actions? Why might one gender drive more volume but fewer conversions? You need to answer these questions (and more) through the lens of your business to weed out only the customers who will likely generate the greatest long-term profitability for your business.
  5. Begin targeting. Once you’ve determined the segments with the greatest potential to grow your business, it’s now time to identify the digital media channels through which you can reach them with targeted and relevant marketing messages. Then, it’s just a matter of optimizing those campaigns in real-time to ensure you achieve an optimal customer acquisition cost that maximizes your margins and total profit.

Why Customer Segmentation Matters

Knowing exactly who your most profitable customers are is the first and most important step in building a digital acquisition game plan that drives real results. Failing to do so leaves you susceptible to wasting valuable marketing dollars to reach customers that either aren’t a good fit for your business or won’t drive long-term profitability. Why risk that?

Set aside the time to build a focused customer segmentation strategy — and don’t be afraid to be critical every step along the way. The more you hone in on the right customers now, the more effective your digital acquisition efforts will be down the road. Focusing your customer segmentation strategy on only the customers with real potential to drive long-term value for your business is what differentiates how a Digital Economist (vs. a digital marketer) approaches and executes on digital customer acquisition campaigns.

Now, if you hit a roadblock as you begin tackling these five steps on your own, don’t forget that we’re here to help. Just give us a call.

Check out how LQ puts customer segmentation into practice by downloading the Sun Basket case study today — and see how we’ve helped them turn more of their most profitable customers into actual subscribers!

Keywords

  • Optimization