Start with needs. You can use many different variables to segment your customers, but the most valuable are those that drive customer choice in your market, according to Ian Dunbar, a founder of the Market Segmentation Company and co-author of Market Segmentation: How to do it, how to profit from it. 'Find out what are the delights and disappointments that customers experience,' he suggests. Hard data on purchasing patterns can be the starting point.
Look at the whole market. 'If we segment only our own customers, we're missing out on insights into those that could buy from us but aren't,' says Roger Palmer, director of the MSc course in strategic marketing at Cranfield School of Management.
Keep it in single figures. Don't have too many segments. 'I'd suggest around half a dozen,' says Palmer, 'the sensible mid-point between selling the same thing to everyone and something different to everyone.'
Flesh it out. Once you've identified your segments, build up a profile so that they can be well understood internally. Focus groups and ethnographic research can help; visualisation can bring these archetypes to life.'
Choose which segments to target. One of the main reasons for segmentation is to work out which segments are profitable and which to target. 'We use three Cs to measure the value that segments deliver,' says Martin Hayward, director of strategy at Dunnhumby, Tesco's majority-owned marketing consultancy. 'Contribution is how much they spend today; commitment is about keeping them long-term; and championing is about them being advocates for the business. Most companies are less good at segmenting on what the potential may be.'
Put it into action. With a bit of luck, each customer will fit into one of your segments. At the very least, this means you can send them tailored offers and communications.
It can be strategic, too. 'You can do different segmentations for different reasons,' says Hayward. 'For example, you could do a segmentation to help you with product development. Or if you're a retailer, it could help you to design new store types.' Palmer adds: 'Segmentation can help you to decide where to allocate your resources.'
But don't tell the customers. It's best kept inside the company. Nobody is likely to complain about being designated a member of your Gold Card Club, but if they discover they're a Couch Potato, they might not be too thrilled.
Do say: 'We're developing our offer around the following market segments, which represent the closest fit with our capability and the greatest potential to deliver value.'
Don't say: 'We've segmented our customers by age, sex and income. Now what?'