Customer segmentation separates a market into discrete customer groups that share similar characteristics. This can be a powerful way to identify unmet customer needs. Companies that identify underserved segments can then outperform competitors by developing uniquely appealing products and services. Segmentation works best when a company tailors offerings to segments that are the most profitable and serves them with a differentiated proposition. Prioritizing segments helps companies develop marketing campaigns and pricing strategies to extract maximum value from both high- and low-profit customers. Segmentation thus may serve as the principal basis for allocating resources to product development, marketing, service and delivery programs.

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How companies use customer segmentation

• Prioritize new product development efforts and product features. Segmentation analysis allows companies to understand the preferences of each segment so that they can adapt product development.
• Develop customized marketing programs. Each segment should be reached in a personalized way.
• Determine appropriate product pricing and distribution strategy. Pricing and distribution choices should be flexible enough to fit to all segments.
• Identify cross-sell and upsell opportunities.
• Customize customer experiences.
• Target advertising or optimize media mix and media buying.
• Increase customer retention.
• Measure share of wallet and customer lifetime value.

Key considerations

• Define the size of segments that best fit the business objectives and inform specific business decisions.
• Do not treat segments or customers within segments as carved in stone. Segments evolve depending on customer needs and behaviors, and individual customers may move from one segment to another.
• Focus investments on the most promising segments, or create a strategy to make customers move from one segment to another, such as low spenders becoming high spenders.
• Meet a concrete business objective. Leading companies apply different segmentation schemes for different purposes.