Cetrix Blog

Customer-Centric eCommerce: A Guide to Customer Segmentation

Stewart Balanchine - Aug 25, 2021 2:11:10 PM

Marketing these days is all about personalization. It’s about making the customer feel cared about. Companies must take the time to understand their customers needs, values, and how those impact their buying habits.

But how do you do that for every customer?

You don’t. You cultivate customers that are most likely to purchase. By segmenting customers, you can understand who those customers are and how to reach them.

What is Customer Segmentation?

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Customer segmentation is breaking down your customer base into groups based on their behaviors.

This can get overwhelming. There are seemingly endless ways you could break apart your customers into segments. Here are the most common segments used by businesses:

  • Demographics - identifying characteristics such as age, genders, socioeconomic status, etc.
  • Geographics - physical location
  • Psychographic - psychological traits such as personality, values, etc.
  • Technographic - level of tech-savviness and what technologies are most commonly used (desktop versus mobile, apps versus software, etc.)
  • Behavioral - trends observed in customer behaviors such as product use, cart abandonment, webpage visitation, and other habits
  • Needs-based - needs looking to be met by the product or service
  • Value-based - financial impact of the customer on the business

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Finding the right segments for your business will take a little trial and error. You will continue to learn more and more about what content interests each segment. Over time, your marketing team will be able to develop consistent messaging for each segment, taking you from inefficiencies to insights.

Why Segment Your Customers?

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Customer segmentation improves efficiency in marketing, so that you save not only your time but also your customers time. Customers do not want to read advertisements all day to find the products that are right for them. They want to read one advertisement that tells them about the exact product they were looking for. With customer segmentation, that’s possible.

Customer segmentation focuses on the core customer base . For example, you may create one segment of customers who spend large amounts of money at your business infrequently, and another segment of customers who spend small amounts of money at your business frequently. These are both groups of core customers, but the messaging to each group needs to be very different. Customers who buy frequently want more frequent communication and engagement. However, customers who buy infrequently might be more likely to increase their spending frequency when they see a sale or expiring coupon. Breaking core customers into segments allows you to analyze data from a group based on past behaviors, to find out what will best convert them to a new or firsttime sale.

By segmenting your customers, you can provide personalized messages to each group of core customers . A personalized offer encourages customers to buy more products because the offer meets a need they already had. Personalized customer service retains customers and increases loyalty to your business. Customers don’t want to spend any extra time deciding what to buy or fixing their issues. They want you to use what you know about them already to streamline the process. Customer segmentation can allow you to do just that.

Businesses can use customer segmentation to increase their ROI by leveraging data on current segments to cultivate higher-value core customers.

How to Segment Your Customers

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Data is the basis for all segmentation strategies. Every business already has one data point to start from: customer purchase history. You also might have data from emails sent out as part of marketing campaigns, including open rates and click rates. At the beginning, there is no need for the high-tech, complex, and expensive machine-learning software. You can start small and get more complex as it fits your company’s needs.

Starting too big or too complex is the quickest way to overwhelm yourself and stop before you even get started. Start with one essential metric, such as either:

  • Customer lifetime value
    Who has purchased over $200 worth of products and who has not?
  • Email opens
    Who has opened at least 5 out of the 6 previous emails we sent out and who has not?

Your marketing strategies will then be directed by the metric you choose. Using an iterative approach, start with one campaign for each group. For core customers, reward them with premier offers that let them know how much you value their business. Maybe you give them exclusive access to new products, or offer them discounted shipping. For low-value (non-core) customers, encourage them with promos and discounted shipping. The goal for each campaign is to encourage more sales.

 

Make sure you are measuring your campaigns with additional metrics that you can use not only to see if it worked, but also to learn more about your customers. This will help you segment even further.

Once you have a good flow of basic segmentation, it’s time to dig even deeper.

The RFM Framework is a segmentation model that has been used for decades internationally. RFM stands for recency, frequency, and monetary. In other words:

  • How long has it been since a customer made a purchase or engaged with the business?
  • How frequent does the customer make purchases from or engage with the business?
  • How much financial value does the customer bring to the business?

This framework can help your company decide who are core customers, potential core customers, and non-core or one-time customers.

The RFM framework can also be used alongside any metric. For example, recency can be the time since a customer has opened an email; frequency can be the number of times a customer visits the page for a certain product or type of product; and monetary can be the value of items in an abandoned cart. Overall, the purpose is to identify high-value customers that will give you the highest ROI. Using a data-driven customer segmentation approach, you can make customer cultivation an integral part of your company’s strategy, across all departments.

When you’re ready to expand your customer segmentation practices, consider conducting a buying behavior analysis. More on this later.

Using the RFM Framework in the eCommerce Customer Lifecycle

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Let’s take a look at how you can apply the RFM framework with some of the customer segments we discussed earlier.

Low-value (non-core) customers. Customers who spend relatively little and not very often. Using the RFM framework, you will find that these customers are not fit for long term relationships. They will come and go based on sales or promos.

  • Recency: It’s been a while for these customers. Some of them may even be lost core or potential core customers.
  • Frequency: These customers do not purchase very often, and may often have only purchased once and never returned.
  • Monetary: These customers have a low order value. They probably saw something on the clearance rack or received an enticing promo, but have no intentions of making a larger purchase.

The most you can do for this group of customers is to have great customer service. Beyond that, they typically are not worth the effort of a costly or time-intensive marketing campaign.

Potential Core Customers. Customers who show promise of becoming core customers. They are ones that are likely to give you a higher ROI on marketing campaigns. The RFM framework shows the potential these customers have for becoming core customers.

  • Recency: New Customers have recently made their first purchase. Promising customers have recently made another purchase.
  • Frequency: Promising customers have made at least one other purchase, although we encourage you to narrow this group to 3 or more purchases to rule out false hopes.
  • Monetary: New Customers and Promising customers both make sales that are substantial, not just 1-2 items off the clearance rack.

When cultivating New Customers, be sure to focus on an onboarding strategy rather than a simple welcome campaign. The difference is that instead of telling them about your business and convincing them to make another purchase, you are showing them that you value them as a customer with or without another purchase.

When cultivating Promising customers, decide on what qualifies customers to fall into this group. For example, if your products are a one-time buy with add-ons, then a second purchase could be a sign of a promising customer. But often we advise businesses to go beyond just a second purchase. Perhaps you want to only include customers who have made at least 3-4 purchases. Or maybe you have a referral program and focus on customers who have made at least 1 referral. However you do it, make sure you go beyond just a one-time return to really focus this group of customers.

Core Customers. Here is your bread and butter, the core customer segment. These customers are purchasing more recently, more frequently, and with higher-value purchases than any other group of customers. These are the basis for increasing revenue, are brand promoters, and give you a higher ROI per purchase. Core customers don’t just purchase, they also promote. They rave about you to bring in additional customers through word of mouth, public reviews, and personal content. Using data from real businesses, we know that core customers are actually worth up to 10 times their direct spending amount.

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  • Recency: All groups of core customers have made a recent purchase. For Champions, they may have even sent a friend over to make a purchase recently. Make sure that your marketing to these customers is frequent enough to match their spending habits.
  • Frequency
    • Loyalists: These customers make regular purchases. You can count on them to make a purchase almost on a schedule. They may have even subscribed to purchasing your product if that’s available. If so, make sure they don’t forget where that subscription is coming from.
    • Champions: These customers buy frequently and also promote your business frequently. Make sure your marketing campaign matches their frequency to reward them regularly for their support.
  • Monetary
    • Big Spenders: These customers will spend a lot at one time. They come back, but maybe not as frequently because they purchased all they needed at once. Reward them for their large purchases with promos that give them incentive to spend as much if not more each time they visit your business. Try to anticipate when they will be close to the end of the product lifecycle and market accordingly.
    • Champions: These customers spend the most money, the most often. Shower them with incentives because they will be your best advertisers. You might even want to give them incentives that they can share with others, such as a personalized code to share on social media or within their social circles. It not only makes these customers feel valued, but also allows you to track how much ROI each individual champion is really giving you.

 

Core customers will require the most care in your marketing strategy, but they can also be the easiest to automate. Since they engage often, these customers offer a lot of data to fine tune your marketing strategy.

For example, if they are given personalized emails and promo codes, then you can know the exact value of each campaign. These customers buy frequently so you will know relatively quickly if the campaign was successful. This can be more difficult with other groups where they may see the campaign and forget about it before it expires. It wasn’t that they weren’t interested, they just weren’t interested enough to act within the expiration window. But core customers are more likely to jump on an offer and at least.

Just remember with these customers to make your strategies data-driven to ensure you are giving them the value they really want.

The Retention Spectrum

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Another aspect of the RFM framework to consider is the retention spectrum: Active, Drifting, Churn-risk, and Lost. This spectrum can help you prevent core customers and potential core customers from being lost over time.

Active. This is where you want to keep your core customers. But it doesn’t always have to mean they are actively purchasing. Businesses often keep their customers active with value-based products rather than endless buying pressure. Let’s be honest, when a company sends you promo after promo, or reminds you constantly to make a purchase, it can sound a bit desperate. Offering customers value-based products such as educational videos, articles on popular topics, or a community platform can help them feel like they are getting more than they paid for. The goal is to have customers feeling like they got 10x more than they spent. Almost as if you are paying them!

Drifting. These are customers who are still aware of your brand, but are no longer actively engaging with it. They made a purchase recently enough that they haven’t forgotten about you, but could use a nudge to return to your site. This is not the group that needs all-hands-on-deck. A simple reminder of the value of your business and a nudge to return to your website should do the trick.

Churn-risk. At this point, it’s time to start introducing offers. These customers have been out of touch with your brand long enough to lose touch. This is when many businesses send out the famous “We miss you!” emails. The most effective strategy at this stage is to have consistent messaging over time, and end with an expiring offer. Take some time to experiment with what works best as far as messaging and promotions. Do some A/B tests and the like to gather data on what these customers respond to.

However, be careful not to over-promo. Customers in this category can easily become low-value customers if they are only looking for the next sale email. Send out a few offers, but after they churn a few times with the same result, it might be time to burn that bridge.

Lost. Customers who have not made a purchase in a while will need significant incentives. They left or simply didn’t return for a reason. Sometimes it can be helpful to reach out to these customers after a new product is launched or a new value is being promoted for your product. Maybe new research has come out indicating an unexpected benefit for your product or service. Beyond anything significantly new, these customers might be simply lost. Some companies implement a last-ditch effort when customers have moved into the lost category. But other companies like to leave lost customers as lost. It really depends on the company and industry.

How long is too long will really depend on your product life cycle and customer habits in the general market. It’s helpful to consult an expert to help you decide when to place customers into each of the buckets above.

Buying Behavior Analysis

Buying behavior analysis, as developed by our partners at Unific, compares the behaviors of your actual customers to the general population to compare your business to the larger industry. It allows your company to:

  • Dig deep into your customers buying habits
  • Differentiate core, potential core, and low-value customers
  • Leverage data for growth
  • Look towards long-term expansion

A buying behavior analysis can help you attract, cultivate, and retain customers. By understanding what key segments exist in your customer base, you can find out:

  • Am I attracting customers who are ready to be cultivated into core customers?
  • Am I cultivating these customers so that they can become core customers?
  • Am I retaining core customers by providing them the value they were looking for?

It can also help you find out if your revenue is concentrated in too few parts of your customer base. Maybe there are customer segments you didn’t even realize existed.

The most common segments that can impact your marketing strategy include:

  • Champions: Customers with the highest lifetime value. They engage regularly and have been with you the longest.
  • Big Spenders: Customers with above average order value.
  • Loyalists: Customers who purchase on a regular basis.
  • Promising: Customers who have purchased more than once, but not yet on a regular basis. These customers need a little extra incentive to increase the frequency of their purchases.
  • New Customers: Customers who have recently placed one order, but have not yet come back for seconds. This is a pivotal group of customers, as we all know the saying about first impressions.
  • Low-value customers. Customers who spend very little and engage with the business infrequently. These customers need a special kind of TLC to increase sales, and may not be worth extended efforts or costly campaigns.
  • Lost customers: Customers who used to be core customers or potential core customers, but no longer fit into those categories. This is an important group to segment because it can help you prevent any further loss. Find out why these groups were lost and you will know how to prevent it in the future, using the retention spectrum.

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The analysis generates a segmentation report to help your business understand who are the core customers, potential core customers, and the low-value customers.

Core customers. These customers can be broken up into the following groups:

  • Champions
  • Big Spenders
  • Loyalists

Potential core customers. These customers can be broken up into the following groups:

  • Promising
  • New Customers

Non-core customers. These customers are also known as low-value customers.

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Using these new groupings of customer segments, your company can focus marketing techniques on the groups of customers who are most likely to buy frequently and make high-value purchases to improve your ROI.

 

To get started on your buying behavior analysis, follow these simple steps:

  1. Sign up for a free account and connect it to your cart. We will download data on your orders to begin analysis.
  2. Look out for an email from us when the report is ready. Then we will schedule a time to review it with you.
  3. Once you better understand your customer’s behavior, we will help you identify strategies for the short, medium, and long term growth of your business.

This analysis currently supports Shopify, Magento 2.x, BigCommerce, and WooCommerce. For any other carts, send us a message using the chat feature on the bottom right corner of your screen. Or you can visit our Get in Touch page for more ways to connect.

 

Customer Segmentation for Customer Cultivation

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Customer segmentation is a launching point for a scalable customer cultivation strategy. In order to cultivate your customers, you must deliver to them the value that they are seeking. The problem is, not every customer will be seeking the same value. By dividing your customers into segments, you can better understand what value each segment is looking for and develop targeted marketing strategies.

Using customer segmentation will elevate your customer cultivation by:

  • Improving your understanding of customers to guide automation
  • Creating targeted campaigns to increase efficiency in marketing workflows
  • Allowing you to scale your marketing strategy by starting small and implementing more complex systems as you receive the value in customer segmentation

For a little inspiration, here are some campaign ideas from Unific to get you started:

Prospects → New Customer

  • Abandoned cart campaign with time-limited promotion
  • Lead nurture campaign
  • Welcome series for new subscribers
  • Dynamic retargeting ads on social media
  • Popup promotions

New Customers → Promising Customers

  • Abandoned cart campaign with time-limited promotion
  • Dynamic retargeting ads on social media
  • Post-purchase welcome series (product specific with related recommendations)
  • Newsletters announcing new products or services

Promising Customers → Loyalists or Big Spenders

  • Post-purchase welcome series (product specific with related recommendations)
  • Newsletters announcing new products or services
  • Abandoned cart campaign with time-limited promotion
  • Seasonal Promotions

Loyalists or Big Spenders → Champions

  • Post-purchase welcome series (product specific with related recommendations)
  • Newsletters announcing new products or services
  • Abandoned cart campaign with time-limited promotion
  • Seasonal Promotions
  • Dynamic retargeting ads on social media
  • Loyalty program
  • Segment-specific promotions

Reengage Drifting Customers

  • “We Miss You!”’ campaigns
  • Reminders to purchase again
  • “How can we help?” email with feedback survey
  • Dynamic retargeting ads on social media

Recover Churn Risk Customers

  • Win-back campaigns with time-limited promotion
  • Abandoned cart campaigns with “Win-back” promotions
  • Dynamic retargeting ads on social media
  • Announcements of new products or services
  • Segment-specific promotions

Optimize Your Marketing Strategies with Customer Segmentation

Customers want a personalized experience with your business. They don’t want to feel like a number or a price tag. At the same time, your business doesn’t want to waste time, effort, and financial resources marketing to leads that won’t convert. That’s why customer cultivation is so essential. Finding out what customer segments are truly worth the effort and focusing on them can save you and your customers from disappointment.

Ready to start segmenting? We are here to help. Cetrix works with analytics and AI software systems from IBM, Google, Cloudera and Salesforce to give our customers the most advanced decision-making tools of our age. Using these tools we can help you design the most effective marketing strategy through focused customer segmentation.

Contact us anytime using the chat feature, or email us at info@cetrixcloudservices.com

 

 

 

Topics: eCommerce

Stewart Balanchine

Stewart Balanchine

Stewart former Director of Market Development and Innovation - Inbound Marketing Strategies and Educational Technology Platforms at Cetrix Tech is now directing our Salesforce Higher ED solutions. An evangelist of 21st century Education Technology, he is a regular contributor in this blog. He writes to share ideas in helping others in the transformation process and tackles technology integration in the active learning process in depth.

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