The importance of marketing segmentation

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In 1958, American Express launched its first travel and entertainment credit card, and was quickly seen as an innovator in the field. But as the credit card market started to heat up in the ‘90s, the brand knew it needed a unique way to differentiate itself.

That’s when American Express turned to marketing segmentation.

By splitting its customer base into groups according to income, spending habits, and frequency of travel, the company was able to pinpoint a few highly loyal segments who were big spenders. With this information at its fingertips, the brand could build strategies to nurture these groups and even find other groups with similar traits who could become loyal and more profitable.

To that end, American Express launched customized rewards programs, benefits packages, upgrades, and even new cards for these individual groups.

The result was no small uptick. Thanks to marketing segmentation, American Express saw spending grow by thousands for each customer, adding over $104 billion in charge volume in just three years.

American Express isn’t alone in its success. Many businesses—large and small—have enjoyed growth from marketing segmentation. And you don’t need to be a huge credit card brand to make it happen.

In this piece, we’ll break down everything you need to know about marketing segmentation, including what it is, why you might need it, and how you can incorporate it into your marketing operation.

Let’s get started.

What is marketing segmentation?

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Marketing segmentation is the process of dividing your audience into different groups to help you more effectively advertise, reach, and sell to those customers. It’s common for brands to segment their markets by various categories, such as location, age, income, interests, and behaviors.

Mercedes-Benz, for example, needed a new way to reach millennial buyers. This audience segment is buying fewer cars than older generations, but set to drive 40% of new car purchases by 2020. The car brand knew it couldn’t just keep catering to Baby Boomers with deep wallets. It had to entice a new generation of customers.

That’s why Mercedes-Benz launched a new, entry-level car called the A-Class sedan, which is more affordable and technically advanced than many of its other cars. To promote the product, the brand created the “A-Class Bucket List” campaign on Instagram Stories. Millennials were invited to use a provided template and share their bucket list items. The brand then chose select bucket list items and helped people fulfill them.

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“We really wanted to connect with a new generation of buyer,” said Mark Aikman, general manager of marketing services for Mercedes-Benz USA. “This Millennial generation that is as concerned about checking experiences and incredible things off their bucket list. And with the introduction of the A-Class, we hope that they check one item—which is owning your first Mercedes-Benz—also off the bucket list.”

As a result, Mercedes-Benz generated thousands of contest entries and 200 million impressions from its target audience on Instagram.

Why is marketing segmentation important?

Marketing segmentation is important because it helps you better understand your target audience and more effectively strategize and budget on how to reach them. Instead of creating one-size-fits-all campaigns for 1 million people, for instance, you can create several, more personalized campaigns for smaller audience segments with unique interests and behaviors. Once you have that deep customer data, you can then use it to better predict how specific audience segments will react to new products and advertising.

According to Bain & Company, 81% of executives said marketing segmentation was “crucial for growing profits,” and companies with strong segmentation strategies saw a 10% higher profit than those with ineffective segmentation.

In fact, marketing segmentation is a particularly helpful approach when it comes to email marketing. Studies have found that 83% of companies use marketing segmentation in their email campaigns, and customers are 75% more likely to engage with emails from segmented campaigns than from non-segmented campaigns.

Just look at T-shirt brand BustedTees. The company was sending daily emails to grow its audience. That might sound like a great idea, but it was essentially sending generic emails at only one set time to everyone in its global audience.

"[That] translated to customers in L.A. receiving it in the early morning, [New York] mid-morning, London afternoon and Sydney the following morning," said Jonny Cottone, interactive marketing director of BustedTees.

BustedTees worked with email marketing platform Sailthru to segment its email send times by time zone. This way, each marketing segment would receive its emails at the most opportune time for engagement. The company even took this one step further and was able to determine optimal send times for each individual subscriber. How? By using Sailthru data about each person’s email open history.

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As a result of this marketing segmentation strategy, BustedTees saw an 8% lift in email revenue overnight, a 17% increase in total email response rate, and an 11% higher click-through rate.

"Now we've figured out how to bring more subscribers to the site through individualized email delivery, we have the opportunity to apply personalization learnings to each and every phase of the conversion funnel ranging from email design, to on-site experience checkout, and post-purchase communications," said Cottone.

How can you incorporate marketing segmentation into your strategy?

Marketing segmentation can seem overwhelming if you haven’t tried it before. But the good news is that it doesn’t have to be so daunting.

You can start your journey into marketing segmentation—and building more effective campaigns—with these steps.

Collect customer data

You can use tools like Google Analytics to gather concrete data about your customers, including their demographics, interests, behaviors, and previous interactions with your brand. You can also conduct surveys with your audience by using tools like SurveyMonkey and Typeform. This research will help you gain a more fleshed-out, qualitative view of your customers.

You might ask questions like:

  • How did you learn about our brand?
  • What are your favorite products or experiences?
  • What do you wish we would do differently?

Once you have this data, you can start dividing it up, looking at certain cross-sections, and constructing your audience segments.

Build marketing segments based on that data

When it comes to building your marketing segments, it’s important to consider your goals. For example, if you’re looking to increase revenue or move customers down the marketing funnel, you might want to find segments of people you can upsell to or segments of dormant users you can re-activate.

LEGO, for instance, divided its audience to build more effective social media strategies. These were the six marketing segments they used after looking at purchase and usage rates:

  • Lead users. Actively engaged customers who’ve helped create products
  • 1:1 Community. Customers they know by name and address
  • Connected community. People who’ve made a purchase and been to a shop or park
  • Active households. people who’ve made a purchase in the last year
  • Covered households. People who’ve made one purchase
  • All households. People who’ve never made a purchase

LEGO built its social strategy around the first three groups because they had the most potential for driving engagement and becoming advocates.

Create unique strategies for each segment

As soon as you have a clear idea of who these audiences are, you can more effectively build campaigns that match their interests and meet them on their favorite platforms.

In the LEGO example, for instance, the brand launched LEGO Ideas, a platform that LEGO lovers can use to showcase their own LEGO creations, submit them to challenges, and garner support for their great ideas.

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“The Lego Group has never seen such tremendous success as they have in the past few years, since they began taking advantage of their most valuable resource—their fans,” said Jake McKee, former social media manager at LEGO. “Not only have they received more coverage on the Internet, through the proliferation of cool LEGO pictures and fan-made viral videos, but have also turned feedback into new products.”

Advocate Health Care, a hospital system, also used marketing segmentation to build a campaign targeted towards health and wellness advocates. The #HealthiestLife initiative invited social users to submit their own tips and activities for living a healthy life.

The campaign increased physician appointments by 26% and a 126% spike in website traffic.

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Measure and optimize based on your results

The work isn’t over once you launch your first marketing segmentation campaign. In fact, it’s just starting. But that’s a good thing. Because you can now use the data you’ve collected, segments you’ve created, and campaign results to learn even more about your audience and deliver even more relevant products and messaging.

Take Walmart Canada. The corporate giant studied audience segments in its test markets so it could build more productive markets in new areas. As a result, the grocery store chain exceeded its annual sales goals in 2016 by over 40%. But it didn’t stop there. Walmart Canada went on to launch this program in more cities and use those customer insights to optimize its everyday marketing objectives.

“Analysts now examine online sales by … segment daily and integrate the results into the company’s database for email marketing and customer profiling by commodity and category,” the case study reads.

The company has even created an in-house data team to run predictive analytics and best budget resources based on marketing segmentation.

As Tom Maryniarczyk, Walmart Canada’s director of site experience and analytics, said: “The project has shown that there is a wealth of information available about customers ... that can be leveraged in innovative ways throughout an organization.”

Yes, that includes your organization, too. Any business can use these marketing segmentation insights and strategies to drive growth and truly understand what makes their customers tick.

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