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Customer segmentation is a fundamental part of maintaining relationships, no matter what industry you’re in.
Below, you'll learn what customer segmentation is, how to do it for your company, the impact to your bottom line.
Customer segmentation is a process in which a business evaluates its customer base, identifies commonalities of mutually exclusive groups like age, behavior, preferences, or spend history, and breaks out these segments for communication purposes.
This is a marketing process that is a precursor to targeting and positioning.
Targeting means selecting a segment and deciding what channel to reach them through, like email, in-service greetings, post-service follow-up, etc.
Positioning is the act of deciding on the messaging that you will use to communicate.
An important component to customer segmentation that makes targeting easy is choosing mutually exclusive groups. That way, you target each with individual messaging that does not overlap.
So think of customer segmentation as the following:
Of course, this is simplifying the process. The reality could be multiple pies with different types of segmentation (see next section) where there is overlap from a slice in one pie to the next. This is where targeting gets specific, and a company must choose a communication hierarchy and set filters into place that prevent customers from receiving two communications.
For example, let's say I have a business that is a restaurant. It's called Five Figs. I segment out my guests based on spend and number of visits. I want to send to send two emails: one to high-spenders, inviting them to a VIP dinner at Five Figs, and another to first-timers, thanking them for stopping by for their visit.
It’s possible for a First Timer to also hit a spend threshold that qualifies them as a High Spender. So Five Figs would need to set a threshold that says “send XX emails max per week to each guest” and/or they could set a priority where guests receive the VIP email over the other.
(Did you know? SevenRooms automates all of the above for restaurants. Get your personalized demo today.)
In addition to being differentiable, like we talked about above, here are some other important requirements for effective customer segmentation:
Measurable — Are you able to say how large the size of this target market is?
Accessible — Do you have a way to reach this audience? Do you have the budget and resources?
Substantial — Is the target market expected to grow? Is it profitable right now?
Actionable — Do you have something to say to this audience that could pique their interest and drive action that benefits your bottom line?
Compatible — Does this market align with your company’s values and goals?
Here are the four primary categories of customer segmentation, examples listed as restaurant guest segments:
Now, let’s dig into the High Spender and Low Spender segment examples.
Measurable — You can quantify each of these segments by setting spend thresholds for each. Let’s say high spenders have bills that are over $200 and low spenders have bulls under $50.
Accessible — These groups are both accessible because the restaurant has email addresses and phone numbers for guests who have booked a reservation.
Substantial — Because the High Spenders group is the most profitable (it is these guests who are likely to spend the most on a return visit), this is the more substantial group.
Actionable — The restaurant could do a few things here, like send an email about higher-ticket items that are new to the menu, or even invite these guests to a VIP dinner.
Compatible — The High Spender segment aligns well with the restaurant’s goal of providing an excellent experience and delicious food that bring guests back for more.
In the next section, we’ll build out personas that involve different segments.
One of the best ways to segment your customers is to come up with personas.
Personas are your way of finding your most profitable customers and the segments that group them together.
They make it easy for companies to group together people with shared values and pain points.
Now, let's run through a step-by-step of what actions to take to segment your customers:
1. Identify your top three customer personas.
2. Lay out the segments that comprise each persona.
Frugal Family: Live nearby (geographic), typically two parents and 2+ children (demographic), spend less (behavioral), wants children’s menu (psychological)
Business Buffs: Work nearby (geographic), typically 3+ people aged mid twenties to forties (demographic), spend more (behavioral), there for the drinks and to impress clients (psychological)
Cozy Couple: Live or work nearby (geographic), two people aged mid-twenties to sixties (demographic), like to linger (behavioral), wants to enjoy time together alone (psychological)
3. Dig deeper into the values and desires of those segments.
In this case, Frugal Family wants a low-cost meal with an option on the menu for their children. They usually dine early and don’t stay as long as the other three personas.
Business Buffs are typically networking or entertaining clients, so they typically care about good drink options and do not pay attention to prices, because the bill will be expensed.
The Cozy Couple likes to enjoy a night out to themselves. They are there for the experience. So, they're in no rush to leave after they’re done eating and are willing to pay for desired food and drinks.
4. What is your status quo for communication? How can you improve?
Let’s say that Five Figs, our hypothetical restaurant, currently does not proactively reach out to any of these segments. The guests dine, they leave, and the only time the restaurant reaches out is with holiday greeting cards over email.
Once they begin segmenting out these audiences, they can ask for email addresses with a card that’s left during the check-drop, with the promise of offers to come. The server then can mark which segment their party was in and enter them into their guest database.
5. Develop a plan to reach these segments. Prioritize most profitable ones.
A great way to reach customers fast — and generally low cost, depending on the platform you use — is through email.
Planning involves knowing how to reach out, as well deciding what to say. Your message has to align with the values of your audience.
Looking at the personas above, Five Figs might decide to send out a new children’s menu to Frugal Families, a happy hour with private space to Business Buffs, and a romantic dinner for two to Cozy Couples.
6. Make it scalable.
Many email platforms let you send emails automatically, triggering them off of segments, and even add secondary emails set to send after the first.
This takes the hard work off your plate and it factors in the reality that the average email open rates is under 30%. So send an email, and then automate a reminder to send to those who didn’t open the first one, trying with a different subject line.
Email automation is half of making this process scalable; segmentation automation is the other. You should have a platform that tracks customer behaviors, attributes, and preferences and logs them without any manual effort.
There are three important ways that segmenting your customer base ties to revenue:
By communicating with messaging that is personalized to your customers, you show that you know them and that you care. You also present offers that they are more likely to bite on, which increases revenue in a real way for your business.
Pro Tip: Monitor which personas and offers that drive the most revenue. When you can isolate patterns, it’s easier to replicate and iterate for other customer profiles.
When you don’t segment your customers — whether it’s not knowing what to segment, why, or how — your efforts to promote things could come back to bite you. An email that you send trying to give customers a personal touch could actually feel very impersonal.
Here’s an example: sending a wine dinner invitation to a recovering alcoholic.
Or a pizza and pasta class to a gluten-free guest.
Think of the lifetime customer value that you risk losing when you send the wrong messaging to one of your customers.
Pro Tip: When you’re thinking about customer segments, make sure you include things people are passionate about, but also think carefully about things that they try to avoid.
This helps you become more strategic about pulling back on budget in one place or adding it to another.
The great thing about finding similarities is that it brings repeatability into the equation.
If customers in Segment X drive revenue today, new customers that fall into Segment X in the future are very likely to do the same.
Being able to recognize revenue-generating sources is important because it shows you where to invest budget and resources and where to pull back from investing efforts into.
7X by SevenRooms is a package that sends feedback emails to your guests for you, it automates follow-up based on positive or negative sentiment from the owner, and it creates guest segments that you contro. It also aggregates third party reviews from Google, TripAdvisor, Facebook, and OpenTable into a dashboard. You can pull reporting based on the date range and star-rating you choose, and search reviews. You also get a daily summary of new reviews, right in your inbox.