Customer Segmentation Models to Improve the Performance of Loyalty Marketing Campaigns

To create a loyalty marketing strategy, it is critical to understand that every customer is unique. Every member has different needs, preferences, communication channels, behavior, and emotions. Approaching all these unique members as one via mass communication is a big mistake when trying to scale your business. Segmenting your customers is absolutely critical to your success. But what is customer segmentation, why is important, and which segmentation models should be considered?  

What is customer segmentation? 

Customer segmentation is the practice in which marketers divide their customer base into specific groups in order to deliver more effective communication and a personalized experience. These segments can be based on one or several characteristics that clients have in common, such as demographics, psychographics, preferences, or even behavior. 

For example, customers can be split based on demographics such as their age, gender or location - then these characteristics can be combined with preferences such as how they want to be contacted -  in addition to account history, say the number of transactions made in the last few months or their lifetime value. Segments can be as simple or as detailed and granular as you prefer. 

Defining a customer segmentation strategy requires your organization to understand who your audience is, as well as their needs, and behavioral tendences. This will allow the right allocation of budget and resources to provide more personalized communication and make your business grow faster. 

Why is customer segmentation important?

Defining a customer segmentation strategy will bring a variety of valuable benefits to any business. Here are some examples of why customer segmentation should be a top priority:

1. More effective communication

Brands who understand the importance of customer segmentation have the greatest chance of hitting their target. The messaging used for a 20-year-old female shouldn’t be the same as the messaging for a 60-year-old male. A deep analysis of your customers will lead to a more personalized experience considering the segment group and the channel they are being communicated through. Ultimately, this will translate to higher response rates and engagement. 

It is also important to consider the number of times per day and days per week a customer should be contacted. Optimizing the communication time will prevent overcommunication and its potential consequence of losing the customers’ trust.

2. Improve marketing ROI

Effective customer segmentation also helps in allocating internal human and capital resources. Companies can determine which groups will be more and less profitable, and decide which ones deserve more or less attention. The final result - your revenue will grow while simultaneously stabilizing  your customer base. 

3. Increase customer lifetime value

Improving the customer experience naturally leads to increased engagement. The key is to then maintain this engagement over extended periods of time. Some techniques to achieve this include custom offers tailored to the preferences of specific groups. This, together with recognizing their loyalty to your brand with incentives (coupons, rewards or promotions), all lead to gaining a larger share of your members’ wallets and spend. 

While most brands tend to target their top spending customers to reward them and maintain their engagement, it is imperative not to forget about your underperforming members. Those who gave the company a high benefit in the past and whose purchasing trend has dwindled over time can receive special attention in order to bring them back to their old spending habits

Personalizing these communications depending on loyalty segments and/or trends also improves customer service, and the way the business assists in customer loyalty and customer retention. 

4. Product improvements

By understanding what motivates customers to buy your brand’s products, you can then tailor offers to better suit client needs. This will maximize customer satisfaction, and in turn, create brand ambassadors. What is better than a happy customer recommending your brand to their friends? 

5. Separate your brand from the competition 

All the customer segmentation benefits detailed above not only enhance clear distinctions from your competitors, but also prepare your brand to adapt to any and all market changes. Clients can be impulsive, and their opinions, behavior and needs can vary often. Executing customer segmentation means being ahead of the curve in terms of upcoming trends, understanding the clients’ new priorities and adapting to them. 

Actionable strategies to implement customer segmentation

When embarking on your customer segmentation journey you must first ask yourself… What is the goal? What are your brand’s unique selling points? How many members of the marketing team will be involved? And so on… Once this is established, the focus shifts to your customer base. Some tasks could include determining the size of the audience, the number of potential segments needed, identifying which customer will spend more and which will spend less, etc.

Then, decide what data needs to be collected and how it will be collected. Remember that this information is crucial when creating your segments, and will be the foundation of the marketing campaigns and initiatives. In order to execute any of these segmentation exercises you must ensure you have access to the most important piece of it all… the data!

Data can be collected in various different stages throughout the loyalty lifecycle. Whether it be mandatory upon enrolment or optional after the fact in the form of a survey. Now, every piece of information received will come directly and voluntarily from clients. This is what is known as zero-party data. 

What’s more, these data points can be compiled into segments. It is recommended to start with a broad focus, and continuously narrow them down over time. AI and ML can do wonders unearthing and analyzing behavior and trends, as well as shaving time and resources off the shoulders of your workforce. While defining these customer segmentation models, set up the main strategy to retain and gain customers loyalty, and after that focus on acquiring new ones.

Defining customer segmentation models

Customer segmentation models are the different ways in which a company decides to divide their customers. In loyalty, there is a wide spectrum of customer data points to consider, but the most relevant across the industry are:

Demographic

Demographic segmentation is when customers are divided by their social characteristics as part of the population. Some examples include age, location, gender and birthday. 

Psychographic

Psychographic segmentation considers an individual’s personality, attitudes, aspirations, interests, and values. For example, in customer segmentation for fashion, the audience can be divided depending on their size, favorite store, product, and even their concern for recycled clothes. For a Veterinary clinic, it will be more interesting to know what type of animal their clients have at home. Each industry will have very distinct data points that are more important to their unique business. 

Customer behavior

Customer behavior is one of the most important attributes when building customer segments. This division will allow a deeper knowledge of customer trends, habits, and product usage. Some examples are the total amount spent on transactions, the total number of transactions, the date of the last purchase, the number of points spent in the last month, the number of redemptions completed, etc. Here is where the customers engagement with the loyalty program can truly be measured. 

Now, member activity can be tracked, and trends can be identified automatically. Thanks to artificial intelligence and machine learning, segments can be created according to customer lifetime value (CLV) trends. Just to give an in-practice example, Retail customer segmentation models should focus on targeting their best performers in stores which lifetime value is greatest, but also send out communications and promotions to those members who have had a high spend in the past, but their trend is now decreasing. 

Campaign responses

Campaign response segmentation can be set up according to, for example, the way your members wish to receive communication -email, SMS, push notifications, etc.-, the channel used to enrol in the loyalty program -mobile app or web portal-, or the number of referrals made to a friend. The response to the program awarding customers with different recognition tiers can be another factor to consider for segmentation. 

Multiple conditions

Customer segmentation can apply to multiple different characteristics simultaneously. For instance, companies can target members by a condition as simple as membership type, or by their membership in combination with their location and a purchase  of a specific product. The most effective segments are as narrow and specific as possible to small groups in order to personalize campaign at its absolute lowest level. 

Understanding your member needs, preferences and behavior is the beginning of your customer segmentation journey. Defining goals, resources, unique selling points and crucial data points will prepare your business for all segmentation possibilities. Customer segmentation helps targeting the right clients, who present more profitable opportunities, at the right time, and in the most efficient way. With it, their retention and satisfaction will be ensured, as well as the maximization of sales and revenue. 

To learn more about customer segmentation models and how to build the most effective loyalty marketing strategy, request a demo with our Loyalty Experts! We will match you with an experiences Loyalty Consultant with experience in your unique market space and industry. 

Frequently Asked Questions about Customer Segmentation