Market segmentation: Definition, types, benefits, & best practices

What is market segmentation?

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.

By understanding your market segments, you can leverage this targeting in product, sales, and marketing strategies. 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.

Read on to understand why segmentation is important for growth and the types of market segmentation to use to maximize the benefits for your business.

Free eBook: How to drive profits with customer segmentation

The benefits of market segmentation

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 organizations with great market segmentation strategies enjoyed a 10% higher profit than companies whose segmentation wasn’t as effective over a 5-year period.

Other benefits include:

1. Stronger marketing messages: You no longer have to be generic and vague – you can speak directly to a specific group of people in ways they can relate to, because you understand their characteristics, wants, and needs.
2. Targeted digital advertising: Market segmentation helps you understand and define your audience’s characteristics, so you can direct your online marketing efforts to specific ages, locations, buying habits, interests etc.
3. Developing effective marketing strategies: Knowing your target audience gives you a head start about what methods, tactics and solutions they will be most responsive to.
4. Better response rates and lower acquisition costs: will result from creating your marketing communications both in ad messaging and advanced targeting on digital platforms like Facebook and Google using your segmentation.
5. Attracting the right customers: targeted, clear, and direct messaging attracts the people you want to buy from you.
6. Increasing brand loyalty: when customers feel understood, uniquely well served, and trusting, they are more likely to stick with your brand.
7. Differentiating your brand from the competition: More specific, personal messaging makes your brand stand out.
8. Identifying niche markets: segmentation can uncover not only underserved markets, but also new ways of serving existing markets – opportunities which can be used to grow your brand.
9. Staying on message: As segmentation is so linear, it’s easy to stay on track with your marketing strategies, and not get distracted into less effective areas.
10. Driving growth: You can encourage customers to buy from you again, or trade up from a lower-priced product or service.
11. Enhanced profits: Different customers have different disposable incomes; prices can be set according to how much they are willing to spend. Knowing this can ensure you don’t oversell (or undersell) yourself.
12. Product development: You’ll be able to design new products and services with the needs of your customers top of mind, and develop different products that cater to your different customer base areas.

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

The basics of segmentation in marketing

Understanding segmentation starts with learning about the various ways you can segment your market as well as different types of market segmentation. 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 what causes people to purchase your products. In many cases, a predictive model may be incorporated into the study so that you can group individuals within identified segments based on specific answers to survey questions.

Demographic segmentation

Demographic segmentation sorts a market by elements such as age, education, household income, marital status, family size, race, gender, occupation, and nationality. The demographic approach is one of the simplest and most commonly used types of market 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. It’s also seen as a simple method of predicting future behavior, because target audiences with similar characteristics often behave in similar ways.

How to start demographic segmentation

Demographic segmentation is often the easiest because the information is the most readily available. You can send surveys directly to customers to determine their demographic data, or use readily available third party data such as government census data to gather further information.

Geographic segmentation

Geographic segmentation can be a subset of demographic segmentation, although it can also be a unique type of market segmentation in its own right. As its name suggests, it 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.

How to start geographic segmentation

Geographic segmentation data again can be solicited from customers through surveys or available third party market research data, or can be sourced from operational data such as IP addresses for website visitors.

Firmographic segmentation

Firmographic segmentation is similar to demographic segmentation, except that demographics look at individuals while firmographics look at organizations. Firmographic segmentation would consider things like company size, number of employees and would illustrate how addressing a small business would differ from addressing an enterprise corporation.

How to start firmographic segmentation

Firmographic segmentation data can be found in public listings for companies and information that the business makes available, as well as trade publications. Again, surveying existing and potential customers can help to build out this data.

Behavioral segmentation

Behavioral Segmentation divides markets by behaviors and decision-making patterns such as purchase, consumption, lifestyle, and usage. For instance, younger buyers may tend to purchase bottled body wash, while older consumer groups may lean towards soap bars. Segmenting markets based on purchase behaviors enables marketers to develop a more targeted approach, because you can focus on what you know they are looking for, and are therefore more likely to buy.

How to start behavioral segmentation

Of all the types of market segmentation, behavioral segmentation is likely best started with the information you have on an existing customer base. Though it can be bolstered by third party market research data, the information you already have on customer purchase and usage behavior will be the best predictor of future behavior.

Psychographic segmentation

Psychographic segmentation considers the psychological aspects of consumer behavior 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.

How to start psychographic segmentation

Pychographic segmentation relies on data provided by the consumers themselves. Though market research might provide insights on what particular segments are most likely to believe or prefer, psychographic segmentation is best completed with information direct from the source. You can use survey questions with a qualitative focus to help draw out insights in the customers’ own voice.

On-demand webinar: How to drive product design and profits with customer segmentation

How to get started with segmentation

There are five primary steps to all marketing segmentation strategies:

1. Define your target market: Is there a need for your products and services? Is the market large or small? Where does your brand sit in the current marketplace compared to your competitors?
2. Segment your market: Decide which of the five criteria you want to use to segment your market: demographic, firmographic, psychographic, geographic, or behavioral. You don’t need to stick to just one – in fact, most brands use a combination – so experiment with each one to figure out which combination works best for your needs.
3. Understand your market: You do this by conducting preliminary research surveys, focus groups, polls, etc. Ask questions that relate to the segments you have chosen, and use a combination of quantitative (tickable/selectable boxes) and qualitative (open-ended for open text responses) questions.
4. Create your customer segments: Analyze the responses from your research to highlight which customer segments are most relevant to your brand.
5. Test your marketing strategy: Once you have interpreted your responses, test your findings by creating targeted marketing, advertising campaigns and more for your target market, using conversion tracking to see how effective it is. And keep testing. If uptake is disappointing, relook at your segments or your research methods and make appropriate changes.

Market segmentation strategy

Why should market segmentation be considered a strategy? A strategy is a considered plan that takes you from point A to point B in an effective and useful way. The market segmentation process is similar, as there will be times you need to revisit your market segments, such as:

In times of rapid change: A great example is how the Covid-19 pandemic forced a lot of businesses to rethink how they sell to customers. Businesses with physical stores looked at online ordering, while restaurant owners considered using food delivery services.

If your customers change, your market segmentation should as well, so you can understand clearly what your new customers need and want from you.

On a yearly basis: Market segments can change year over year as customers are affected by external factors that could alter their behavior and responses.

For example, natural disasters caused by global warming may impact whether a family chooses to stay living in an area prone to more of these events. On a larger scale, if your target customer segment moves away from one of your sales regions, you may want to consider re-focussing your sales activities in more populated areas.

At periodic times during the year: If you’ve explored your market and created market segments at one time of the year, the same market segments may have different characteristics in a different season. Seasonal segmentation may be necessary for better targeting.

For example, winter has several holidays, with Christmas being a huge influence on families. This holiday impacts your market segments’ buying habits, how they’ll behave (spending more than normal at this time than any other) and where they will travel (back home for the holidays). Knowing this information can help you predict and prepare for this period.

When considering updating your market segmentation strategy, consider these three areas:

1. Acknowledge what has changed: Find out what has happened between one time period and another, and what have been the driving forces for that change. By understanding the reasons why your market is different, you can make key decisions on whether you want to change your approach or stay the course.
2. Don’t wait to start planning: Businesses are always adapting to long-term trends, so refreshing market segmentation research puts you in a proactive place to tackle these changes head-on. Once you have your market segments, a good idea is to consider the long-term complications or risks associated with each segment, and forward-plan some time to discuss problem-solving if those issues arise.
3. Go from “what” to “why”: Why did those driving forces come about? Why are there risks with your target market? At Qualtrics, we partner with companies to understand the different aspects of target markets that drive or slow success. You’ll have the internal data to understand what’s happening; we help unleash insight into why with advanced modeling techniques. This helps you get smart market segmentation that is predictive and actionable, making it easier for future research and long-term segment reporting.

Free eBook: How to drive profits with customer segmentation

Market segmentation use case examples

Where can you use market segmentation in your business? We’ve collected some use case scenarios to help you see how market segmentation can be built out across several departments and activities:

Market and opportunity assessments

When your business wants to enter into a new market or look for growth opportunities, market segmentation can help you understand the sales potential. It can assist in breaking down your research, by aligning your findings to your target audience groups.

For example, When you’ve identified the threats and opportunities within a new market, you can apply your customer segment knowledge to the information to understand how target customers might respond to new ideas, products, or services.

Segmentation and targeting

If you have your entire market separated into different customer segments,  then you have defined them by set criteria, like demographics, needs, priorities, common interests, or behavioral preferences.

With this information, you can target your products and services toward these market segments, making marketing messages and collateral that will resonate with that particular segment’s criteria.

Customer needs research

When you know a lot about your customers, you can understand where your business is connecting well with them and where there can be improvements.

Market segmentation can help with customer needs research (also known as habits and practices research) to deliver information about customer needs, preferences, and product or service usage. This helps you identify and understand gaps in your offerings that can be scheduled for development or follow-up.

Product development

If the product or service you’ve developed doesn’t solve a stated problem of your target audience or isn’t useful, then that product will have difficulty selling. When you know what each of your market segments cares about an/d how they live their lives, it’s easier to know what products will enrich or enhance their day-to-day activities.

Use market segmentation to understand your customers clearly, so that you can save time and money developing products and services that your customers will want to purchase.

Campaign optimization

Marketing and content teams will value having detailed information for each customer segment, as this allows them to personalize their campaigns and strategies at scale. This may lead to variations in messaging that they know will connect better with specific audiences, making their campaign results more effective.

When their marketing campaigns are combined with strong calls to action targeted to the specific segment, they will be a powerful tool that drives your target market segments towards your sales channels.

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 your segment will spend on your product. For example, one of your segments may be made up of people who are more likely to shop during a promotion or sale.
• Accessible: Understanding your customers and being able to reach them are two different things. Your segments’ characteristics and behaviors should help you identify the best way to meet them. For example, you may find that a key segment is resistant to technology and relies 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 from you. In this instance, your market might include environmental enthusiasts who are willing to pay a premium for eco-friendly products, leisurely retirees who 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 that people who love their pets and people who care about the environment have the same purchasing habits. Rather than having 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 realize that segmenting based on behaviors doesn’t give you actionable segments, but behavioral segmentation does. You’ll want to iterate on your findings to ensure you’ve found the best fit for the needs of your marketing, sales and product organizations.

Common segmentation errors

We’ve outlined the do’s, so here are some of the dont’s:

• Avoid making your segments too small or specialized: Small segments may not be quantifiable or accurate, and can be distracting rather than insightful
• Don’t just focus on the segment rather than the money: Your strategy may have identified a large segment, but unless it has the buying power and wants or needs your product, it won’t deliver a return on investment
• Don’t be inflexible: Customers and circumstances change, so don’t let your segments become too entrenched – be prepared to let them evolve.

Qualtrics solutions for market segmentation

Market segmentation doesn’t need to be complicated to be effective. We would advise, though, to get automated from the beginning. Forget spreadsheets – choose market segmentation software to measure and streamline your marketing strategy; as you grow, the technology will scale with you.

Innovative features such as XM Directory allow you to build your own customer segments and start personalizing experiences at scale based on the rich insights into your critical customer groups.

If you want to get a feel for your market segmentation upfront, before taking a step towards a streamlined and integrated system, trust us to take you through the research with our Market Segmentation Research service.