Customer segmentation involves grouping customers based on specific characteristics, such as demographics or behavioural metrics, using data from online and off-line sources.
On this page, you’ll learn:
- What is customer segmentation?
- Why is customer segmentation important today?
- How is customer segmentation different from market segmentation?
- How to target the right customers
- Types of customer segmentation
- Challenges in customer segmentation
- Practical applications of customer segmentation
- Can over-segmentation be a problem?
- The future of customer segmentation
- Getting started with customer segmentation
What is customer segmentation?
Customer segmentation is the process of dividing a customer base into smaller groups or segments, based on shared characteristics such as purchasing behaviour, demographics or psychographics. It allows businesses to craft marketing campaigns and strategies tailored to each segment’s unique needs and preferences, rather than relying on generic messaging.
Unlike market segmentation, which focuses on broader market characteristics, customer segmentation homes in on a company’s existing customers. This makes it a critical tool for improving personalisation and enhancing the customer experience.
By using segmentation data to build detailed buyer personas, businesses can better understand customer motivations, address pain points and deliver messages that resonate — ultimately fostering loyalty and improving retention.
Benefits of customer segmentation.
The growing demand for personalised experiences has made customer segmentation more important than ever.
- Personalisation isn’t just about attracting new customers; it’s also about retaining customers by showing care and delivering content, product recommendations and experiences that match their preferences.
- Effective segmentation drives engagement, extends the customer lifecycle and creates lasting loyalty.
A 2022 Adobe Trust Report highlights this shift: 58% of customers stop purchasing from brands that fail to provide personalisation, underscoring the importance of tailoring experiences to meet customer expectations.
How is customer segmentation different from market segmentation?
While both strategies involve dividing groups based on shared traits, they differ in focus and scope:
- Customer segmentation: Concentrates on existing customers, examining how they interact with a brand and tailoring experiences to their preferences.
- Market segmentation: Looks at broader audiences to identify potential opportunities and drive sales growth.
In an era where personalisation drives business success, customer segmentation has become a priority for modern companies.
How do you target the right customers?
Targeting customers effectively begins with gathering accurate data and leveraging the right tools, such as data management platforms (DMPs) and customer relationship management (CRM) systems.
Steps to target the right customers:
- Data collection: Gather data on both visits (engagement metrics) and visitors (demographics and lifestyle).
- Segmentation goals: Define which customer attributes or behaviours to target.
- Analytics evaluation: Use analytics tools to track performance, ensuring the right audience is being reached.
Example in practice:
A company identifies that monthly visitors to their site are less engaged than daily visitors. By analysing demographic and behavioural data, they design a personalised promotion to encourage more frequent purchases, increasing engagement within this segment.
Types of customer segmentation.
Customer segmentation can be broken into three key types, each offering unique insights:
- Demographic segmentation: An insurance company categorises customers based on age groups to create targeted policies — for example, offering discounted health insurance for young professionals and retirement plans for seniors.
- Psychographic segmentation: A luxury car brand targets customers who value exclusivity and status by emphasising premium features and limited-edition models.
- Behavioural segmentation: An ecommerce store segments customers who frequently abandon baskets and sends personalised discount offers to incentivise purchases.
Challenges in customer segmentation.
Despite its benefits, customer segmentation presents several challenges:
- Data limitations: Many companies lack sufficient first-party data or rely on outdated information, making accurate segmentation difficult. For example, a segment initially targeting single users aged 18-24 may become irrelevant as the audience ages and transitions into a new demographic group.
- Resource constraints: Organisations often lack the necessary tools or skilled personnel, such as data analysts, to fully utilise segmentation strategies.
- Failure to act on insights: Even when segmentation data is available, businesses may not apply it effectively, leaving potential opportunities untapped.
How to overcome these challenges:
- Regularly update customer segments.
- Invest in analytics tools that provide actionable insights.
- Ensure adequate resources and expertise to use segmentation effectively.
For example, a clothing retailer targets “young urban professionals” but relies on outdated demographic data. Over time, this segment evolves into a mix of married couples and mid-career professionals, leading to irrelevant campaigns that fail to resonate. Updating the segmentation based on purchase behaviour and lifestyle changes allows the company to refine its strategy, increasing relevance and campaign ROI.
Practical applications of customer segmentation.
Customer segmentation is a powerful tool for improving marketing strategies and enhancing operational efficiency.
Examples include:
- Targeted promotions: Reaching customers based on device usage and purchase history. For example, a beauty brand identifies a segment of users who purchase skincare products during seasonal changes. By running targeted promotions for moisturising creams and serums as winter approaches, the brand increases seasonal sales and strengthens its connection with this segment.
- Churn reduction: Identifying customers at risk of leaving and implementing re-engagement strategies. For example, a subscription box company notices a subset of users skipping multiple months of their subscription. By targeting these users with a “pause instead of cancel” option and offering loyalty discounts, the company reduces churn and retains customers longer.
- Product improvement: Using feedback from specific segments to refine products or services.
Segmented strategies also drive loyalty by personalising customer experiences, helping businesses stay ahead of competitors.
Can over-segmentation be a problem?
Yes, overly narrow segments can limit reach and lead to missed opportunities.
Key considerations:
- Avoid creating segments so small that they become ineffective or unscalable.
- Balance segmentation depth with segment size to ensure campaigns remain impactful.
The future of customer segmentation.
Advances in AI and machine learning are revolutionising customer segmentation. These technologies are enabling businesses to:
- Automate the discovery of “smart” segments with deeper insights.
- Receive actionable recommendations for engaging each segment.
- Implement segmentation strategies while maintaining privacy compliance.
With these developments, segmentation will continue to evolve, becoming more precise and effective in delivering personalised experiences.
Example:
Retail companies are leveraging AI-driven tools to create dynamic segments, such as grouping customers based on real-time shopping behaviour during sales events. This allows personalised recommendations to be updated instantly, driving higher conversions during short-term campaigns like Black Friday.
Getting started with customer segmentation.
To begin, gather data on customer interactions through purchase history, surveys and analytics tools. Define segmentation goals and use this data to create meaningful segments that personalise the customer journey.
Adobe Target is a personalisation solution that provides AI-powered testing, personalisation and automation to help you to understand what customers want and deliver those experiences at scale.
Watch the Adobe Target overview video to learn more.
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