The Ultimate Guide To Customer Segmentation Part 1: What Are The Fundamentals And What Can You Expect To Gain?

By Dee Kumar
18 Comments

Hi, I’m Dee Kumar and I’m a new contributor here on Entrepreneurs-Journey.com.

In my first mini series I’m going to teach you the fundamentals of customer segmentation and how to use it correctly to increase your profits within a very short time. This will help provide the answer to some of marketing’s most asked questions including the infamous ‘How often should I mail my list?’. So many marketers talk about this, but no one has been able to give a good answer, until now.

In this three part series I am going to cover three main elements. The first, in this article, is the fundamentals of customer segmentation, why you should be thinking of customer segmentation and the gains you can expect. The second part of this series will look closely at how to segment your customers correctly and the last will look at how to communicate with these segments correctly to increase participation on your blog or sales of your products.

Members of my blog or Online Marketing MBA coaching program will know the quality of my credentials, but anyone that has never heard of me should click here first to learn more about me before reading the rest of this article (something every entrepreneur should check out before taking someone’s advice).

What Is Customer Segmentation?

Customer Segmentation put simply, is splitting your customers into groups based on some common characteristics for each group or subset. These characteristics can be anything from language, gender, age or spending but they should allow you to target each segment correctly and therefore help you motivate each group in the right way, thus making you more money.

NOTE: Before we continue it is important to define what customer means. A customer is anyone you service. That means if you sell a product it can be a potential customer or an actual buyer. If you have a blog, then your customers are your readers.

In order to split your customers correctly you have to know something about your customers. So in essence good customer segmentation actually comes down to how well you know your customers.

Since good marketing is defined as successfully fulfilling your customers needs and wants it becomes logical that good segmentation leads to better marketing as it helps you to correctly fulfill the needs of each customer segment.

There is however another key advantage of focusing on customers and learning more about them. Being good and really fast at something gives you a competitive edge only for a short-lived time, until someone better or faster out prices you. Being innovative also only works in the short term, especially since larger companies can copy your basic idea and wipe you out easily.

Being customer focused however, gives you a long term strategy. You get to know the customer, an asset which helps give you a long-term sustainable advantage. Large corporations have known this for some time and treat their customer groups differently, but I’m going to show you how even blogs such as yours can use the same concepts to increase reader loyalty and reader spending at the same time.

Where To Start With Customer Segmentation?

Almost every one has heard of the Pareto principle, or as many of you will know it the 80/20 rule. It basically implies that 80% of all effects can be attributed to 20% of the causes, which in plain English means that 80% of your gains can be attributed to 20% of your efforts.

So whenever you have good streak in your business, maybe your blog readership has doubled since last month or you have increased sales since last year, then it was usually due to 20% of your efforts that were the most important.

Yep, that is correct, not all your efforts bring results, and your role as a good entrepreneur is to work out which 20% of your efforts are giving you the 80% of results. Everything else is noise and distracting you from what is important.

Well actually, I believe that theory to be wrong because after having worked as an Executive Consultant with multiple multinational companies, roughly 90% of all profits can be attributed to just 10% of customers.

Do you see what that means? It means that 10% of your customer base are feeding your profits. How? Well simply because they buy from you again and again, they are serial buyers. They are so fixated on either your products, your brand or even your image that they will buy almost anything with your name on it.

This is why it is so vitally important to find out who those 10% of customers are, so that you can treat them well and work on strategies to keep them loyal for as long as you can. They truly are the lifeblood of your profitable business.

This might seem a little alien to you, or even perhaps over your head, but let me show you how well-known Internet Marketers all over the world have started using my formula.

Email Makes Internet Marketers Lazy

It all started a few years ago when I was having a discussion on board the infamous ‘Internet Marketers Cruise’ with a number of well-known individuals, and I challenged some of their consumer relationship management principles.

The cheap costs of email marketing means Internet Marketers tend to treat all their customers the same. They send them the same offers and the same emails, as unlike larger multinational corporations they do not have to think about the enormous costs of printing brochures and mailing them to their best customers.

I suggested this was wrong because different types of customers have different types of motivation to buy. If I could segment their customers for them they would see an instant increase in profits.

You see, people who buy from you less often need much more motivation to buy from you again, and customers who buy every time you send an email, simply need to be shown some appreciation to keep them buying from you at the same astonishing rate.

Almost every marketer gets this wrong and as such is losing profit when it is sitting there for the taking. If you send too many emails to people who do not need it they unsubscribe. If you send too few then you get poor results.

The secret is to segment your customers and treat each group separately.

If you have been on any major Internet Marketers list you will have noticed over last few years that whenever they launch a new product you seem to have to opt into a new mailing list. Then when they launch yet a new product, you have to opt-in again to a different list to view the launch videos. What they are basically doing is segmenting their lists and elevating the quality customers to separate lists.

In simple terms, they move the people who actually read their emails and click the links to a separate list. The people who actually buy the product from this separate list will also be separated again so that the owner now has three lists…

  1. People who do not bother clicking any links in their email
  2. People who click the link and thus showed some interest in the product
  3. Lastly your buyers, the guys that make you money

They segment their lists by value of the customer.

When they launch the next product, even previous buyers are made to opt into a separate list. This helps them separate the occasional buyers and the super buyers (the ones that buy everything you produce and thus the ones you should really be treating the best).

Now you know what the professional Internet Marketers are trying to do and why you seem to have to opt into many different lists from the same marketers. (By the way the reason they produce so many products is that they know their top 10% will buy it for sure, so they keep giving them a reason to spend.)

Coming Up Next

In the next article in this series, I will show you how to use customer segmentation practically on your blog and how you can use it to increase comments and participation rates.

I will show you why many people comment multiple times on blogs, but then disappear altogether, along with a simple formula to stop this ever happening to you. For this to work I need you to do some homework before the next article in this series. I need you to think seriously about two questions. These questions are:

  1. Who exactly is your customer? (It is not always somebody who buys something.)
  2. How can you divide your customers to identify the 10% that give you the most value?

Try to spend at least 15 minutes thinking about this. Doing this now will help you take maximum benefit from the practical steps in the second and third parts of this series.

Anyone who wants to make more money, either from their own sites, products or their blogs needs to start focusing on the principles of customer segmentation and customer relationship management that I will lay out in this series. Well-known Internet Marketers have started to take this advice seriously and so should you.

Feel free to post any questions below and I will get round to answering them as best as I can.

Click here to read part two of the series

Dee Kumar

About Dee Kumar

Be sure to read more from Dee Kumar on his Twitter Account and his Business Development Strategies Blog. Dee has also created a video series teaching 'essential business basics' which every marketer should learn. You can access the video series for free by clicking here: Double Your Success with Dee Kumar's Essential Business Basics course’,

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18 Comments

  • Once you identify the customer then the rest is up to you by serving them in the right way..its called growing your business.

    “Black Seo Guy “Signing Off”

  • Fantastic, well thought out and explained in great detail.

    It’s very difficult to do identify in today’s market, but I can comment from experience and I completely agree, around 10% of our client base are what we call ‘resellers’ who contribute for a large proportion of our income.

    On another note, welcome to the team Dee!

    • Thanks for welcome and kind words, Darren.

      The next article in this tri-series gives you a killer tip to keep those 10% buying. I look forward to reading how you might impement it.

  • I heard many IM gurus talk about customer segmentation, but i really haven’t got into it. Now i have to, because i realized how powerful it could be. Thank you for the very informative post.

    • The problem is that most people know they should be doing it and they tell others to do it without fully understanding it themselves. I’m fortunate to have studied this in practice and have some great advice practical advice that you can implement in the next two articles in the series.

      But you are right, it is very powerful. It is not as difficult as people think either, so David give the exercises at the bottom of the post a go and it will help you implement things next week.

  • Approaching every costumer as an unique person is very important for every business but as you said most internet marketers forget to do that or they are simple too lazy and just want to make some money thinking short term only

    • Wow approaching every customer as a individual must be time consuming but must be ultra productive when done right. I prefer to segment them into smaller groups which are very similar in behaviour so that they feel as if they are recieving personal attenton.

      Interesting what you say about short term focus. Makes a lot of sense that people who really take the time to learn best practices in business usually do have a longer term focus.

  • Sometimes we forget that even segments have sub-segments within them. If your out to make more dollars, pay attention to the smallest difference within a particular segment.

    • I do not believe segmenting is all about makig money, its rather about good business practice.

      It helps keep your customer or readers loyal and by identifying your core groups and keeping an eye on them you will be able to see changes i their habits long before your competitors.

      If I made this article sound only about money then that is perhaps my bad, as the real focus of segmentation is embroiled within Good Business Practice.

  • Very nice breakdown.

    Specific seems to win over general.

    It seems like relevancy, authenticity, and authority are a powerful triad.

  • Very good information. What would be the best method to get the most pertinent information about the people on the list?

    • It really does depend on your target market Lily. Without knowing who you market too or who your audience is it is a little hard to answer.

      As a general answer many people ask for certain information when someone leaves a comment or buys something. Often new age marketers often send out a questionnaire in return for a free gift, the questtionnaire of course involves filling in multiple fields which help gather user information.

      But you do make a point here that if marketers do not think about it, then information will not gather by itself. It needs at least a little proactivity to really obtain useful information.

  • I’ve been doing this without even realizing it. I did get some complaints about why someone who is one my list needs to sign up to another list. Now I have several small lists and I kind of feel unorganized or not sure what to do with some of them. Looking forward to the next part of the series.

  • Customer segmentation is one way of personalizing services for our clients/customers. I love your article. I’ll be waiting for your next post Dee. :)

  • Great addition to Yaro’s blog, Dee.

    I’ve given it some thought before, but never made it past just thinking about it.

    I hope for some practical tips that will get me from “thinking” about it to doing it.

    Ana

  • […] Since this is not a post about subscriber segmentation, let me give you a great source for that – this particular post is a part 1 of 3 of an eye-opening series I recently read on Entrepreneurs-Journey.com. […]

  • Hello Dee, this piece is quite instructive. I perfectly agree with you on the reasons to segment.

    For effective marketing strategy, plan or program the different groups in a market must be divided into smaller groups whose members are similar to each other in one or more important ways.

    More grease to your elbows!

  • […] you haven’t already segmented your customer base, I recommend reading this guide by Dee Kumar on Entrepreneur’s Journey, as it will give you some ideas around how to segment […]

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