Creating useful customer segments starts with choosing the right approach. But with multiple segmentation methodologies available, how do you decide which one will deliver the insights your business actually needs?
The truth is, there’s no single, standard way to do segmentation. What works brilliantly in one situation might be completely wrong for another. The key is understanding the strengths and limitations of each approach, then matching your choice to your specific business context and goals.
Let’s explore the three main segmentation approaches and help you determine which one will drive the best results for your organisation.
The three main segmentation approaches
1. Survey-based market segmentation
How it works:
Survey-based segmentation asks people questions about what they like, what motivates them, and why they make certain purchasing decisions. This approach focuses heavily on the “why” behind customer behaviour.
Best for:
- Understanding both current and potential customers
- Informing marketing strategy and brand positioning
- Product innovation and development
- Exploring new market opportunities
- Categories where emotional and attitudinal factors drive choice
Limitations:
- Hard to connect insights directly to your actual customer database
- Difficult to target specific individuals with precision
- May not reflect actual purchasing behaviour
- Requires ongoing research to keep insights current
When to choose this approach:
If you’re launching a new product, entering a new market, or need to understand the broader competitive landscape. It’s particularly valuable when you need to understand customer motivations that aren’t visible in transaction data.
Real example:
A home and car insurance company used survey-based segmentation to understand attitudes towards insurance across the broader market. They discovered that a large segment simply wanted insurance that would fix their problems and let them get back on track with their lives. This insight led to a successful brand repositioning that returned the business to growth.
2. Database customer segmentation
How it works:
This approach analyses purely transactional and behavioural data from your existing customer database and CRM system. It looks at the “what, where, when and who” of your customers’ actions.
Best for:
- Targeting specific existing customers with personalised offers
- Improving customer retention and loyalty
- Optimising pricing and promotional strategies
- Understanding purchase patterns and lifecycles
- Immediate activation and measurement
Limitations:
- Doesn’t explain why customers behave the way they do
- Limited ability to attract new customers outside your current base
- May not capture changing customer motivations
- Can become a tool for promotions rather than building long-term engagement
When to choose this approach:
If you have a substantial customer database and want to improve retention, increase purchase frequency, or optimise your existing customer relationships. It’s ideal for businesses with high repeat purchase rates and clear transaction histories.
Theoretical example:
An e-commerce retailer uses database segmentation to identify customers who consistently purchased premium products but had reduced their frequency. They create a targeted retention campaign with exclusive early access to new premium lines, resulting in a 40% increase in purchase frequency among this segment.
3. Hybrid segmentation
How it works:
Hybrid segmentation combines customer data, survey insights, and third-party data to create a 360-degree view of customers. It connects what consumers do with why they do it.
Best for:
- Personalisation at scale
- Long-term strategic growth
- Understanding both current customers and market opportunities
- Comprehensive customer experience optimisation
- Businesses with complex customer journeys
Requirements:
- Access to customer database or transaction data
- Ability to conduct market research
- Resources for data integration and analysis
- Third-party data sources (optional but beneficial)
When to choose this approach:
When you need comprehensive insights that drive both short-term tactics and long-term strategy. It’s the gold standard for businesses with the resources to invest in a complete segmentation solution.
Real example:
A multinational telecommunications company combined customer contract information, usage data, demographic details, and survey insights about customer motivations. This hybrid approach revealed strong links between household size, customer motivations, and product choices, enabling them to create highly targeted offerings that increased both acquisition and retention.
Comparison: Choosing your approach
| Approach | Strength | Weakness | Best Use Case |
|---|---|---|---|
| Survey-based | Deep understanding of motivations | Hard to action with specific customers | New market entry, brand strategy |
| Database | Immediate targeting and measurement | Limited understanding of "why" | Retention optimisation, existing customers |
| Hybrid | Complete 360° customer view | Requires significant resources | Comprehensive growth strategy |
Key decision factors
1. Your business goals
If you want to…
- Understand market opportunities: Survey-based
- Improve existing customer performance: Database
- Drive comprehensive growth: Hybrid
2. Your data assets
If you have…
- Limited customer data: Survey-based
- Rich transaction history: Database or Hybrid
- Multiple data sources: Hybrid
3. Your resources
If you can invest in…
- Market research only: Survey-based
- Data analysis capabilities: Database
- Comprehensive research and analytics: Hybrid
4. Your timeline
If you need results…
- For strategic planning (3-6 months): Survey-based
- For immediate campaigns (1-2 months): Database
- For long-term transformation (6-12 months): Hybrid
Making survey-based segmentation more actionable
Even if you choose survey-based segmentation, you can increase its practical value:
Profile matching: Use demographic and behavioural patterns from your survey to identify similar customers in your database.
Acquisition targeting: Use segment characteristics to improve targeting for new customer acquisition across digital platforms.
Product development: Apply insights to create products and services that meet identified unmet needs.
Message testing: Use segment insights to develop and test marketing messages that resonate with different groups.
Making database segmentation more strategic
To get more strategic value from database segmentation:
Add context: Conduct focused research with representatives from each database segment to understand their motivations.
External data: Overlay third-party demographic and lifestyle data to enrich your segments.
Predictive modelling: Use historical patterns to predict future behaviour and lifetime value.
Cross-channel integration: Connect online and offline behaviour for a more complete picture.
The hybrid advantage: Best of both worlds
While hybrid segmentation requires more investment, it delivers unique advantages:
Immediate activation: You can start targeting specific customers immediately while building longer-term strategic insights.
Comprehensive understanding: You know both what customers do and why they do it.
Continuous optimisation: You can track how attitudes and behaviours change over time.
Cross-functional value: Different teams can use the same segmentation for different purposes – marketing for campaigns, product for innovation, customer service for experience design.
Implementation considerations
Data integration challenges
Survey-based: Requires representative sampling and regular updates to maintain relevance.
Database: Needs clean, comprehensive data and robust analytics capabilities.
Hybrid: Demands sophisticated data integration and analysis skills, plus ongoing data management.
Organisational readiness
Survey-based: Teams need training to translate insights into actionable strategies.
Database: Requires strong analytical capabilities and CRM integration.
Hybrid: Needs cross-functional collaboration and change management support.
Making your decision
Consider these questions to guide your choice:
- What’s your primary goal: Understanding the market, optimising current customers, or comprehensive growth?
- What data do you have: Market research capabilities, customer database, or both?
- What resources can you commit: Research budget, analytical capabilities, or full strategic investment?
- What’s your timeline: Quick wins, strategic planning, or long-term transformation?
- How will you measure success: Brand metrics, customer metrics, or business growth?
Getting started
Whichever approach you choose, success depends on having clear goals and measurement criteria from the start. The best segmentation is the one that your teams will actually use to make better decisions.
Remember: you can always evolve your approach over time. Many successful companies start with one method and gradually build towards a more comprehensive hybrid approach as their capabilities and needs develop.
The key is choosing the approach that matches your current situation while building towards your long-term customer understanding goals.
Next in our series: We’ll explore how to choose the right data for your segmentation – from demographics and behaviours to attitudes and needs – and create segments that drive real business results.