Customer segmentation: How to better understand and target your customers

"Knowledge is power." This is also, if not especially, true in marketing. Knowing which customer group is interested in which products is the key to successful marketing. Good customer segmentation can help minimize wastage from your advertising efforts and further understand your customers' buying behavior.

In this post, we're going to take a look at what customer segmentation exactly is, what different methods there are, and how it can be implemented with Shopify.

What is customer segmentation?

Interests and tastes are different. Accordingly, customer wishes are sometimes very individual: What buyer A thinks is an incredibly exciting and innovative product may leave buyer B completely cold, and vice versa. As a retailer, you should therefore know your customers at least as well as your competitors, because only those who respond to the wishes of their clientele will be successful in the long term.

This is exactly where customer segmentation comes into play. Its goal is to identify different groups of buyers and classify them on the basis of certain characteristics. In this way, it is easier to address customers with similar preferences and interests, which noticeably increases the effectiveness of your marketing and sales measures. At the same time, a homogeneous separation of your customers also serves to provide clarity. You can analyze individual groups based on their behavioral patterns and learn to understand them even better.

When does customer segmentation make sense?

Basically, this question could be answered quickly: Customer segmentation is recommended for almost every company. Even if at first glance you operate in a very clearly defined market niche and serve an extremely specific customer base, there are often secondary target groups that could also be interested in your product portfolio. These should not be neglected.

For example, if you sell model-making items, your customer base will primarily consist of people who pursue this hobby. However, you should by no means disregard the fact that your products are also suitable for friends and relatives who want to give model building enthusiasts a gift. Since the purchase frequency of model builders is very likely to be higher than that of their friends and relatives, it makes sense to distinguish between these customer groups.

What are the benefits of segmentation?

With the help of target group segmentation, your company benefits from a number of advantages. We will show you what these are here.

Improved customer understanding: As mentioned at the beginning, you will gain a better understanding of your customers' behavior patterns and needs. These insights are a key benefit of customer segmentation, as it will be much easier for you to meet customer needs and establish a close connection with your customers.

Increased customer loyalty: Correctly interpreted, data on customer behavior can be used to derive targeted strategies and measures for a personalized customer approach. In this way, you generate leads that fit your company and are often more willing to commit to the company in the long term.

Maximize profits: With the help of customer segmentation, you can identify customers with particularly high shopping cart values and target them specifically. This increases your sales potential and ultimately your profit.

Optimizing prices and products: Customer segments tell you a lot about the willingness to pay and preferences of prospective buyers. You can use this knowledge to improve your products and find the ideal compromise between margin and sales volume.

Simplified performance measurement: To improve marketing and sales in the long term, you should compare different campaigns with each other. This can be done much more easily if the addressees of your measures are already pre-grouped. Based on the results of your analysis, you can reorder your segments if necessary or adjust the focus of your marketing. Over time, this enables increasingly precise and effective campaigns.

What are the methods for customer segmentation?

A basic distinction is made between one-dimensional customer segmentation and multidimensional customer segmentation.

One-dimensional customer segmentation

One-dimensional segmentation makes it comparatively easy to analyze the structure of your customer base. The methods are based on only one characteristic, for example, the fact that a person has created a shopping cart in the last 90 days.

Methods for one-dimensional segmentation

ABC analysis: The ABC analysis divides customers according to your importance and bases thereby usually on a monetary size such as the profit. A-customers are thus particularly important, C-customers have the least relevance.

Analysis of the purchase frequency: With this method it is differentiated which customers particularly frequently, occasionally or only once buy.

Analysis of purchase volume per purchase: The shopping cart value can also be a criterion for one-dimensional customer segmentation. The resulting segments are often very similar to the results of an ABC analysis.

Analysis of usage intensity: The subdivision into so-called "heavy users" and "light users" can also be useful, since it can be assumed, for example, that customers with high usage intensity are more interested in suitable accessories for their product.

Multidimensional customer segmentation

Multidimensional customer segmentation is based on several criteria. For example, a customer's age could be combined with their annual income. This form of segmentation is often much more elaborate and complex. For this reason, the implementation of the various methods is often based on machine learning. However, their advantage is that customers within a segment are very similar to each other because they share socio-demographic characteristics.

Procedure for multidimensional segmentation

Factor analysis: Factor analysis is used to elicit so-called supervariables that combine many different characteristics.

Neural Networks: Neural networks visualize common connections and courses of action within your customer base.

Multidimensional scaling: In multidimensional scaling, different customer segments are arranged in such a way that they reveal similarities and differences between them.

Cluster analysis: Cluster analysis is based on a similarity measure. Various criteria and characteristics can be used to determine similarity.

Criteria and characteristics for segmenting target groups

Regardless of which method you choose, you need characteristics that you can use to form your customer segments.

The following criteria are suitable for customer segmentation:

• Demographic characteristics (e.g., age, gender, household size).

• External sources (e.g. market research institutes such as GfK or FFG)

• Customer journey

• Purchase history data (e.g., shopping cart value, returns, purchase frequency, total sales per customer)

• And many more ...

Which characteristics are best suited for your customer segments depends heavily on the goal of your marketing and sales measures.

Criteria according to the business model (B2B and B2C)

Since B2B and B2C customers differ from each other, it makes sense to distinguish the selection criteria for customer segmentation according to the business model.

Customer segmentation in B2C

Private individuals could be classified into the following segments, among others:

Sociodemographics: gender, age, occupation, level of education, annual income or marital status.

Geography: place of residence, residential area or cultural background

Psychographics: motivation, values, lifestyles, opinions, or preferences

Behavior: Price orientation, brand choice, media usage or background knowledge

Customer segmentation in B2B

The buying behavior of business customers can only be compared with that of private individuals to a limited extent. Therefore, you should use other characteristics for segmentation. The following characteristics, for example, are suitable for this purpose.

Environment-related: Industry, technological standard, government or union influence, affiliation with associations and other bodies.

Organization-related: Company form, company size, competencies and know-how

Individual characteristics: Procurement policy, willingness to take risks, order volume, purchasing criteria

How can customer segmentation be performed?

#1 Define goals

In the first step, you should define what exactly you want to achieve with your customer segmentation in the first place, as all subsequent steps are derived from this. Since it is advisable to take a cross-company approach and involve your marketing and sales team, it is worth using Scrum and/or project management tools such as Trello, Asana or JIRA for communication. Especially if you work in larger teams, you probably already use such a tool.

#2 Capture characteristics

Once the goals of your segmentation have been mapped out, you would need to define the characteristics you want to use to group your customers. Theoretically, this step can still be done very intuitively and on paper or within the aforementioned Scrum tools. For better clarity, mindmaps can also be a good help. To make sure that you can really capture your desired characteristics, you should possibly already include the software that you want to use for the actual collection of the data.

#3 Data collection

Exactly which software is used in the third step of customer segmentation depends primarily on your previously defined characteristics. Third-party services such as Google Analytics or Google Signals are very suitable for querying your customers' demographic data or finding out more about their user behavior. For the latter, Clarity from Microsoft is also interesting, as it creates heat maps and records your users' sessions. Data on purchase history is best taken directly from store systems such as Shopify and Shopify Plus, as these provide first-hand data. If you have an ERP connected to your online store, you can and should draw on it. ERPs are also often equipped with CRM functions for managing customer data.

#4 Select analysis method

Depending on which analysis method you choose, the pool of suitable tools also varies. One-dimensional methods such as ABC analysis could theoretically still be accomplished with an Excel list. For example, you could sort your customer base by revenue and declare the top 10% as A-customers.

For multi-dimensional customer segmentation, you usually need dedicated software for this. Statistical tools such as R or SPSS are suitable e.g. for the popular cluster analysis and other methods. In addition to these softwares, the Python programming language has also established itself for empirical tasks.

#5 Describe customer segment

The next step is to use the data obtained to derive customer segments. In practice, one or more buyer personas are created for this purpose. These are fictitious buyers who embody the demographics, motivation, buying behavior, etc. of an individual customer segment. Buyer personas could be created with HubSpot, for example. In addition, there are some (limited) free tools such as Userforge or Xtensio. Mnemonic.ai specializes in the AI-supported creation of buyer personas.

#6 Derive marketing and sales measures

In conjunction with the relevant business units, you need to derive suitable marketing or sales measures for your customer segments. Again, it very much depends on which measures you decide on and which channels you want to use to reach your customer groups. For email marketing, for example, newsletter tools such as Klaviyo can be used. For the automation of your measures, it is worth using tools such as Shopify Flow.

How large is a customer segment?

The size of an individual segment depends on many factors and can vary greatly from company to company. First and foremost, the segment size is determined by how many customers you serve in the first place. If you have defined the differentiating characteristics for segmentation very broadly, a segment can also be much larger than if you prefer a heterogeneous separation. Unfortunately, there is no general answer to this question.

How can customer segmentation be implemented with Shopify?

Shopify Customer Segmentation natively provides a set of features that you can use to group your customer base.

In the Customer > Segments section of your Shopify backend, you will find predefined templates. You can use these to create segments that

• Appeal to first-time customers,

• Target customers who spend a lot,

• win back customers,

• target the storefront behavior of the target group,

• target purchasing behavior

• or target a specific location.

Using the predefined segments, you can already group them in a meaningful way. However, you can also create your own segments. Numerous filter functions are available for this purpose. For example, you could use the command "customer_cities is Berlin" to create a segment that contains all customers from the state capital. However, this is only one example of many.

In the following table, we show you some of the filtering options and the associated criteria that you can use to create your own segments.

You can find an overview of all filter functions including examples of use in the Shopify help.

Once created, Shopify customer segments can be used for discount promotions, for example. For example, you could make your discount available only to newsletter subscribers or customers who have purchased something within a certain time window.

Shopify customer segmentation in B2B

Through Shopify Plus, you can offer your B2B customers individual conditions in addition to the standard functions for customer segmentation. To do this, you link the accounts of your B2B customers to previously created catalogs. After logging in, each B2B customer sees the catalog assigned to him or her, or the products and prices contained therein.

Shopify customer segmentation in B2C

Would you also like to display different products and catalogs for B2C or D2C customers on Shopify? Unfortunately, Shopify or Shopify Plus does not yet offer these individual conditions for D2C sales out-of-the-box. However, with the help of numerous Shopify apps, this problem can be solved. In the Shopify app store, there is a separate category for custom prices and offers with apps that offer various functions for personalization. These include, for example, hiding payment options for certain customer groups, dynamic product or price adjustments, or obtaining quotes for individual price negotiations.

Examples of Shopify customer segmentation: the variety of applications is large

We had already mentioned discount promotions and individual conditions above. Below we want to give you more options for segmentation under Shopify and Shopify Plus.

#1 Targeted email marketing

With segmentation, you can target specific parts of your mail contacts. As a rule, the open rates of segmented email campaigns are significantly higher than mailings that you send to all customers across the board.

#2 Retargeting

Reactivating existing customers is much easier than having to constantly acquire new customers. You can create customer segments for customers who bought something from you some time ago and use them as a focus group for your sales and marketing activities. Common time periods for this are 30 or 90 days.

#3 Cross-selling

If you know what customers have bought within a pre-defined time window, you can draw attention to useful accessories and thus generate further sales via cross-selling.

#4 Reduce shopping cart abandonment

Nothing is more annoying than a visitor who almost became a customer, but then backed out of their purchase intention. By creating a separate customer segment for shopping cart abandoners, you can remind this group of their incomplete purchase and perhaps still achieve a conversion.

#5 Individual content

Customer segments in marketing are not only suitable for creating individual offers. All of your content creation can be targeted to specific audiences. With interesting content that is closely related to your customers' areas of interest, you can create a particularly credible brand identity that your target group can easily identify with.

#6 Customer service

You can contact your customers a short time after the purchase to ask about their satisfaction and/or draw their attention to special care instructions. This way, you receive valuable feedback on your items on the one hand and strengthen customer satisfaction at the same time.

Selecta presents its customers with individual conditions with Shopify Plus

Have you satisfied your hunger or thirst via a vending machine lately? Then you have most likely consumed a product from Selecta - the Swiss company headquartered in Cham is one of Europe's largest suppliers of food products from vending machines and operates more than 460,000 sales outlets in 16 countries.

Meanwhile, Selecta's items are also available through six multilingual B2B online stores. The retailer offers its customers individual conditions such as customized prices, products and delivery options. To do this, Selecta relies on a combination of Shopify and the Infor M3 ERP.

Latori, Germany's first Shopify Plus agency

In the meantime, Latori can look back on more than a decade of experience in e-commerce. We were the first agency in Germany to specialize in Shopify Plus as an enterprise solution. We have helped numerous national and international players make the switch to Shopify or get started directly with the platform in e-commerce.