The top priority for small businesses over the next six months is maintaining current sources of revenue, i.e., keeping their customers, according to American Express Open.  Actually, customer retention is a challenge that retailers have been facing for years. Moreover, every customer is so different that it is hard for a retailer with limited resources to create a unique experience for every customer. This is why many retailers still rely heavily on pricing competition, even though they know the importance of optimizing the customer’s experience.

A solution: customer segmentation

Currently, the most effective and cost efficient solution for optimizing the customer experience is to group similar customers together, and create experiences that are relevant and work for those segments. This is called customer segmentation. When you segment your customers, you identify groups of customers that have similar needs, wants, and demographics. In response, you create environments, services, price strategies, and product groups especially for the customers in each segment.

A good example: Best Buy

In 2003, Best Buy determined that they should adopt a customer centric strategy instead of sticking with a pricing strategy. They identified their customer groups by learning customer transaction history and asking customers what they would like to see Best Buy offers. They also identified their profitable and unprofitable customer segments. 

Their key profitable customer segments are: "Barrys," high-end customers who spend to get the best; "Jills," busy moms who want a kid-friendly store environment and often purchase based on staff recommendations; and "Buzzs," tech-savvy early adopters who enjoy the latest in gadgets, often buying after carefully reviewing specifications.

Then, Best Buy adapted their store environments, products, services and pricing to target each segment.This strategy of Best Buy paid off. The company posted an incredible 85 percent profit gain in its fiscal first quarter of 2005. Best Buy attributed the profit growth partly to this customer segmentation strategy.