What is Market Segmentation? Different Types Explained

7 min read
Market segmentation is the research that determines how your organisation divides its customers or cohort into smaller groups based on characteristics such as, age, income, personality traits or behaviour. These segments can later be used to optimise products and advertising to different customers.

At its core, market segmentation is the practice of dividing your target market into approachable groups. Market segmentation creates subsets of a market based on demographics, needs, priorities, common interests, and other psychographic or behavioral criteria used to better understand the target audience.

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By understanding your market segments, you can leverage this targeting in product, sales, and marketing strategies. Creating your marketing communications both in ad messaging and advanced targeting on digital platforms like Facebook and Google using your segmentation will allow for better response rates and lower acquisition costs. Market segments can power your product development cycles by informing how you create product offerings for different segments like men vs women or high income vs low income.

Companies who properly segment their market enjoy significant advantages. According to a study by Bain & Company, 81% of executives found that segmentation was crucial for growing profits. Bain also found that organisations with great segmentation strategies enjoyed a 10% higher profit than companies whose segmentation wasn’t as effective over a 5-year period.

Companies like American Express, Mercedes Benz, and Best Buy have all used segmentation to increase sales, build better products, and engage better with their prospects and customers.

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The Basics of Segmentation

Understanding segmentation starts with learning about the various ways you can segment your market. There are four primary categories of segmentation, illustrated below.

Types of Market Segmentation

With segmentation and targeting, you want to understand how your market will respond in a given situation, like purchasing your products. In many cases, a predictive model may be incorporated into the study so that individuals can be grouped within identified segments based on specific answers to survey questions.

Geographic Segmentation

While typically a subset of demographics, geographic segmentation is typically the easiest. Geographic segmentation creates different target customer groups based on geographical boundaries. Because potential customers have needs, preferences, and interests that differ according to their geographies, understanding the climates and geographic regions of customer groups can help determine where to sell and advertise, as well as where to expand your business.

Demographic Segmentation

Demographic segmentation sorts a market by demographic elements such as age, education, income, family size, race, gender, occupation, nationality, and more. Demographic segmentation is one of the simplest and most commonly used forms of segmentation because the products and services we buy, how we use those products, and how much we are willing to spend on them is most often based on demographic factors.

Firmographic Segmentation

Firmographic segmentation is similar to demographic segmentation. The difference is that demographics look at individuals while firmographics look at organisations. Firmographic segmentation would take into consideration things like company size, number of employees and would illustrate how addressing a small business would differ from addressing an enterprise corporation.

Behavioural Segmentation

Behavioural segmentation divides markets by behaviours and decision-making patterns such as purchase, consumption, lifestyle, and usage. For instance, younger buyers may tend to purchase body wash, while older consumer groups may lean towards soap bars. Segmenting markets based off purchase behaviours enables marketers to develop a more targeted approach.

Psychographic Segmentation

Psychographic segmentation takes into account the psychological aspects of consumer behaviour by dividing markets according to lifestyle, personality traits, values, opinions, and interests of consumers. Large markets like the fitness market use psychographic segmentation when they sort their customers into categories of people who care about healthy living and exercise.

Did you know that Qualtrics offers Market Segmentation software? Check out more here

How to Get Started with Segmentation

Market segmentation doesn’t need to be complicated to be effective. There are five primary steps of segmentation.

  1. Conduct Preliminary Research –  Get to know your customers better by asking some initial, open-ended questions.
  2. Determine How To Segment Your Market – Decide which criteria (i.e. demographics/firmographics, psychographics, or behaviour) you want to segment your market by.
  3. Design Your Study – Ask a mix of demographic/firmographic, psychographic, and behavioural questions. Be sure to make your questions quantifiable.
  4. Create Your Customer Segments – Analyse your responses either manually or with statistical software to create your segments.
  5. Test and Iterate – Evaluate your segments by ensuring they are usable and helpful. If they aren’t, try segmenting based on other criteria.

Ensuring Effective Segments

After you determine your segments, you want to ensure they’ll be useful. A good segmentation analysis should pass the following tests:

  • Measurable: Measurable means that your segmentation variables are directly related to purchasing a product. You should be able to calculate or estimate how much you segment will spend on your product. For example, one of your segments may be a coupon maven, who is more likely to shop during a promotion or sale.
  • Accessible: Understanding your customers and being able to reach them are two different things. Your segment’s characteristics and behaviour should help you identify the best way to meet them. For example, you may find that a key segment is resistant to technology and rely on newspaper or radio ads to hear about store promotions, while another segment is best reached on your mobile app. One of your segments might be a male retiree who is less likely to use a mobile app or read email, but responds well to printed ads.
  • Substantial: The market segment must have the ability to purchase. For example, if you are a high-end retailer, your store visitors may want to purchase your goods but realistically can’t afford them.  Make sure, an identified segment is not just interested in you, but can be expected to purchase form you. In this instance, your market might include environmental enthusiasts who are willing to pay a premium for eco-friendly products, leisurely retirees who have can afford your goods, and successful entrepreneurs who want to show off their wealth.
  • Actionable: The market segment must produce the differential response when exposed to the market offering. This means that each of your segments must be different and unique from each other. Let’s say that your segmentation reveals people who love their pets and people who care about the environment have the same purchasing habits. Rather than have two separate segments, you should consider grouping both together in a single segment.

Market segmentation is not an exact science. As you go through the process, you may realise that segmenting based on behaviours doesn’t give you actionable segments, but behaviour does. You’ll want to iterate on your findings to ensure you’ve found the best fit the needs of your marketing, sales and product organisations.

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