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Want to sell more products? Turn market shifts into a competitive advantage? Get customers coming back time and time again, spending more as they do?
If your answer to all these questions is “yes!”, then you need to know exactly who you’re targeting, why you’re targeting them, and what they actually want from you.
If you don’t understand the segments that make up your audience, there’s no way you’ll be able to engage them effectively. Each one is different, and will need different products, marketing and messaging to be engaged successfully.
In times of change, companies that deeply know their customers can adapt quickly, turning market shifts into growth opportunities whilst competitors struggle. This is where customer segmentation becomes your secret weapon.
What is customer segmentation?
Customer segmentation means breaking your commercially-addressable audience into smaller groups (typically 5-8, but this can vary depending on your needs), each of which is united by shared characteristics like attitudes, demographics, needs and behaviours.
Instead of treating everyone the same, segmentation allows marketing, products and messaging to be tailored to meet these different audience needs.
But before you can segment, you need to define your commercially addressable market. This is everyone who could possibly consider buying or using a product or service of yours, even if they don’t do so currently. Another term for this is “non-rejector” – basically everyone who won’t not buy from you, if you’ll excuse the double-negative.
Think of it this way: your commercially addressable market is the entire pool of potential customers. Segmentation is how you divide that pool into meaningful groups you can actually do something with.
Why segmentation drives business growth
Segmentation isn’t just about organising your customers into neat categories. It’s a powerful strategic tool that drives growth in three key ways.
1. Identifying where to play
Looking at multiple layers of information informs the decisions you make around which segments would be best to target.
By looking at the value of existing customers (segment size, average order value and lifetime value) you can pick out financial targets. These are the segments that would generate the most revenue for you if targeted effectively.
By assessing the value of potential customers:
- how close they are to your brand (current penetration and share of wallet), identifies your most realistic targets in terms of increasing market share.
- the different needs, motivations, attitudes and behaviours that drive each segment and what barriers they have helps you understand why each segment makes the purchase decisions they do. This helps with targeting your messaging and product lines.
Together, this information means you can identify the segments you want to go after – substantial, valuable and attainable. Specific targeting is about using your resources in the smartest way, to maximise ROI.
2. Defining how to win
Once you know who to target, segmentation helps you determine what to target them with. This could take different forms:
Product innovation: Adapting your service, reworking an existing product, or developing new offerings that meet the unmet needs of your target segment.
Brand positioning: Refining your market position to better serve a target segment – this could be repositioning your value proposition, adjusting what makes you different, or redefining what your brand stands for.
Portfolio strategy: Understanding which of your existing brands or products are most aligned with your key targets.
Strategic acquisitions: Acquiring competitors or adjacent brands to obtain relevant value propositions.
3. Activating your winning strategy
Finally, segmentation informs how and where you build relationships with your target customers:
Channel strategy: What platforms and channels would be most effective? What media do your target segments consume?
Targeting: What filters should you use to target specific groups? What customers from your segments should you use to find “lookalike” audiences through your digital marketing platforms?
Messaging: How should you talk about your services and products? What would appeal most to your target segments?
Once you’ve identified how best to target each segment, and how each segment likes to be communicated with, you can also use your segmentation to identify which segment each customer belongs to. Now you can tag their account with this information in your CRM and personalise your interactions according to what will resonate best with them – improving customer experience and strengthening relationships that drive more value.
Real-world impact: The numbers don't lie
When done right, segmentation delivers transformational results. Here are some real examples:
Travel sector success: One travel company estimated that their segmentation delivered around £50 million in additional revenue in the first 18 months. By understanding different traveller types and trip motivations, they created targeted holiday packages that saw 215% higher uptake than previous offerings.
Insurance turnaround: A home and car insurance company facing revenue decline used segmentation to discover that a large segment simply wanted insurance that would fix their problems and get them back on track. A well-executed brand campaign based on this insight returned the business to growth without spending any more on advertising.
White goods innovation: A household appliance company struggling against bigger competitors used segmentation insights about changing cleaning habits to create a new cordless vacuum cleaner. This product was so successful it transformed their entire business, allowing them to charge premium prices and become a major market player.
The strategic framework that works
Successful segmentation follows a clear strategic framework:
Who we will target and why – Using segmentation to identify your most valuable customer groups and understand what drives them.
What we will target them with – Determining the right products, services, positioning and messaging for each segment.
Where and how we will build relationships – Identifying the best channels, touchpoints and experiences to engage each segment effectively.
This framework ensures your segmentation isn’t just an interesting exercise in customer analysis, but a practical tool that drives real business decisions and measurable growth.
Getting started: The foundation of effective growth strategy
By understanding how consumers think, feel and behave, you can react to market changes quicker than your competitors.
A transformational segmentation doesn’t just bring clarity on who to target, but why you are targeting them, so different teams can focus on target segments and refine what to target each of them with.
The key is moving beyond demographics and basic customer data to understand the deeper motivations, needs and barriers that drive customer behaviour. When you understand not just what your customers do, but why they do it, you unlock the insights needed to create products, messages and experiences that truly resonate.
Ready to transform your approach to customer growth? Understanding your audience through strategic segmentation is the first step towards building a customer-centric business that adapts quickly to change and consistently outperforms competitors.
This is the first in a series of posts exploring customer segmentation. Next, we’ll dive into the three main approaches to segmentation and how to choose the right one for your business.