Ecommerce customer segmentation: basics, 6 types + 5 hacks for higher loyalty
Have you ever received a direct mail in which someone tried to sell you a fitness vacation, an after shave lotion and plush toys at the same time? If yes, you are already aware of why you should segment your customers.
How many people from the addressees do you think will fight their way through the 20-30 offers, until they find something relevant for them?
It is much better if on any platform – e-mail, your website, in advertisements – you only offer your target audience relevant things, whether it is a product or some content, which they really find interesting.
You might not have known, but possibly presumed that even three-quarters of western online stores (73%, to be precise) do not use segmentation. This is a huge mistake in the big data era.
In this article we will cover in detail how to avoid this mistake, how to increase conversion in your online store, what specific methods you should apply to get ahead of your competitors.
This is what we will look through in the following:
- What can you use segmentation for?
- What determines a segment?
- Demographical segmentation
- Customer Lifetime Value (CLV)
- Segmentation by customer habits (RFM segmentation)
- Segmentation by product categories
- Segmentation by intention
- Segmentation by behaviour
- Examples of the most common segments
- Potential customers
- First-time customers
- Returning customers
- Cart abandoners
- Non-purchasing visitors
- Dropping out customers
- Set clear objectives
- How to achieve higher revenue by segmentation
- Premium treatment for key customers
- Pay attention to delivery with those who order a lot
- Give to those who read your letters, but do not purchase
- Encourage those who wait
- Reactivate the ones who seem lost
- There is no ecommerce without segmentation
What can you use segmentation for?
If you group your customers based on analytics, you can draw plenty of useful consequences. Let’s see some examples as follows.
You can discover cross-sell and upsell opportunities.
If you realize that four-fifths of your customers regularly buy two products at the same time, you have already found a splendid opportunity: make a package deal of two (or possibly more) products and offer them together – if you can precisely identify those who do not buy the two items together, target them with this deal.
You can cut down on unnecessary costs.
You can find out who the customers are that are not worth giving discount to or spending any advertising budget on. Perhaps you have some products that do bad for your business – for instance, because you hardly have any margin on them (teaser, entry-level products), but they bring you poor quality customers, who do not return or spend, who are not loyal.
You can concentrate on your most valuable customers.
It is an unquestionable fact that it is cheaper, easier and more profitable to keep your existing customers, than always trying to get new ones. (The reason is simple: you are through with the step requiring the most persuasion, which is the first purchase.)
Before starting a campaign for any segment, you must be sure it is going to be worthwhile. For this you need to know whether the given segment is worth working on. You should study carefully these aspects:
The segment is well definable. It has specific features, its reactions to each campaign is simply measurable. You can mark your segments by demographic features, purchase habits or other methods, all of which we will discuss in detail later.
The segment is significant enough. Of course, you cannot make a campaign for each segment, as it would be far too expensive, so obviously you should target the largest and most valuable ones to be able to make a significant profit. Analyse how much profit a campaign could make you, how much it will cost, what target messages you can use.
The segment is accessible. This means you have the opportunity to communicate with them through the given channels: you can access them in newsletters, you can target them by remarketing on social media, and so on.
The segment is stable. You do not change the definitions, features, indicators: define the most important segments the way that you will be able to work with them for years without changing.
The segment is well distinguishable. Customers have different preferences, demands, problems, behaviour patterns from other segments. If there are too many things in common, it might be a good idea to unify the segments in order to make the campaigns simpler (and cheaper).
The segment can be activated. You should not only be able to plan the solutions giving answers to the segments’ problems, but you should also be confident in actually getting them ready for action, making sure you can run a campaign that addresses them.
Let’s see the segmentation methods that you absolutely need to know.
The simplest method is segmentation by demographic data. In some cases it might be useful to target men and women, urban and rural inhabitants, etc. by different messages or offers.
If you have never done segmentation before, this is the first method you should try, as it is simple (you can analyse your market basically with no effort, with the help of analytics), and it perfectly shows what a segmented campaign is capable of.
Customer Lifetime Value (CLV)
We will show you a more complex method as well, but first let’s see how you can calculate the average Customer Lifetime Value, and what you can do with this information.
You must know three things to get the estimated Customer Lifetime Value:
- The average cart value: how much money does a customer spend in your online store in case of one order?
- How often they purchase on average.
- How much it costs you to acquire (and keep) the customer.
You should stop here for a second, as it could be extremely useful to be able to calculate CLV for each segment you have set in accordance with other aspects.
Segmentation by customer habits (RFM segmentation)
You can use the most basic analytical methods to determine which customers are the most valuable for you and which segments make the least profit.
From your database you can figure out who buys, how often and for how much – you can make an RFM segmentation which is the most basic method.
The essence of the technique is that you observe three indicators in case of each customer:
- Recency, meaning: When did he/she last purchase anything in your online store?
- Frequency, meaning: How often does he/she return to you?
- Monetary value, meaning: How much is his/her average cart value per purchase?
From this you can see whether the given customer is active, loyal and purchases in high value. Obviously the most valuable ones are those who have recently bought something, frequently return and usually purchase in higher value – but you can set 8 more categories and build unique campaigns targeting them.
The principle is simple: you can encourage the frequently returning customers to spend more by offering discounts in return for their loyalty; you can make special offers for those who purchase in higher values in order to get them to return more often; you can even try to reactivate the inactive segments.
Segmentation by product categories
Observe what products the given customer buys or regularly looks at. Based on this information you can precisely customize the messages addressed to him/her. You can make more effective upsell and cross-sell activities on the site, you can send products or reasonable offers via email, which are more likely to be interesting for them.
Segmentation by intention
Treat your customers based on what their intention is with your online store, not by demographics or anything else: that is the theory of segmentation by intention.
Based on this method you can sgroup the people into four basic categories, which are the following:
- SEE: the largest qualified audience accessible to you; they are basically the ones, as shown in the category name, who see you, but do not want to purchase from you. However, they have existing problems linked to you (which means you could solve them with your products). In their case you should get their purchase intention to increase.
- THINK: they are your audience with stronger purchase intention, who have not yet made a decision. They are considering buying a product that you have in order to solve their problems, but nothing has definitely pushed them in the direction of purchasing yet.
- DO: your potential customers with strong purchase intention, basically those who are already browsing your site, perhaps even placed the items in their carts. Around 97% of the current marketing activities focus on them – you can improve this ratio by applying segmentation by intention, in order to reach more people.
- CARE: the final segment involves those who are already returning customers, who have had at least two transactions. You must actively care for them, offer them exclusive opportunities, communicate actively with them, create loyalty programmes and so on.
You can target each segment differentiated by intention with various content marketing tools. In case of the first segment, your aim is brand building, in other words enhancing visibility – then point out their problems and what solution you can provide them.
In case of the second segment, education is what you should focus on, to get them to better understand how you could satisfy their needs. You should give information about the solutions to their problems, show them with the tools of storytelling how others have solved the same problems.
Do not try to sell immediately to the first two segments – you should just guide them first to evoke definite purchase intention, otherwise you could cause revulsion.
In case of those with more definite purchase intention, less creative solutions will also do, as they already know they want to buy and what they want to buy. With them you can induce making the final decision, or even to buy more, using case studies or statistics.
At last, in case of the CARE segment, helpful content is the best choice: they show how they can make a better, more efficient, smarter use of the previously purchased goods, which will help them solve their problems even more.
Segmentation by behaviour
The principle is quite simple: you sort the people coming in your way by the actions they take.
You make separate groups for those who only follow you, who visit your site, who browse it, who visit specific product pages, who place items in their carts, and so on.
This way, the group of cart abandoners is also generated, which will be one of your most important segments later on. We will soon discuss what to do with them.
Behavioural segmentation is practical, because you can make action plans on how to make larger profits with them – besides, data on customer behaviour is easily accessible even for the laymen from analytics software.
Examples of the most common segments
If you do not know which segments to set up first, we will help you in this as well. Here are the most commonly used customer segments in ecommerce.
They are the ones who have never purchased from you, but some interaction has happened in the past. They might have just looked at a product page, or perhaps given their email addresses in return for a bait item and therefore ended up on your newsletter list, or any other way.
Their purchase intention is weak: they have given proof that they are interested in your products, but are not yet ready to pay you. You can target them using retargeting solutions, but it is even more useful, if you send them various emails making them more committed, such as content recommendations and educational letters.
Obviously they are the ones who have had their first transaction, but nothing else has happened yet. You should relatively quickly grab them, for example with content that helps them make better use of the purchased product (such as a how-to video), or offers directly connected to the purchased item.
Perhaps they only periodically need the purchased product. For instance, if they have bought a printer cartridge from you, you can track the purchase time in your database, and after the average lifetime of a cartridge, you can send them a reminder that they had bought the last one from you.
In order to reach them this way, you need a more complex database integrated with the newsletter software, but it is worth the effort to build such a system, as segmentation will make you a much higher profit.
They are the ones who already trust you so much that they have made several transactions in your online store – but cannot you recommend them something that will make them buy more frequently or in higher value?
You can sort them into further categories using RFM segmentation, and by targeted offers, discounts, actions you can get them to increase their average cart value.
You can sort them into active, unsure and inactive groups, depending on how often they return – this is the clearest indicator of how much they trust you, so if you do not want to get deeper into RFM segmentation yet, this is how you should examine them.
As for returning customers, you should know that it is much more worth spending on them than working on gaining new customers all the time. According to ecommerce surveys, non-first-time customers spend nearly twice as much on average in your online store than those who convert for the first time.
The difference can be felt with the visitors, too: a returning customer is nearly twice as much likely to place something in the cart than someone who visits your site for the first time.
All online stores take up a huge challenge to reduce the number of cart abandoners – they are the ones who place items in their carts, but do not pay for them.
There can be several grounds for that – they simply forget it, postpone it to make lists, they currently have no money, but later they intend to purchase from you.
If you can find out what the most common reason for cart abandonment is, you can target this segment by retargeting adverts via email, or other ways, say, offering immediate discount or simply reminding them of the interrupted shopping.
There are those who are keen visitors of your site without ever purchasing from you. This can be so for a number of reasons – perhaps they are just “window-shopping”, perhaps your offers are not good enough, but it is also possible that they mainly visit you for the content you offer them.
Observe what route the non-convertors reach your site – which sub pages they visit, how much time they spend and where, whether any interaction follows these routines.
Try to get them to purchase: improve the CTAs offers, transparency on your pages, where dropping out is most relevant according to the clickstream analysis.
As your aim is to keep your customers, you should analyse the details of each segment in order to find out when they are most likely to drop out. Before this happens, somehow you should reach them and wake them up.
You should know that 68% of the customers do not return to an online store because they simply do not get customized offers. If you show them products, offer discounts that might interest them based on their earlier activities, and you are not randomly trying to sell everything in your online store, they will not only be more keen to purchase, but the shopping experience will also remain positive for them.
But even if you do not reach them before dropping out, you still have a chance to lure them back. If you have data about what they had previously purchased, you can recommend it to them after the lifetime of the product, or show any other relevant products.
Set clear objectives
If the methods of segmentation are now clear, it is advised to make the so called GAP analysis. This shows how the current performance of a company relates to the potentially achievable performance.
In order to make an efficient analysis, you should be aware of what exactly your goal is with segmentation. We can say things like: we want more returning customers instead of first-time customers, the returning customers should purchase more often, or they should have a higher cart value.
Also observe by segment, what profit results of each campaign can be expected. It might not be worth working on getting them to come shopping to you more often, because your product features are simply not like that, but you can get them to buy more at once, or to recommend you to others.
From this you will know on which segments you should focus your further marketing activity. If the opportunity is too low, you should build a campaign making a higher profit – this is obvious.
The question is, how many campaigns can you build and run from your resources, because you will have to prioritize them based on these analyses in order to be able to reasonably share your resources.
How to achieve higher revenue by segmentation
Premium treatment for key customers
It is also true in ecommerce that probably 20% of your customers generate 80% of your revenues. It is a big mistake, a missed opportunity to treat them the same way as any other customer.
If someone spends outstanding amounts, you should make sure they will return to you in the future and compile other high value carts.
You should pamper them, not with discounts or actions. You should rather offer them special services. Special support, extended warranty. Give them free gifts, make extra functions available at the time of order or delivery.
When defining this group, you must pay attention to one thing: only offer special key treatment to as many customers spending the most as it is still definitely profitable for you.
Pay attention to delivery with those who order a lot
As for delivery, you should mostly concentrate on those who order the most from you. Even if they leave a smaller amount at the cashier, they regularly return to you, they are loyal, they are the perfect evangelists.
You should pay attention to this, because as much as 44% of the customers abandon their carts if they find delivery options unsuitable.
Delivery is an important issue; it is crucial that the customers get their goods comfortably, fast and in the right place. Observe what delivery options your competitors offer and how you could improve your service in a still profitable way.
Give to those who read your letters, but do not purchase
There are many newsletter subscribers who open your letters but do not click on your site – or even if they do, they just look at the current content, offers, but do not buy anything.
In this case, you should think your offer over, because it might happen that most of them are just waiting for the one that is most suitable for them.
Encourage those who wait
There might well be a segment among your customers who do not purchase when special occasions approach – this is because they are waiting for special deals and offers connected to celebrations or holidays.
You should make (at least) one separate segment for them for these occasions.
You exclude those who have recently purchased and those who are already considered inactive. Target the rest with campaigns that will convince them not to wait until the very last moment.
You can support this by something like: if they order the presents for Christmas now, they will be delivered on time, so they will be able to comfortably wrap them, without any stress.
Reactivate the ones who seem lost
No matter how long ago someone purchased from you, you always have the chance to lure them back, to get them to purchase again – or at least to get them back to your site and start persuading them.
Realistically, you should mostly target those who have not purchased from you in the last 3-6 months. Send them a letter – if they used to be regular customers, offer them a loyalty programme.
One of the biggest advantages of ecommerce is that you can give everyone the most reasonable, personally relevant offer. Based on their details you can learn about what interests them, how they can be motivated, how exactly they behave on the site. This way, your automatic systems can work as if you placed a personal sales assistant in front of each customer.
Segmentation provides the chance for this; and you can be sure your competitors exploit this opportunity.
If you have not yet done so, you have learnt about the basics and the most commonly used methods from this article – all you need to do now is put them in practice.