Using Behavioral Segmentation To Understand Your Customers

A few weeks ago, we discussed the importance of customer segmentation and how it can be used to drive profits for any company, regardless of its size.

In this past article, we talked about the four main bases of segmentation: demographics, geographic information, psychographics, and behavioral data.

There’s no denying that knowing your average customer’s age, gender, location, and social class is essential for gaining an understanding of who they are as a person. This information will certainly help you tweak your product or service in order to better suit their needs.

But, when it comes to getting these individuals to actually purchase your goods or services, behavioral data is of utmost importance. Without this information, all other segmentation data you’ve collected is rendered moot.

You’ve heard the phrases “make hay while the sun shines” and “strike when the iron’s hot,” meaning to take advantage of a window of opportunity when it opens. By collecting data regarding your customers’ purchasing behaviors, you’ll know exactly when these windows become open — and be able to capitalize on the perfect opportunity to make a sale.

The following article will discuss six “types” of behavior you can analyze in order to segment your customers, providing examples of categories within these overarching types. We’ll also talk about some of the pitfalls to avoid when utilizing behavioral segmentation (and customer segmentation in general).

But, before we dive in, let’s gain a clear understanding of what behavioral segmentation is, as well as why it’s an essential part of your overall customer segmentation initiatives.

Behavioral Customer Segmentation: What Is It And Why Do You Need It?

As alluded to in our introduction, behavioral segmentation is the act of segmenting your customers based specifically on how they act as consumers.

Behavioral segmentation aims to understand customers’:

• Purchasing habits (both universally and within a given niche)
• Usage habits
• Spending habits (time, money, and other resources)

The goals of segmenting your customers based on behavioral data are to:

• Identify various segments based on the above-mentioned factors
• Determine how your product or service meets the needs of each of these segments
• Tailor your product or service to meet these needs
• Tailor your marketing initiatives and campaigns to reach a specific segment at a time in which they’re most likely to make a purchase

It’s important to note that behavioral data doesn’t exist independently from other segmentation data. Characteristics such as a customer’s age, gender, location, and social class often correlate to certain behavioral data — but not always.

A good way to think about it is, behavioral data can often be used to confirm certain conclusions you may have reached when analyzing other segmentation data.

We’ll get into this in the next section as we explore the many different types of behavior individuals exhibit as consumers.

A Quick Caveat

After segmenting your customers based on their behaviors, you may be tempted to focus on the individuals who provided the most information: your most active users.

But, as explained by Groove CMO Len Markidan, this can lead to wasted time, effort, and other resources:

“Behavioral segmentation isn’t useful if you’re not targeting the right behaviors.

The biggest mistake we made early on was focusing on the behaviors of our most active users, rather than our most valuable users. We spent a lot of time studying what the users who were logging in most frequently did, and we made quite a few changes to our product to try and get new users to emulate that behavior.

But while we were focused on getting people to do things like connect their Twitter accounts, we didn’t realize that our most profitable users actually behaved very differently. It took a long time for us to recover from that.”

Of course, some of your most active users will also be your most valuable; but that’s not always the case. Take care to differentiate the two, or you might end up making changes that could alienate the customers that do provide the most value to your company.

The 6 “Types” Of Behavior to Notice In Your Customers

A number of factors come into play whenever a customer is faced with the opportunity to make a purchase:

1. Purchasing behavior
2. Occasion/Timing
3. Usage rate
4. Benefits sought
5. Loyalty
6. User status

At times, some of these factors may outweigh others, leading customers to make a purchase with little hesitation. Other times, however, each of these factors must align in order for a customer to make a final purchasing decision.

As we go through each of these factors in more detail, we’ll come back to this idea and provide examples of when certain factors might outweigh others.

Let’s get started.

Purchasing Behavior

A consumer’s purchasing behavior can be broken down into four possible categories:

1. Complex
2. Variety-Seeking
3. Dissonance-Reducing
4. Habitual

Most customers fall into each of these categories at some point in their lives. As much as their classification has to do with their personal behavior, it also has to do with the product they’re considering purchasing:

• Complex purchasing behavior is most evident when a customer is highly involved in the purchasing and decision-making process, and there is a significant difference between the brands being considered. For example, the decision between buying a Mercedes and a BMW is not one to be taken lightly — and is therefore quite complex.
• Variety-seeking purchasing behavior is evident when a customer isn’t very involved in the purchasing process, but there’s a rather significant difference between the product being offered by different brands. For example, a customer who usually buys Crest toothpaste might one day decide to try Colgate — if they like it, they might stick with it; if they don’t, the purchase was rather inconsequential.
• Dissonance-reducing purchasing behavior is evident when a customer is facing a rather major purchase, but there isn’t all that much difference between similar products being offered by different brands. For example, when purchasing a new living room furniture set, a customer might base their decision on personal preference or price rather than the objective quality of the product.
• Habitual purchasing behavior is evident in purchases that don’t require much involvement and when the product being offered doesn’t vary much from brand to brand. In these cases, purchasing decision tends to come down to personal preference (for example, to an impartial individual, there’s probably not much difference between Coke and Pepsi; on the other hand, both Coke and Pepsi fans just cringed while reading that last sentence.)

Again, these categories deal not just with your customer, but with the product or service you offer. But, by understanding how these two entities related to one another, you can determine the moments in which a consumer is most likely to make a purchase — and you’ll know exactly how to market your services to them.

Occasion or Timing

All consumers’ propensity to make purchases fluctuates based on timing — both objectively and subjectively.

This category can be broken down into three subcategories:

• Universal occasions apply to the majority of consumers within a certain demographic. For example, consumers are generally more prone to make purchases during the holiday season each December than they are throughout the rest of the year.
• Regular-personal occasions apply to purchases an individual consumer makes according to factors in their personal life. This may refer to an individual making the same coffee order every weekday at 8:00am, or to an individual buying flowers every August 9th for wife on their anniversary.
• Rare-personal occasions are anomalies that aren’t necessarily trackable or predictable, such as purchases made for a friend’s wedding or a spontaneous road trip. However, the purchases an individual makes during these times can be analyzed to determine their buying habits during such irregular (but likely not “one-off” moments in their lives.

Earlier on, we mentioned the importance of “striking when the iron is hot.” Understanding when an individual consumer (and a group of similar consumers) is most likely to make a purchase can help you determine how to best tailor your offer to catch them in “buying mode.” Miss your chance with a certain customer, and you might have to wait an entire year before they become a potential buyer again.

Usage Rate

Knowing how often a customer uses your product or service can help you tailor your marketing initiatives accordingly, providing each individual with an offer that makes them more likely to do business with you in the future.

Categorizing your customers based on usage is rather simple:

• Heavy users are your most reliable customers who provide you with a bulk of your consumer-generated revenue. As much as you rely on them for revenue, they also heavily rely on you for the services you provide. Think of the benefits airlines provide frequent fliers: as thanks for their continued patronage, these individuals are usually given free upgrades and other discounts fairly often.
• Mid-level users are customers who can be counted on to make purchases at regular — but not frequent — intervals. Similar to regular-personal occasion customers, mid-level users might make purchases during times that are significant to them, such as birthdays or anniversaries. Companies that offer birthday freebies understand the importance of contacting mid-level users during such occasions to keep them interested and engaged with their brand.
• Light users are similar to rare-personal occasion customers: they’ll likely be one-off customers — unless the company makes an offer they can’t refuse. This is why many companies offer discounts and other freebies for first-time customers: they know they need to provide immediate value in order to keep individuals coming back for more.

The goal of any company is to get light users to become mid-level users and get mid-level users to become heavy users.

While coercing formerly one-off customers up the ladder is a time- and money-consuming process, the hope is to eventually get to a point where your efforts across your customer base pay off in dividends.

(However, it should also be noted that keeping heavy users happy is much more cost-effective, and drives much more revenue, than fighting to keep one-off customers from churning.)

Benefits Sought

As the provider of said product or service, it’s important to know what your customers expect to get out of using your wares.

And, if you ask each of your individual customers why they use your product or service, each answer you receive will be unique in at least one way or another.

Consider the many types of customer you encounter during a typical trip to your local grocery store:

Some are extreme “couponers” looking for the best deals they can find.

Others are health-conscious vegetarians who have never stepped foot in the junk food aisle.

Still others are the type who want to grab the essentials and get home as fast as possible so they can enjoy their Sunday afternoon.

It’s the duty of the owners and managers of this grocery store to simultaneously cater to the needs of all of these individuals — or else risk losing a sizable percentage of their customer base.

By understanding the reasons each of your customers has come to you in the first place, you’ll be in a much better position to provide for their needs and keep them aboard.

Loyalty

This goes along with many of the segments we’ve already discussed, such as usage rate, timing, and purchasing habits.

But the concept of a loyal customer differs from that of a habitual customer in that, while habitual customers are continually in need of the product or service you offer, loyal customers continually purchase your product or service (rather than a competitor’s).

Your most loyal customers generate the bulk of your revenue — and they cost relatively little to keep around. In other words, they provide the most bang for your buck.

Understanding this, it’s clear that knowing who your loyal customers are — their needs, their buying habits, etc. — is essential for keeping your business as profitable as possible.

By getting to know your loyal customers on a deeper level, you’ll discover the best ways in which to thank them for their patronage — in turn incentivizing to engage even further with your brand.

User Status

Categorizing consumers by user status segments them into the following categories:

• Non-users
• Prospects
• First-time buyers
• Regular users
• Defectors (ex-customers who have chosen a competitor’s brand)

The way you approach an individual through your marketing initiatives will depend heavily on where they fall within these categories:

• Non-users might need to be made aware that they have a problem or pain point in the first place
• Prospects will need to learn why choosing your product or service is the better option
• First-time buyers might need further instruction on how to use your product to get the most out of it
• Regular users would benefit from being introduced to supplemental products or services you offer that could help them attain their goals
• Defectors might — though it’s unlikely — come back to your brand if you’ve recently fixed the issue that caused them to defect in the first place

Again, the likelihood of keeping customers around depends largely on where they stand as users to begin with. It may be a no-brainer, but it’s worth saying:

The more regular customers you have, the better.

Common Pitfalls of Behavioral Segmentation

In determining how to go about creating your next marketing initiatives, segmenting your customers based on their consumer-related behaviors is a good start.

But your plans can easily go off the rails if you’re not careful.

Next, we’ll discuss some of the common pitfalls of behavioral segmentation — as well as what to do to avoid them.

Ignoring Behavioral Segmentation Altogether

It sounds pretty obvious, but once you’ve segmented your customer base by their consumer behaviors, you need to actually do something with the information you’ve discovered.

To be fair, segmenting your audience based on behavior is a much more in-depth process than segmenting them based on demographics or other, more overt characteristics.

However, because this information goes much deeper than the surface-level qualities of your customer, it can prove to be much more valuable when taken advantage of.

In 2009, using behavioral segmentation, Hyundai determined that most consumers were hesitant to purchase a new automobile during the recession.

The company then introduced its Assurance Program, guaranteeing that customers who were unable to make payments could cut their losses without harming their credit score. In turn, the company was one of just a handful of automakers to actually turn a profit during the hard economic times of 2008–09.

Not Understanding How Behavioral Segmentation Relates To Company Goals

We alluded to this a bit throughout the previous section:

The main goal of segmenting your customers in the first place is to determine which segment to focus your resources and energy on.

Though we did mention some strategies that companies can use to turn light users into medium or heavy users, or to change a defector’s mind about leaving a brand behind, we’ve also made it clear that it’s generally more profitable to target the lowest-hanging fruit: consumers who have exhibited a high probability of making continued purchases.

That being said, behavioral segmentation can be used by any company, regardless of the stage it’s currently in. In that same vein, a company need not use all of the behavioral data it’s collected at all times.

For example, a company aiming to increase its regular customer base might analyze the data it’s collected regarding the best way to reach out to “one-off” customers, while a company aiming to increase its loyal fan base could look to its current loyal customers to understand what made them become loyal in the first place.

Creating Behavioral Segments That Are Too Broad — Or Too Narrow

Let’s tackle each of these separately.

Broad Behavioral Segments

The point of creating behavioral segments in the first place is to acknowledge the unique individuality of your customers. So it wouldn’t be very productive to create behavioral segments that are incredibly broad in scope.

For example, consider the example we mentioned in the section on universal timing. The example we used was, admittedly, pretty broad (consumers showing an increased propensity to make purchases during the holidays).

Think of all the questions such a broad segmentation would leave unanswered:

• What do these customers buy during this time?
• Who do they buy for during this time?
• How much do they spend?

Without this information, your company might be left with an excess of beach-related products after the Christmas season is over, with you mumbling “Huh, I thought people bought more during the holidays…”

(Okay, that’s a ridiculous example, but you get my point.)

Narrow Behavioral Segments

On the other hand, making your segments too narrow can cause you to miss out on major opportunities when they arise.

In cases like this, our mantra changes from “strike while the iron is hot” to “fish or cut bait” (you might know a less family-friendly version of this saying).

The point is, while you do want to segment your customers so you can predict their behavior (or use their behavior to focus your marketing campaigns), you don’t want to segment them to the point that you’re waiting for a super-ideal situation to arise.

For one thing, the chances of finding the absolute perfect time to market to a certain segment is slim-to-none. For another, conditions don’t need to be absolutely perfect to make a move; your offer just needs to be more valuable than your competitors’ when you do move in for the sale.

Conclusion

As with all other types of customer segmentation, the purpose of behavioral segmentation is to gain a better understanding of who your target customer really is.

But behavioral segmentation goes beyond defining the relatively superficial, almost stereotypical, characteristics of your customers, and digs into the factors that affect your company’s bottom line: their propensity to spend money.

While behavioral data is much more insightful than demographics and other surface-level segmentation data, one thing remains constant:

The data you collect determines the creation of your marketing initiatives.

The takeaway here is two-fold:

1. Collect data on your consumer base first, then create marketing campaigns that fit this data.
2. Tweak your offering to fit your customers; not the other way around

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Originally published at www.fieldboom.com on May 3, 2017.