Do You Know How Customers Shop? You Should — It’s Important

Behavioral customer segmentation is critical for retail survival. It’s an inescapable fact. Now let me tell you why.

Brands focus their customer segmentation efforts to understand what products customers want to buy, why, when, and where to improve targeting, product selection, placement, marketing, pricing, and experience delivery.

While segmentation efforts often start simple — demographic and geographic — marketers have applied more sophisticated behavioral and psychographic segmentation techniques to understand customers’ underlying beliefs and attitudes. This helps them develop products and strategies that address customers’ emotional needs.

Emotions matter when shopping. In today’s economy, the customer experience is often a bigger differentiator than product availability or price. “How” retail customers buy is evolving rapidly as their buying preferences and default channels for shopping and buying shift towards digital. Therefore, it is paramount for retailers to leverage behavioral segmentation to understand “how” different customers research, shop, and ultimately, purchase. This enables that oh so valuable introspection on a retailer’s value propositions and omni-channel presence.

So, how do customers buy?

It’s an important question to ask. When retailers answer it they can adapt their marketing strategies appropriately as well as customize their in-store and online experiences to maximize revenue generation. Here are a few top line reasons why it’s so important to know how customers like to shop and spend.

To prioritize digital build: COVID has drastically accelerated digital adoption. Customers may still show up at a store to touch and feel a product, but the majority shop online. They’ve done their research, and they’re much savvier today about product options, availability, and price. If retailers don’t explicitly cater to the majority, then they are headed down the path to extinction. Retailers must prioritize the right digital features to design and build, and when to release enhancements or new products and services.

To preserve differentiators: On the flip side, retailers need to fight the urge to go 100% digital, and thereby ‘throw the baby out with the bathwater.’ Retailers of large ticket items — appliances, furniture, cars, etc. — often build their reputations on deep product expertise, which attracts customers who require advice and consultation on customizations. This segment may become niche, but is unlikely to entirely disappear.

To establish financial dominance: Retailers that really understand how their customers shop can financially dominate as compared to competitors. The nuts and bolts choices retailers make internally — where to stock, staff size in-store, call center size, and marketing budget — impact COGS and SG&A. The question “how do customers buy?” is central to optimize spend. For instance, if a large portion of customers start shopping on Google search, a media shift from upper-funnel and expensive TV ads to lower-funnel and cost-effective paid search tactics might be far more effective. Or, if there is a growing segment of online-only customers in a city, optimizing distribution center size or location could save costs.

Okay, great. But really, how do customers buy?

To answer the question, three approaches need to converge:

Customer survey: Designed to test key attitudes and influences driving decision making, a large format survey (1,000+ participants) is likely the best tool to identify the full universe of addressable and non-addressable customer segments. Survey design is critically important. The first design choice is selecting target participants by age range, gender distribution, socio-economic factors, and geographic factors such as urban/suburban/rural. The second important aspect is defining a number of attitudinal statements within the survey that participants can select to reveal their needs and preferences for purchase decisions. When survey results come back, the information about participants based on their email address is augmented with third party data attributes — additional demographics, influencing behaviors, and marketing propensities — and then analyzed via hierarchical clustering to create multiple groups of similar responses to the attitudinal statements. Consistent and distinct response patterns across all attitudinal responses will reveal a set of 5–10 distinct and non-overlapping customer segments as well as each one’s needs. Pain points and key stressors for each segment reveal opportunities to assign value propositions that are most important to each segment, such as lowest price, frictionless experience, value add services, product choice, and delivery speed — all the things they consider before they buy.

Customer research: How do we know the segments survey analysis revealed are actually practical, human, or correct? Well, customer interviews reveal the “why” around segment attitudes and needs, augmented by observed behaviors that confirm and often course correct segment definition. For instance,busy parents don’t have time to research; they depend on other’s recommendations. Sometimes observing how a segment shops online or in store reveals a need that did not emerge in the survey, prompting a change to the segment definition. Most importantly, ethnographic research humanizes the segments by allowing researchers to put a name and persona details to the segments. This allows marketers and designers to create tangible experiences and define value propositions for a single person that represent the segment’s needs vs. for an esoteric faceless segment.

Customer data: Retailers possess a wealth of data within their CRM and transactional systems about their customers. Analyzing this data can reveal insights on who the purchasers are, what they buy, at what frequency, via which channels, and when. While customer data analysis can reveal demographic and geographic segmentation along with customer profitability and lifetime value, it does not answer three key questions: One, why are customers buying from the retailer? Two, where else are they shopping? Three, who is not purchasing and why? This is where the previous two steps converge. Augmenting the dataset with third party data allows clustering of existing customers who have bought in the past into the same segments identified in the survey analysis and then confirmed by customer research. Comparing the size of the CRM clusters to the survey clusters shows the extent to which the retailer is able to attract a segment or not. Magic is just one step away when insights reveal sub-segment level details — mobile vs. desktop shoppers, customers that drive long distances — which then prompt discussions around value propositions, brand promise, and messaging.

Pay attention to behaviorally-based segments

Customer segmentation provides numerous benefits if used uniformly across the organization vs. solely for product development or marketing. For instance, it can highlight a need for customers to have “peace of mind” typically addressed via guarantees and warranties. It can reveal a need for product choice, or show that customers value a frictionless experience. These become value propositions that need to be designed for all customer segments.

It’s important to develop segments that are mutually exclusive, however. Here are some illustrative retail segments that could arise from understanding how customers shop:

Impulse buyer: Shoppers who decide to purchase on a whim using last minute, if any, research on other product options or retailers with lower prices.

Convenience shopper: Shoppers who prefer to order from the comfort of their home and have the product(s) delivered to their doorstep.

Relationship buyer: Shoppers who have a level of comfort with a retailer or need advice consultation: “I have always bought from retailer ABC,” or “Jane helped me the last time and she was great.”

Instant gratifier: An online shopper who understands the best retailer to buy from based on product availability and price but wants to both touch the product and bring it home the same day.

Customizer: A less price sensitive customer who is willing to wait days or weeks for the perfect product configured to their exact taste or needs.

To maximize revenue generation, behavioral segmentation plays a critical role in understanding how and why customers buy. That information is then used to define the “bread and butter” segments, those an organization may be missing, or unprofitable segments that it should suppress. Then companies have to address each segment’s needs without coming across as being everything for everyone. After all, even the most jaded customer wants to feel special.