How e-commerce marketers can use customer segmentation to improve ROI

No marketing campaign can reach its full potential without segmentation. It’s critical to sort your target audience into distinct groups based on shared characteristics and tailor ad messaging to each group. It’s also best to segment your list of past purchasers so you can re-engage them with ads that are hyper-relevant to them.

In this blog post, we’ll explore seven essential segmentation models that every e-commerce marketer should know about, along with examples of how they can be applied to real-world marketing scenarios.

7 Key segmentation models for e-commerce marketers

Read on to understand which model will work best for your organization. 

1. RFM segmentation

RFM (Recency, Frequency, Monetary) segmentation categorizes customers based on their purchasing behavior and assigns them scores for recency, frequency, and monetary value.

Businesses that benefit from this segmentation model typically include retail, e-commerce platforms, subscription-based services, and any other business models that rely on repeat customer engagement and purchases. B2B companies with ongoing client transactions can also leverage RFM segmentation to enhance customer relationship management. These steps can help you conduct RFM segmentation effectively: 

• Collect data: Gather data on recency, frequency, and monetary values for each customer over a specific time period.

• Score customers: Assign scores for each RFM metric, typically on a scale of 1–5 or 1–10, with higher scores indicating higher customer lifetime value.

• Segment groups: Sort customers into groups based on their RFM scores.

• Analyze and act: Analyze each segment's behaviors and characteristics and develop targeted marketing strategies for each group.

2. Demographic segmentation

This segmentation model classifies customers based on demographic characteristics like age, gender, income, occupation, and education level. This approach is typically favored by consumer goods companies, retail chains, financial services, healthcare providers, and educational institutions. Any business whose products or services appeal to specific demographic groups can leverage it. Follow these steps to segment your customers using this method:

• Collect data: Gather comprehensive demographic data about your current customer base and target audience through surveys, first-party data, and market research.

• Analyze: Assess the collected data to identify patterns and trends. This involves looking at how different demographic groups interact with your products or services.

• Define segments: Define clear segments based on your analysis. For instance, you might categorize your market by age group, income level, or education level, depending on what's most relevant to your product.

• Target and position marketing material: Develop targeted marketing strategies for each demographic segment. This includes crafting messages that resonate with each group's specific needs, preferences, and values.

3. Psychographic segmentation

Psychographic segmentation delves into consumers' qualitative attributes by analyzing their lifestyles, interests, values, attitudes, and personality traits. This technique helps marketers understand what motivates their customers' buying decisions and how to align marketing messages with the target audience's inner drivers. 

Businesses that sell products connected to self-expression or personal identity — such as fashion, beauty, wellness, fitness, and the arts — often benefit from psychographic segmentation. Luxury brands and niche brands also find it particularly useful to understand the deep-seated motivations of their customers. Here is how you can segment your customers using this method: 

• Conduct research: Gather data through surveys, focus groups, and in-depth interviews to understand your market's psychographic characteristics.

• Look for patterns: Analyze the data to identify common psychographic patterns that correlate with purchasing behaviors or brand preferences.

• Define segments: Create segments based on shared psychographic traits such as values, interests, or lifestyle choices.

• Target with ads: Develop and deliver variations of your ads tailored to the motivations and values of each segment.

• Validate and refine: Test your assumptions by rolling out targeted campaigns and measuring their performance. Based on feedback and results, refine your segments and strategies.

4. Geographic segmentation

Geographic segmentation categorizes customers by their physical location — ranging from broad categories like countries or regions to more specific ones like cities or neighborhoods. This method is particularly useful for businesses whose products or services vary in relevance and demand across different areas, such as retail chains, real estate agencies, restaurants, and localized services (e.g., landscaping or plumbing). Additionally, companies that adjust their offerings based on climate, cultural preferences, or regional regulations find geographic segmentation beneficial. Follow these steps to conduct geographic segmentation for your business: 

• Collect data: To gather geographic information, use customer addresses or IP locations from your database, market research, or geographic information system (GIS) tools.

• Analyze market characteristics: Examine each geographic segment for unique market characteristics, such as population density, urban versus rural settings, climate conditions, and local competition.

• Define segments: Define market segments based on your geographic criteria. Segmentation could be as broad as country or region or as specific as city neighborhoods.

• Tailor strategy to regions: Develop tailored marketing and product strategies for each geographic segment, considering local tastes, consumer behavior, and logistical considerations.

5. Behavioral segmentation

Behavioral segmentation focuses on customers' actions and behaviors toward a business's products. This could include patterns within their purchase history, browsing behavior on your website, how customers interact with marketing campaigns, and their responses to different types of promotions.

Businesses that benefit the most from this model tend to be those with a strong online presence, such as e-commerce platforms, digital service providers, and subscription-based companies, as well as retail businesses with loyalty programs. This segmentation allows companies to personalize their marketing efforts and predict future behaviors based on past actions. Here is how you can use behavioral segmentation to reach your ideal customer:

• Collect data: Gather comprehensive behavioral data from customers across all touchpoints, including transaction records, website analytics, and engagement metrics.

• Identify patterns: Use data analysis to identify common behaviors that could indicate different customer needs or preferences, such as frequency of purchases, average spending, product usage, and response to marketing actions.

• Create segments: Define behavioral segments based on identified patterns, such as “frequent buyers,” “discount seekers,” or “social media engagers.”

• Customize marketing activities: Develop targeted marketing initiatives for each segment, such as tailored emails, retargeting ads, or loyalty rewards, to cater to their specific behavior patterns.

6. Technographic segmentation

Technographic segmentation drills into the technology usage patterns and preferences of customers, classifying them based on their favored devices, operating systems, and software platforms. This can encompass everything from the smartphones and computers they use to their preferred social media platforms and the applications they rely on daily. 

Technology companies and businesses that sell tech products are most likely to utilize technographic segmentation. It enables businesses to tailor their product development, customer support, and marketing strategies to the needs of different tech user profiles. Here are the steps you should take if you decide to segment your customers using this approach:

• Gather information: Assemble data concerning customers' technology usage, which might involve surveying customers, using analytics tools, or purchasing data from third-party providers.

• Analyze tech preferences: Analyze the data to identify trends and categorize customers by criteria such as device type, operating system, preferred platforms, software usage, and adoption rate of new technologies.

• Identify segments: Define segments based on common technographic characteristics, for example, early adopters, smartphone-centric users, or desktop-oriented customers.

• Develop strategies: Create personalized marketing strategies and product offerings that resonate with each technographic segment.

7. Benefit segmentation

Benefit segmentation capitalizes on the specific benefits that customers seek from products. Rather than focusing on who the customers are, this model zeroes in on why customers choose certain products, which can vary widely even within a single demographic group.

Benefit segmentation is particularly effective for businesses in competitive markets where understanding and catering to specific customer desires is key. Industries such as the health and wellness sector, beauty and cosmetics, and consumer electronics often use benefit segmentation to tailor their marketing strategies. Here is how you can build this model:

• Research the market: Conduct extensive market research through surveys, focus groups, and customer interviews to identify the key benefits customers seek in products or services.

• Refine benefits: Analyze the collected data to pinpoint the benefits most valued by customers, which could range from convenience and efficiency to prestige or affordability.

• Create segments: Group customers based on the benefits they prioritize. Each segment will reflect a unique set of desired outcomes from using a product or service.

• Tailor strategies: Develop marketing strategies and product or service modifications that align with the needs of each benefit segment. This might involve highlighting certain features in advertising campaigns or developing new product variants.

How e-commerce marketers can choose the right segmentation model

Begin by setting clear business goals, such as boosting sales or customer loyalty, and gather comprehensive customer data to understand their behaviors and preferences. Choose a segmentation criterion that is measurable, accessible, substantial, differentiable, and actionable and that fits your marketing resources and objectives. Finally, conduct a pilot segmentation campaign, carefully monitor the results, and continuously refine your approach to adapt to changing customer behaviors and market dynamics.

If all this data seems overwhelming, consider using a platform like Marin to unify data from all your different marketing channels and first-party data sources. Click here to learn more.