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Market segmentation: Types, benefits and best practices

12 min read
Market segmentation helps your business efficiently target resources and messaging at specific groups of consumers. Here’s how it works.


What is market segmentation?

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.

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.

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 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 over (or under) sell yourself.
  12. Product development: You’ll be able to design 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.

Become a pro at market segmentation, by downloading this eBook

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.

 

Demographic
(B2C)
Firmographic
(B2B)
Psychographic
(B2B/B2C)
Behavioral
(B2B/B2C)
Definition Classification based on individual attributes Classification based on company or organization attributes Classification based on attitudes, aspirations, values, and other criteria Classification based on behaviors like product usage, technology laggards, etc.
Examples Geography Gender Education Level Income Level Industry Location Number of Employees Revenue Lifestyle Personality Traits Values Opinions Usage Rate Benefit Types Occasion Purchase Decision
Decision Criteria You are a smaller business or you are running your first project You are a smaller business or you are running your first project You want to target customers based on values or lifestyle You want to target customers based on purchase behaviors
Difficulty Simpler Simpler More advanced More advanced

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 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, income, family size, race, gender, occupation, and nationality. Demographic 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.

Geographic segmentation

Geographic segmentation can be a subset of demographic segmentation, although it can also be a type of segmentation in its own right. 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.

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.

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, and are therefore more likely to buy.

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 get started with segmentation

There are five primary steps to segmentation:

  1. Define your 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?
  2. Segment your market: Decide which of the five criteria (demographic/firmographic, psychographic, geographic or behavior) you want to use to segment your market. You don’t need to stick to just one – in fact, most brands use a combination – so experiment with each one and find what works best.
  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 on 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.

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 those 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 behavior 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 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 realize that segmenting based on behaviors doesn’t give you actionable segments, but behavior 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.

Mass personalization, at scale

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.

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.

Get the eBook: How to Drive Profits with Customer Segmentation