Types of Customers and Customer Segmentation

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KEY Takeaways

  • Internal customers are those within an organization. External customers are people or organizations outside of the organization.
  • Customer segmentation helps businesses to understand the target market better and offer customized products and services.
  • There are four main ways to segment customers into smaller groups: demographic, psychographic, geographic, and behavioral.

Customer Types

Broadly speaking, there are two types of customers:  internal customer and external customer.

The concept of the internal customer was popularized by quality Guru Joseph Juran. In an organization, the next process is the customer. For example, if the first step is manufacturing parts and the second step is assembling these parts, then the assembly is the customer of manufacturing. Manufacturing needs to meet the requirement of assembly as a customer. Since both manufacturing and assembly belong to the same organization, the assembly would be called the internal customer of manufacturing.

The external customer is someone who is outside the organization. For example, if company X is making chocolates and for making that chocolate it needs a number of inputs from its suppliers Y and Z.  In this case for suppliers Y and Z, the company X is the external customer.

Now going further, these chocolate are supplied by company X to retailer R, then, the retailer R is the intermediate customer of company X.

The retailer R then sells these chocolates to the ultimate customer, who pays to buy these chocolates for his/her kids.  Kids who actually eat these chocolates are the consumers.

In the above case, we have the supply chain consisting of:

supplier > organization > intermediate customer > ultimate customer > consumer.

Customer Segmentation

Customer segmentation is the process of segmenting a customer group into smaller groups in order to obtain a clear understanding of their unique needs and expectations. Customer segmentation is a method of analyzing the customer group in terms of differences and similarities within a customer group. These factors help you in offering tailor-made products or services to them and improve the retention rate of your existing customers as well. 

You can segregate your customers based on their location, buying habits, gender, language, local customs, education, past purchases or many other things. You need to decide on what factors you want to segregate your customers on and why do you want to do that.

For example, one segment of the customer would be willing to pay a much higher price by having more additional features built into the product and another segment which wants the product to be cheap, with minimum facilities. Based on this segregation you might want to develop two separate products for these two segments. One product meeting the needs of the customer who is willing to pay a higher price and one which is meeting the needs of the customer who is willing to pay less price.

Why Segment?

By customer segmentation, you can understand your customer base better and accordingly customize products or services for their needs. Data on customer preferences helps you in setting up new offerings and find opportunities for selling products to different customer groups. Customer segmentation plays a significant role in increasing the number of customers and revenue.

Tools for Segmentation:

Companies collect the customer data depending on what type of product they are selling. The simplest thing is to segregate customers based on one particular factor. The factor could be male-female, (as male or female could have different buying habits, and needs). In addition, the customer could be segmented based on married/unmarried, young/old, location, country etc.

However when you want to cluster the customer data on multiple factors, such as buying habit based on multiple factors such as "young married male" then you might need to have the advanced tools for customer segmentation. Some of the advanced statistical tools which are used for customer segmentation are:


Customer segmentation can greatly enhance the bottom line. Businesses have no choice but to create customer segmentation to ensure they keep customers happy and loyal.

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