What’s the Difference Between Market Segmentation and Customer Segmentation?

While the terms are often used interchangeably, market and customer segmentation are notably different. Yet each is a powerful technique to guide sales, marketing, and revenue intelligence efforts.

Of the two categories, market segmentation takes a broad, high-level overview of all targets across an entire market. Your target market is comprised of potential and existing customers, and the process involves dividing this large population into general subgroups based on combined shared factors.

These segmentation subgroups are often broken out by:

• Demographics (age, gender, ethnicity, education, income, religion)
• Geography (country, region, culture, city, postal code)
• Psychographic Factors (personality traits, values, lifestyle)
• Behavioral Tendencies (media usage, browsing/interaction, spending habits)

In business-to-business settings, market segmentation is also often based on company size. The consumption levels of a large company with hundreds of locations purchasing toilet paper will undoubtedly be much higher than that of a small business with only a handful of locations.

Another market segmentation approach is grouping customers by the products or services they tend to purchase. Consider a business that sells software, training, and professional services. Sales and marketing efforts for each of these three product segments require different tactics depending on the customer. Similarly, for a business-to-consumer play, an athletic footwear business will segment its efforts for golfers versus snowboarders. Each distinct group will respond differently to various marketing approaches and the nuances of messaging and has different spending habits and personality traits.

Customer segmentation is the breakout of an organization’s current customer base. Its purpose is to identify particularly profitable customers, and it involves analyzing and grouping existing customers based on various factors to more effectively communicate with each segment. The end goal is to maximize sales and marketing efforts and pricing to achieve retention and profitability.

Customer segmentation – like market segmentation – involves slicing and dicing data based on demographics, geographics, psychographics, and behaviors. But the dissection goes deeper to parse customers into various personas based on what is known about them, and the interactions they’ve already had with your brand. For B2B, this might be helpful to break out by industry sector, decision-makers title, or customer sophistication (e.g., the customer uses a cloud-based service versus hard-copy papers in a filing system).

However, it’s important to note that customer segmentation in distribution is unique. In distribution, segmentation around demographics and geography can provide some pitfalls. For example, while geography is a key factor for sales territory management and forecasting, no two buyers in a geographic area behave the same. Demographics can also be a limiting factor. These statistics are meaningful at a high level but can’t take a distributor far when it comes to pricing strategies and catering to very different purchasing behaviors among customers.

What helps navigate this complex segmentation path for distributors is a data-driven analysis based on their customers’ purchasing behaviors. This enables them to set the right price and the right messaging with precision (and in a data-driven way) and adapt as conditions change.

Tracking the following three customer behaviors can drive better pricing and higher profits:

• Buying Power: This is defined as a combination of data points ranging from sales revenue to unique orders and items. Customers with high buying power are good customers and can demand tighter margins based on their influence and flex. This is a critical consideration in a customer segmentation strategy.
• Profitability: This is an obvious behavior, but understanding why and how a customer becomes profitable is an important insight to fold into the segmenting system.
• Cost to Serve: Weigh this factor against buying power and profitability to get an honest evaluation of how good a customer is for your business. If they place big profitable orders but don’t pay their invoices and burn through your resources and daylight regularly, they are driving down profits in other ways.

When employing customer segmentation practices, businesses are acknowledging that every customer is different. This results in marketing teams pursuing smaller sets of targets with specific, relevant messages to better encourage buying behavior. For example, a sophisticated group might be offered a Free Trial for a forthcoming service or product. This interaction might lead to further engagement, a willingness to provide feedback, and strengthened loyalty – offering a deeper understanding of customer preferences and the ability to modify marketing efforts to that particular segment further.

The distribution industry is ever-changing, and what worked a few years ago may not be effective today. Leveraging data-driven analysis to remain nimble and clearly see and derive the benefits of market and customer segmentation helps drive profits across all sectors. Market segmentation benefits include:

• Helping businesses refine their focus by homing in on those products that are most likely to be well received by the target market and determining the best way to market and deliver those products.
• Allowing companies to increase overall efficiencies by focusing limited resources on efforts that produce the best ROI based on accurate, targeted market segments.
• Differentiating your business from the competition through better marketing campaigns and messaging.

In parallel, it’s imperative to nurture existing customers – giving the right offer to the right contact at the right time in their purchasing journey. Be sure to layer in customer segmentation to gain:

• Maximized cross- and up-selling opportunities through specific special offers
• More effective allocation of marketing resources
• Improved customer loyalty and retention
• The advantage of staying one step ahead of competitors by meeting and exceeding customer expectations

Fine-tuning your marketing and customer segments on a regular basis is one of the most efficient ways to next-level customer engagement and boost profitability. Don’t leave money on the table by allowing your customer intelligence to stagnate. Segmenting and re-segmenting market and customer data once took weeks or months to slog through with manual processes and old-school spreadsheets. Today, this essential endeavor can be accomplished in a matter of minutes by leveraging powerful solutions such as revenue intelligence software.

This mining and managing of your business intelligence on a regular basis uncover ongoing sales opportunities, saves resources, improves customer satisfaction, and helps spot customer performance trends so you can adjust your go-to-market strategy as often as needed – so the best opportunities are always clearly in focus.