Customer Groups feature is useful in a few situations.
For example when you want to group your customers to different category or level, let say some will be VIP or VVIP after certain of order amount achieved, or separate normal customers with wholesalers or resellers.
To create new Customer Groups, navigate to Customers > Customer Groups.
Click on Insert button.
Give the group a Name and Description if you like.
You can also choose to manually approve customers in this group.
Once you have at least 2 customer groups, you can then use this feature in the following sections.
To manually change a customer into a different group, just open up the Customer profile in Customers > Customers > Edit.
1st Option says 'Customer Group'. You can then put this customer from 'Default' into another Customer group that you've created earlier.