How to: Segment Your Customer Base

Some questions to help you gain a basic understanding of your business segments and where the future profit lies in your business.

David Arneil
13/06/2019
Why do you need to segment your customers?

One of the key starting points for positioning your brand is knowing where the profit resides in your business. There is little point focusing effort and resource into areas that only offer slim returns and which offer little prospect of growth.

There are two components to this process:

1. Highlighting the business segments your firm competes in.

2. Highlighting the segments that deliver the most profit.

Having even a basic understanding of your business segments and where the future profit lies in your business is key to positioning your firm for growth and should be a central component of your brand development activity.

What is a business segment?

Businesses seldom offer one service to only one customer group. Most offer a number of distinct services (or products) to a number of distinct customer groups.

Each distinct service (or product) offered to a distinct customer group is known as a business segment (or service/market segment).

A distinct service (or product) will provide a specific set of benefits to customers. One way to work out what your distinct services are is to look at your competitors in the market place. Two distinct services will normally face different sets of competitors.

A customer group is distinctive if the customers have key characteristics that differentiate them from others. A customer group can be defined in a number of ways. For example, by who they are (young/old, business/leisure etc.), what sector they are in, where they are located, or by factors that indicate that different marketing approaches will be needed to reach them.

How do you go about segmenting your customers?

The simple workshop exercise below will help you start to segment and then prioritise your customer base.

Customer Segmentation Exercise
Overview

This workshop exercise aims to help you start to segment and prioritise your customer base, to allow you to better position your firm for growth.

How to prepare

Get a mix of the right people together in a room (ensure that between them they know about all key aspects of your business) and set aside round two hours for the exercise. You’ll only need notepaper and pens and someone to facilitate the discussion.

Activity

1. Introduce the concept of customer segments

2. Read out and explain the Customer Segmentation illustration below

3. Work as a group to answer the four questions that follow as accurately as possible

4. Having answered the questions, plot your own pie chart, then discuss the implications

Customer Segmentation Illustration

A company sells three products (small, medium and large widgets) to three sectors (manufacturing, engineering and construction) in each of two countries (UK and France).

It operates in 3 x 3 x 2 = 18 business segments

Analysis shows that the company’s biggest segment (by far) is large widgets to UK engineering - which accounts for 40% of sales. This is followed by medium widgets to UK engineering at 25% and large widgets to French manufacturing at 15% of sales.

Together these three segments account for 80% of sales.

Very often such sales figures would be broken down in three charts by widget, by country and by sector. This is useful information, but what is much more useful is a pie chart showing product/market segments - as set out below:

This shows in a compelling way that one segment alone accounts for 40% of sales. It highlights that the most important decisions to made in the company’s strategy development are those pertaining to one segment - large widgets to UK engineering.

Or to put it another way: Not large widgets in general, not small widgets, not UK as a whole, not all of France, not French engineering and not UK construction!

Customer Segmentation Questions

Q1. How many distinct services does your business offer?

Q2. To how many customer groups?

Now, multiply the two numbers together and that’s how many business segments you serve.

Q3. Which 2, 3 or 4 segments are the most important - which contribute most to sales?

Q4. Will these be the main contributors to sales and profits over the next few years?