Customer segmentation is one of these topics that are defined in a multitude of different ways. And while all these definitions may be in some way correct, they tell more about the person‘s understanding of the subject than of the subject itself! The question is whether segmentation is a business application, or it is an analytical method? So, to those users who think that segmentation is a just synonym for clustering technique – I would say – it is a good starting point, but there is so much more to it.

Why customer segmentation? Well, customers with similar attributes tend to behave in similar ways, more often than not. This fact is particularly evident in customer relationship management, marketing, and risk management. People within the same life-stage segment tend to buy certain types of products, so promoting products that go with that specific group can lead to successful marketing. In credit and the insurance industry, good customer segmentation can minimize exposure to risk. Similarly, in catalog sales, customers can be selectively targeted to reduce marketing costs.

What is the first step when segmenting? It is to know your segmentation objective: What is the goal that you want this application to take you to? Do you just want to see natural, data driven-segments among your customers by grouping objects with similar attributes together? Do you want to better explain your existing business-driven segments (who are my “gold-card” customers for example, what do they buy, and where do they come from)? Or, do you want to segment your customers based on their buying potential, value, risk, propensity to churn, or something else?

After knowing your segmentation objective it is just a matter of translating it into data driven analytical process, supported by business knowledge. Once you have a segment your population you can now act on these segments in and measure their movement and stability.

So, is that all to it? No - this is just beginning to more advanced segmentation.

If you imagine the segment in a circular shape, you can imagine that there is an inner and outer layer. The inner layer, you can describe as your core segment members who are typical for that segment. Then you have an outer layer, which is far less stable. Any segment migration strategies are done on the outer layer. And that’s where the fun begins. So, depending on the direction of the portion of the outer layer, you can now do two basic things. You can try to stop movement in a specific direction or you can try to encourage movement by running specific (marketing) stimuli on this sub-segment.

So, not only that you are able to group your customers, and understand what makes them similar from marketing, behavioral and other perspectives, but you can stimulate segment movement in any direction that is in line with your objectives. So, have fun segmenting and enjoy the ride!