Customer segmentation is a methodology under customer analytics used to group customers or products with similar characteristics into meaningful segments. The process allows companies to target customers better and serve them in a more fitting manner.

Organizations can segment customers based on various traits – demography, age, frequency of product use, or even other factors such as the book they read or the gym the go to.

Businesses usually employ this analytics methodology to gain a better understanding of their customers’ likes and dislikes. Their focus remains on finding out what could be the most valuable for each segment, allowing them to modify their strategy to market their products or services accordingly.

There are various segmentation methods such as product versioning, demographics and RFM (Recency, Frequency, Monetary). Companies mostly prefer using the latter.

In RFM technique, analysts segregate the recency, frequency and monetary variables into low, medium and high divisions, giving a total of 27 segments.

Importance of customer segmentation

Companies would have no use of huge amounts of data it has on customers if it is not analyzed to find meaningful insights into their behavior. For instance, let us consider a publishing company that has a customers buying their books both physically and virtually.

The said company can conduct customer segmentation and divide its customers into two groups – virtual buyers and physical buyers. It may find out that the virtual buyers tend to be of a younger age and the physical buyers comparatively older. The company can then effectively target their products to them distinctly. It may further conduct different analyses to find out what books each segment prefers and modify their strategy accordingly.