A marketing strategy, however expertly crafted, only fetches results if it resonates with prospects. For this reason, marketers cautiously tailor their brand messaging for specific audiences.
But as a business’s reach grows and the audience size increases, the needs and opinions of the audience become more diverse, putting the marketing message at risk of irrelevance.
This is where market segmentation comes in.
But what is market segmentation? What is the purpose of market segmentation? What are the benefits it can offer?
More importantly, is it easy to get started? What is the first step in market segmentation?
We answer these questions and more in this simple guide to market segmentation.
What is Market Segmentation?
Understanding market segmentation becomes easier when you understand what is market segmentation in a business context.
In business, segmentation refers to dividing a large unit into smaller units with a varying number of related characteristics.
In marketing, the term refers to dividing the target market into smaller, more approachable groups (or “segments”) based on characteristics like needs, demographics, and common interests. Every segment must be distinct from another.
The overarching idea is to group people that a) perceive the full value of your products or services differently than the rest of the audience and b) respond similarly to marketing activities and market fluctuations.
Besides being helpful in marketing, understanding what is a market segmentation can also help improve sales efforts and product quality.
Businesses that use market segmentation to inform their product development approach also benefit from tailoring product development cycles depending on the trends among target demographics.
Benefits of Market Segmentation
A 2018 Harvard Business School study outlines how MetLife significantly reduced customer acquisition costs by identifying personas. The company then allocated marketing resources to engage with the untapped segments of their target audience.
MetLife committed to a net annual savings target of $800 million – a testimony to the effectiveness of market segmentation.
Other big businesses, including American Express, Best Buy, and Mercedes Benz, use segmentation to inform their product development, engage better with audiences, and increase sales.
The benefits are endless, but we’ve highlighted the top benefits below.
1. Promoted Business Growth
Besides helping marketers find new ways to reach their current customers, market segmentation also helps tap into markets of potential customers they haven’t previously reached.
An in-depth analysis of existing customers leads to discovering previously unknown needs and problems that the product or service solves.
These insights can give an organization enough information to initiate new product lines, create new brands, and sometimes rebrand to accelerate the growth of the business.
2. Decreased Spend Rate
As illustrated by the aforementioned MetLife study, it is clear that when an organization understands how to connect with its customers, marketing becomes more efficient, leading to lower overall spending.
A few decades ago, marketing teams would need to try different approaches to find something that sticks. But by segmenting customers, marketers can now get it right every time.
3. Optimal Customer Retention
The use of cohesive customer segments inherently provides the benefit of high customer retention.
Furthermore, capturing customers with a personalized customer journey gives them an excellent brand experience. This results in higher customer loyalty.
If every product and marketing message resonates with your audience, it will be hard for the audience to say no to you.
The Basics of Segmentation
Marketers identify market segments using three criteria:
- Homogeneity: The common needs of a segment.
- Distinction: The difference between one group from the others.
- Reaction: The response to the market.
An athletic footwear company identifies market segments for runners and basketball players. But these groups are distinct and respond to different advertising. Understanding these segments allows these companies to market their branding accordingly.
Marketers approach market segmentation in four conventional ways:
- Geographically (area/region)
- Demographically (gender, age, family size, income)
- Behaviorally (benefit, response)
- Psychographically (lifestyle, personality, social class)
Segmenting markets based on these factors enables businesses to differentiate their products and message from their competitors. Let’s discuss them in detail.
Types of Market Segmentation
One of the best things about market segmentation is that, in most cases, businesses can incorporate a predictive model into their study, allowing them to group individuals within identified segments based on survey data.
The primarily recognized types of market segmentation include:
1. Demographic Segmentation
It involves sorting an audience based on age, education level, income, race, gender, nationality, and occupation. It is the most common segmentation approach since all products and services we buy, how we use them, and how much we are willing to spend on them largely depends on demographic factors.
An excellent example of demographic segmentation is when footwear companies produce and sell clothes for several age groups. For instance, Sketchers sells footwear, accessories, and apparel for men, women, and children.
The three-decade-old company initially targeted the men’s casual footwear market but later diversified to include athleisure and performance footwear lines for all demographics.
What’s interesting about the Sketchers website is it also sorts the products by technology, allowing every demographic to find what they need easily.
Like any other footwear business, Sketchers has distinct advertising approaches for the various market segments it targets.
2. Geographic Segmentation
While some marketers consider geographic segmentation a subset of demographic segmentation, it can be considered a separate segmentation type.
In this type of segmentation, customers are grouped based on geographical boundaries. This approach is significant because prospects have different preferences, needs, and interests in different geographies.
Depending on the industry in which a business is based, marketers can analyze patterns and trends such as climate, product demand, and consumer gripes. In this way, marketers can determine where they should advertise, sell, and expand the business.
A nice way to understand how businesses use geographic segmentation is to look closely at the iconic fast-food chain McDonald’s.
You’d be surprised to learn they have different menus based on the palates of consumers in different countries. In the Philippines, you can order McDonald’s McSpaghetti, and in Hong Kong, you can find ramen-flavored French fries.
3. Firmographic Segmentation
You can think of firmographic segmentation as demographic segmentation for organizations. This type of segmentation is based on factors such as industry, location, company size, number of employees, and sales cycle stages.
The surge in demand for sanitization services during the COVID-19 pandemic forced businesses in the industry to identify the most profitable segments – which included factories, gyms, and restaurants.
While business owners tend always to be keen to ensure employee safety, they inevitably bring in the operations staff to handle the sanitization process. In a lot of cases, the operations staff raise unfounded objections due to a lack of awareness of contemporary hygiene standards.
Marketing-savvy business owners such as Mike Campion, founder of Grow My Cleaning Company, saw the opportunity to connect with their target audience and started a podcast.
Many other businesses in the industry conducted training programs and webinars to overcome the obstacles in the way of closing more sales.
4. Behavioural Segmentation
Behavioral segmentation is the last thing that comes to mind when someone asks what is target market segmentation. However, this type of segmentation can be vital to developing a targeted approach.
Behavioral segmentation involves the division of markets based on readiness to buy, type and frequency of usage, and benefits sought from the product.
It helps identify key trends – for instance, in the skin care industry, marketers understand that younger people are more likely to buy body wash, whereas older people are more likely to buy soap bars.
Many businesses offer reward programs to encourage brand loyalty in various market segments. Reward programs have also proven effective in capturing new customers.
A nice example of this is the rewards program offered by makeup and beauty company Sephora. Higher spending translates to more points, and customers can use these points for generous product samples.
Sephora also offers its customers free services and access to sales.
You may also read: What Is Brand Awareness: Definition, Importance, And Examples
5. Psychographic Segmentation
Sometimes confused with behavioral segmentation, psychographic segmentation divides customers into groups based on personality traits, values, interests, and opinions.
Starbucks is an excellent example of a business implementing psychographic segmentation. We all know that not everyone likes coffee, and some don’t prefer to drink it, but Starbucks has managed to appeal to nearly everyone.
The company offers chocolate milk, cheese sticks, cake pops, and many other products for the children accompanying mom or dad on their store trips.
Starbucks also appeals to customers looking for high-quality beans from different regions.
You will also find options for people that don’t often drink coffee but want to enjoy some time out with their friends and loved ones. Juices, lemonades, teas, and frappuccinos cater to this market segment.
Selling products that appeal to everybody is different from selling products that make every customer feel individually catered to.
How to Get Started with Segmentation
Now that you understand the basics, you can get started with segmentation in five steps:
- Identify your market: Determine the need for your products or services and identify the size of the market. Figure out where your business stands in the marketplace.
- Segment: Pick a segmentation type to divide your prospects into groups. You do not need to use only one type of segmentation – most modern businesses use a combination of them. Experiment with all segmentation types to find which one works best. Study your competition to gather insights.
- Understand your audience: Focus groups, polls, and research surveys are some of the best ways to learn more about your audience. Keep your questions relevant to the segments you have chosen to initially target, and always ask a combination of qualitative and quantitative questions to get the best data.
- Create segments: When you get your hands on the data, analyze it to determine which segments will relate most to the products or services.
- Test your strategy: Testing your finding on the market can be nerve-wracking, especially for small business owners. However, you will not get any results or perceive what is the purpose of market segmentation unless you continually adapt to new data and the opportunities it presents. If the uptake doesn’t meet your expectations, identify whether the segment or the research method failed you and start over.
Common Market Segmentation Mistakes
- Many marketers mistakenly believe that making a specialized segment will fetch better results, but this is often not the case. The more a marketer zones in on the specifics, the smaller the segment and the higher the risk of the segment being inaccurate or not quantifiable. Having a simple approach is the right way to tackle market segmentation.
- If your segmentation strategy identifies a large segment, it does not necessarily mean the potential for sales is high. The business will only be able to grow in the segment that truly needs the product or service and has the necessary buying power. Make sure you prioritize targeting segments with buying power.
- Marketplaces are constantly changing across all industries. Letting your segments become too entrenched can waste time and resources. Preparing the business for catering to a dynamic market and ever-evolving segments is better.
Examples of Market Segmentation
The use of market segmentation is apparent in the products and advertising that we see every day.
Cereal producers tend to actively market to multiple segments at a time, leaving the older, more traditional brands to cater to older customers while the healthier brands capture a share of the growing market of health-conscious consumers.
These companies build brand loyalty among young consumers by tying their products to popular movies and video games. For instance, Kellogg’s products can be seen in season four of the popular Netflix show Stranger Things.
On the other hand, automobile manufacturers rely on actively identifying market segments to develop products and their corresponding advertising campaigns.
Market Segmentation Strategy
Marketing segmentation wasn’t always considered a strategy until marketers compared it with a customer experience strategy. Customer experience strategies take businesses from point A to B in terms of growth, reach, and sales.
Market segmentation is similar, and businesses need to revisit their market segments:
- When markets are rapidly changing: The COVID-19 pandemic forced many businesses to rethink how they sell to customers. Organizations with many physical stores resorted to implementing online purchases, while restaurants offered curbside pickups. Since customers always change, market segmentation should also change to understand what your customers need from your business.
- Yearly: Customers are constantly influenced by external factors, changing their responses and behavior over time. It is healthy for a business to evaluate its markets at least once a year. If a major event such as a natural disaster results in a target customer segment collapsing, focus your sales activities on other segments.
- Periodically throughout the year: Markets segments have different patterns at different times. For instance, there are several holidays in the winter, with Christmas being the biggest holiday. It helps to evaluate the behavior of segments in changing times since holidays influence their buying choices. Understanding these choices can help the business prepare for the demand of the season.
Marketing segmentation strategy must be constantly updated with the following tips in mind:
- Acknowledge changes in the market: Determine how the market changed from one period to another and look into the driving forces for the change. Understanding why your market is different can help marketers make critical decisions, such as whether to change the approach or stay the course.
- Don’t hold off on planning: Businesses conventionally adapt to long-term trends to remain profitable. Therefore, market segmentation research gives you the insight you need to take market changes head-on. Considering the long-term complications and the risks associated with a segment every step of the way is the right approach.
- Always ask why: While the data in and of itself can provide quantitative insights about trends, marketers need to pinpoint the driving forces of changes in a market segment. Some marketing tools come with advanced modeling techniques that provide this insight clearly and allow you to leverage it for greater profits.