Put each person in one group by how you know them (client, past client, sphere, prospect, vendor, peer) and use tags for everything else.
The idea
Groups and tags do different jobs. A group answers "how do I know this person?" and each person gets exactly one. Tags are custom and unlimited, for everything else. Grouping creates segmentation, which stops you from treating everyone the same. The way you stay in touch with a past client should look nothing like the way you stay in touch with a vendor.
How to do it
Set up six groups: client, past client, personal sphere, prospect, vendor or partner, peer or referral partner. (My coaching started in real estate, so rename them to fit your work.)
Put each person in one group. Don't double group: a past client doesn't also go in your personal sphere.
Start with what's easy and feels good: past clients first, then current clients, then everyone else.
Use tags for everything else: interests, expertise, how you feel about them (A/B/C).
Plan value per group. Current clients get help with whatever they're working through right now. Friends and family get their birthdays remembered. Vendors get introduced to your clients.
Example
One play we taught in my coaching: send your past clients a bulk message asking for their favorite local restaurants, then share the crowdsourced list with your general sphere. That only works if you can pull up "past clients" as its own group.
Watch out for
Using groups as tags. If someone fits three groups, pick the one that describes how you know them and tag the rest.
The Three Things That Matter in a Database: For each person, know three things - how you know them, how you feel about them, and when you last talked. Everything else is optional.
Tag Hygiene: Delete auto-generated tags and any tag with fewer than five people; tags are where overthinking starts.
The Common Model: Tag people by what they have in common, like kids, hobbies, careers and life stage, instead of business labels, starting with your A's.
A/B/C Spheres: Sort everyone into three tiers by gut feeling (love, like, don't know) and spend more time on A's than B's, and more on B's than C's.