Customer segmentation is the practice of dividing a customer base into groups of individuals that are similar in specific ways relevant to marketing, such as age, gender, interests, spending habits and so on.
Customer segmentation allows a company to target specific groups of customers effectively and allocate marketing resources to best effect. According to an article by Jill Griffin for Cisco Systems, traditional segmentation focuses on identifying customer groups based on demographics and attributes such as attitude and psychological profiles. Value-based segmentation, on the other hand, looks at groups of customers in terms of the revenue they generate and the costs of establishing and maintaining relationships with them.
Customer segmentation procedures include: deciding what data will be collected and how it will be gathered; collecting data and integrating data from various sources; developing methods of data analysis for segmentation; establishing effective communication among relevant business units (such as marketing and customer service) about the segmentation; and implementing applications to effectively deal with the data and respond to the information it provides.