Customer Segmentation - Data Mining Techniques in CRM: Inside Customer Segmentation - page 189

CHAPTER FIVE

Customer Segmentation

AN INTRODUCTION TO CUSTOMER SEGMENTATION

Customer segmentation is the process of dividing customers into distinct, meaning-
ful, and homogeneous subgroups based on various attributes and characteristics. It
is used as a differentiation marketing tool. It enables organizations to understand
their customers and build differentiated strategies, tailored to their characteristics.
Traditionally organizations, regardless of the industry they operate in, tend
to use market segmentation schemes that are based on demographics and value
information. Over the past few decades organizations have been deciding their
marketing activities and developing their new products and services based on these
simple, business rule segments. In today's competitive markets, this approach is
not sufficient. On the contrary, organizations need to have a complete view of their
customers in order to gain a competitive advantage. They also need to focus on
their customers' needs, wants, attitudes, behaviors, preferences, and perceptions,
and to analyze relevant data to identify the underlying segments. The identification
of groups with unique characteristics will enable the organization to manage
and target them more effectively with, among other things, customized product
offerings and promotions.
There are various segmentation types according to the segmentation criteria
used. Specifically, customers can be segmented according to their value, socio-
demographic and life-stage information, and their behavioral, need/attitudinal,
and loyalty characteristics. The type of segmentation used depends on the specific
business objective. In the following sections we will briefly introduce all the seg-
mentation types before focusing on the behavioral and value-based segmentations
that are the main topics of this topic.