Customer Segmentation Topic Guide
Posted: April 12, 2016Read Time: 15 minutes

A Quick Guide to Customer Segmentation in Ecommerce

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Introduction

Batch and blast, mass-mailout, ‘one-size-fits-all’ ecommerce marketing is on its way out, and fast.

Every time you send a customer or potential customer a marketing message that isn’t relevant to them, they’re less likely to connect with your brand, they’re less likely to open or click on your emails and, as a result, less likely to buy from you.

This guide will teach you how to use customer segmentation to increase customer loyalty by making your marketing messages more relevant.

It’ll answer these key questions:

  1. What is customer segmentation and how do I benefit from it?
  2. What factors should I consider when segmenting my customer communications?
  3. How do I build customer segmentation into my marketing campaigns?
  4. What can segmentation tell me about the health of my customer base?
  5. Which tools do I need to help me segment my customer base?

What is customer segmentation and what are the benefits?

In ecommerce marketing, customer segmentation (sometimes known as ‘marketing segmentation’) refers to the process of using customer data to enable a clustering of customers with shared attributes so that communication can be customised to say different things in different ways.

This is because people will tend to respond better and be greater value to your business when they feel their needs and interests are being specifically addressed in that customised communication.

Here are some of the key benefits that customer segmentation brings to online retailers that incorporate it into their marketing strategies:

Higher conversion rates

Customers are more likely to buy from you when your marketing messages are relevant to their circumstances and interests.

Long-term revenue from customer retention

Acquiring new customers is more costly than retaining the ones you already have – focusing on increasing the lifetime value of each customer as much as possible by making your marketing contextual is a key driver of long-term profitability.

Better insight into your customer base

Examining the performance of certain customer segments provides important insight into the health of your customer base, enables you to spot trends and patterns in what’s working and what isn’t, and can help inform your strategy going forwards.

What factors should I consider when identifying customer segments?

Relevant marketing is all about sending customers the right message at the right time, and there are a number of ways of slicing and dicing your customer base to adapt your marketing messages to different audiences.

Below are some of the factors that an online retailer might want to take into account when creating strategies for targeting specific customer segments.

We’ll cover some examples of specific strategies later in the guide, but for now it’s important to bear in mind that effective segmented campaigns are often based on a number of the factors below, not just one in isolation.

 

Demographic segmentation

At its most basic, you can segment your marketing efforts based on demographic data that you’ve accumulated about your customers. This might be:

  • Gender (e.g. creating a male and female-focused version of your newsletter if you sell to both genders)
  • Age (e.g. creating a student discount campaign for those that fall into the right age bracket)
  • Location (e.g. creating personalised ‘visit your local store’ campaigns to get people shopping offline)

Customer lifecycle segmentation

At Ometria, we’re big fans of what we call ‘customer lifecycle marketing’ – an approach that focuses on tailoring the messaging of marketing to where a customer is at in their journey with your brand. Lifecycle marketing hinges on the interplay between a number of factors:

a) Recency

Recency refers to the last time somebody shopped with you. Though the boundaries you set will depend on what type of business you’re running, you’d typically want to segment your customers into the following:

  • Active – those who have shopped recently, say in the last 6 months
  • At risk – those who have previously purchased from you, but have not returned to make a purchase in the timeframe you’d usually expect (e.g. between 6 and 12 months)
  • Lapsed – those that have purchased previously but have gone way beyond the point you’d usually expect them to return to make another purchase (e.g. 12 months +)

b) Frequency

Frequency refers to how often somebody has shopped with you.

  • Prospect/lead – someone who hasn’t shopped with you at all
  • One-off customer – somebody who has made a single purchase from you
  • Repeat customer – somebody who has made more than one purchase from you
  • Loyal customer – someone who has a sufficient number of times to be considered ‘loyal’ (usually 3 or 4)

c) Lifetime value

It’s also important to look at the amount that customers spend with you – after all, there’s a huge difference in revenue gained from a regular shopper who only buys discounted products and one who consistently buys high-value items.

Usually a VIP/top/medium/low scale might suffice, ranked either by average order value (AoV), historic customer lifetime value (CLV) (i.e. the total amount that a customer has spent with you), or even predictive CLV (a projected view of how valuable a customer will be to you).

d) Marketing engagement

While purchases are all-important, marketing engagement is one micro-conversion that should also affect how you segment your customer base. For instance, you may want to take a different line with an ‘at risk’ customer who is still active on-site and browsing to one that you haven’t seen at all and hasn’t clicked on any marketing messages.

When we talk about ‘marketing engagement’, we refer to factors such as:

  • Whether someone has opened/clicked through from an email
  • Whether someone has clicked through from a retargeting/social media ad
  • Whether someone has been active on-site.

For example, you might segment into two groups:

  • ‘Warm’ – those who are engaging with your marketing/have been active on site
  • ‘Cold’ – those who are not engaging with your marketing and haven’t browsed on-site

Product affinity segmentation

While the above section covers the ‘right timing’ aspect of relevancy, getting the ‘right message’ in front of your customer is crucial, too, if you’re going to attract their interest.

Using data from an individual customer’s behaviour, and from trends in your customer base as a whole, it’s possible to personalise your messaging by segmenting based on:

  • Products or categories viewed
  • Products or categories purchased
  • Products or categories most likely to result in cross-sell

How do I build customer segmentation into my marketing campaigns?

So we’ve covered some of the factors that you can use to identify key segments within your customer base. But how should these segments translate into a real-life segmentation strategy? Here are some examples of advanced customer segmentation in action:

VIP or ‘hero customer’ campaigns

One of the most basic pieces of segmentation an online retailer can do is to recognise who their best customers are. Typically, your top 10 per cent of customers will produce 30-45 per cent of your revenue, so anything you can do to improve the spend or performance of this segment will have a disproportionately good effect on your bottom line.

To work out who falls into the ‘hero customer’ segment, you’d typically look at how active they are (recency), how frequently they’ve shopped with you (frequency) and how much they’ve spent in your store (lifetime value). Setting the boundaries so that the top 10 or 20 per cent of your customer base fall into this category is usually a good place to start. Typically, many retailers will split their hero segment into VIPs – top 5 per cent – and top customers (next 15%).

These groups of customers are particularly valuable to you, so create marketing campaigns that encourage their loyalty and make them feel special:

  • Exclusive events and previews
  • ‘Refer a friend’ schemes
  • Points-based loyalty schemes

Triggered activation and reactivation emails

We know that repeat, active customers are the bedrock of successful ecommerce. And once we start segmenting by recency and frequency, we can get a great idea of which customers fall into this category, and which fall out.

For those that fall out, our objective is to nurture them into active, repeat customers, and we can use triggered email and clever social advertising to do so. Examples of triggered campaigns include:

    • Welcome series: aimed at welcoming new subscribers/customers to the brand

Cart abandonment campaigns: aimed at bringing back visitors who have added to basket but not purchased

  • Browse abandonment campaigns: aimed at bringing visitors back on-site using products or categories that they’ve viewed
  • Post-purchase campaigns: follow-up emails aimed at nurturing the next purchase
  • Reactivation campaigns: aimed at turning lapsed or ‘at risk’ customers back into active customers

You may want to further segment some of the campaigns above to make them more effective. For example, you could try:

  • Segmenting your welcome series for new subscribers (who have signed up to your email updates but haven’t bought yet) versus new customers (who have ended up on your list because of a purchase), making the messaging more targeted for each group.
  • Lessening the number of cart/browse abandonment emails that you send loyal, active customers who are likely to come back and repurchase without a reminder.
  • Changing your messaging in your reactivation campaigns depending on how valuable the customer is to you (more on that later).
  • Segmenting your reactivation campaigns based on whether the person has been onsite (they’re still ‘warm’) or whether they haven’t engaged with any marketing messages at all.

Offer and promotion segmentation

Whether in broadcast or triggered email campaigns, offering customers some sort of perk or discount is a popular way of incentivising them back onsite to re-purchase.

Clever segmentation can help you target the right customers with the right promotions – the best way to optimise this is through testing:

  • Be sensitive about offering discounts to active customers who pay full price – segmenting your promotional campaigns will enable you to offer discounts to those who you want to nurture or re-activate, but retain the revenue from those who would usually pay full price anyway. For the latter group, ‘deal sweeteners’ like free postage and packing or loyalty rewards can be more effective.
  • Don’t give out what you’re not going to get back – before launching any discount program, work out how much profit is being given away by this discount and what change in customer response would be needed to get more than this amount of profit back. This prediction can then be tested on a small sample of the entire customer base.
  • Pull out the stops to incentivise lapsing heros back on-site – while you can’t afford to offer incredible discounts or offers to all of your dormant customers, segmentation will enable you to target those most valuable to you.

What can segmentation tell me about the health of my customer base and my overall marketing performance?

Segmenting by lifecycle stages, and looking at how your customers flow between them, can give you important insight into your overall marketing performance. For example, it can tell you:

  • How successful you are at keeping your ‘active customer’ segment engaged with your marketing messages, and whether this segment is growing.
  • How many new leads and customers you’re acquiring.
  • How many customers you’re losing.
  • How many customers you are reactivating from ‘lapsed’ or ‘at risk’ status.
  • How successful you are at converting one-time customers into repeat customers
  • What your retention rate is – compared to industry benchmarks

Read more: 4 Useful Data Reports To Shed (New) Light On Your Ecommerce Marketing Performance

Which tools do I need to help me segment my customer base?

There are two key contributors to a successful customer segmentation strategy. The first is having the insight into your customer data to be able create segments, and the second is having the ability to use these segments to power marketing campaigns.

Single customer view

Accurate segmentation relies on a unified view of each of your customers that brings together data from a whole host of different touch points, including transactional data from your ecommerce platform, on-site interaction data, email interaction data and demographic data.

Customer segmentation software

Next, you’ll need a tool that enables you to take all of the data that you have on your customers and turn it into meaningful customer segments and insights. This means being able to segment by:

  • demographic information
  • lifecycle stages
  • customer status (i.e. ‘hero’ customers)
  • specific customer cohorts

Automated marketing campaigns

Once you’ve segmented your customer base, you’ll need a tool that can automate the process of getting these marketing messages in front of the right people, whether in the form of email marketing, social or display advertising, SMS, or physical mail-outs.

Customer lifecycle marketing with Ometria

Ometria is a marketing platform for online retailers that empowers them to use data to send customers the right marketing messages at the right time to maximise revenue.

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