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What is customer segmentation and why does it matter?
Customer segmentation groups customers who behave or look alike so you can treat each group differently in marketing, pricing, service or product decisions. Segments can be defined by rules such as spend and recency, or discovered by clustering algorithms. It matters because average customers hide very different needs and profitability.
Good segments are actionable. If you cannot name a different action for each group, the segmentation is just a report.
Common approaches:
- RFM: recency, frequency and monetary value.
- Behavioural clusters, for example by product mix or channel.
- Value tiers, based on margin rather than revenue.
Keep the number of segments small enough that people remember them, and re-check them periodically since customers move between groups.
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