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What is market segmentation?

Last updated

18 March 2023

Reviewed by

Hugh Good

Any market has a mixture of customers with various needs, preferences, and buying criteria. While you can engage with customers at a total market level, identifying and focusing on individual segments will ensure the best use of limited marketing budgets and efforts, which is why market segmentation is so important. Identifying how to direct your marketing efforts to potential customers will ensure the business's success. 

Learn all about market segmentation, what it is, how to do it, and the benefits of a properly implemented market segmentation.

What is market segmentation?

It involves sectioning the total addressable market into discrete, smaller groups. This marketing technique is used to group or ‘segment’ buyers with common characteristics to tailor their needs. 

Each group shares common characteristics that enable the firm or business to create targeted experiences or products for them. A group may have customers with the same income, personality traits, age, religion, or interests. 

Why is market segmentation important?

Market segmentation allows for the customization of brand messages or products for different customers. Using customization, customers will feel more valued and appreciated since the brand caters directly to their needs and wants. It is also essential in determining different consumer groups’ purchasing habits. For a brand, it helps identify social, cultural, or economic factors influencing different customer groups’  purchasing behaviors. 

Furthermore, market segmentation allows businesses to identify the most promising customer groups to focus their marketing efforts on. With a well-segmented market, brands have better alignment with their goals and have a sharper focus on their different customer groups, thus delivering better business results. 

Five types of market segmentation

The types of market segmentation used today include:

1. Demographic segmentation

This is the most common type of market segmentation. It refers to sectioning the market using different variables such as nationality, education, gender, age, income, or personality. You can use demographic surveys to reveal these characteristics of the target market. 

2. Firmographic segmentation

This type of segmentation is common in business-to-business marketing. It relies on the characteristics of business customer groups, such as the number of customers, size of the firm, profits, ownership, location, or annual revenue, to identify groups of businesses most likely to benefit from another business's services or products. 

3. Geographic segmentation

This involves sectioning the target market based on geographical location. For example, geographical segmentation allows businesses to section customers depending on where they live or work. Under this type of segmentation, geographical boundaries such as states, countries, regions, and towns/cities determine how to tailor the product or service to customers in that location. 

4. Behavioral segmentation

This refers to sectioning the market depending on customer behavior. Behavioral segmentation allows businesses to segment the target audience by their decision-making patterns and behaviors. It involves knowing both the customer's attitudes and perspectives towards your brand and how this plays out in their actions and behavior. 

5. Psychographic segmentation

This groups the target audience based on their lifestyle, beliefs, values, interests, and attitudes. Psychographic segmentation provides a framework for understanding the psychological factors behind customers' purchasing decisions. This type of segmentation allows a brand to understand the motivations behind why customers make certain choices, i.e., the attitudes and beliefs driving behavior. 

Benefits of market segmentation

A segmentation driven marketing strategy offer several business benefits. The following describes some of the key ones:

1. Improves campaign performance

Market segmentation allows companies to know their target audience and tailor the perfect message that appeals most to them. When a business identifies and understands its key audience, it can appropriately communicate brand values and benefits of the products or services they are offering to its customers. 

2. Informs product development

It also encourages the development of new products that will cater to the customers' needs. Once a brand focuses on its target audience, it can learn what they need and identify product gaps in the market. Through market segmentation, companies can develop new products with the right features that specific audiences will likely buy. 

3. Reveals areas to expand

With segmentation, a brand can uncover new information on its target audiences. Segmentation can reveal untapped areas with potential customers into which your brand can expand. 

4. Improves business focus

Business focus is among the most important benefits of market segmentation. When a company concentrates on target customers, its focus improves. A brand can focus on targeted segments with the right products or services. In addition, a business has clear objectives which automatically enhance the firm's business focus. 

5. Informs other business decisions

With valuable insights gathered from identifying the target audience, a business can unearth helpful information that can help them make better-informed business decisions. Market segmentation allows companies to consider other decisions like pricing and distribution strategies. A company will consider the customer's price sensitivity and how to boost sales while satisfying their target audiences. 

6. Build customer loyalty

Market segmentation is also an excellent way to retain customers. When you tailor products or services to meet customers' needs, customers overall can be maintained and improved. Customer retention rate increases and they become more loyal to the brand. 

7. Reach new markets

With the use of geographic segmentation, reaching new markets is possible. Through market segmentation, businesses can identify hidden and underserved markets. Once identified, businesses can develop products and strategies to serve customers in these markets. 

8. Reduce customer acquisition costs

Also, by tailoring market campaigns, businesses can make a more cost-effective use of marketing resources and save on costs required for customer onboarding. Market segmentation is cost-effective since it allows a business to focus on specific resources that attract their target audience while spending less time on non-core audiences. 

9. Build better products

When a company narrows down to a specific target market, it can focus on customers' pain points concerning certain products. With the newly acquired information, companies can develop better products that meet their customer's needs and address their challenges.

How to determine your market segment

Although there is no single way to determine your market segment, the following steps can be helpful.

Step 1: Set clear objectives

The first step in determining your market segment is to set clear objectives. This includes clarifying the goals and expectations of performing a market segmentation. 

Step 2: Collect data through market research

Market research goes beyond understanding your customers to have a macro level view of the marketplace as a whole. You can do this through online focus groups, in-person interviews, research surveys, or polls. Also, use analytic tools like Alexa and Quantcast to give you an overview of your customers. The US Census Bureau site is also helpful in gathering demographic information such as income, education, gender, and age. 

Step 3: Create buyer personas

Buyer personals are semi-fictional representations of the target audiences. To help you create buyer personas, use the following approaches:

  • Use research from third parties combined with your own insights

  • Gather feedback from your sales team

  • Send out customer surveys

Once you have collected the information, organize groups based on the various buyer personas. 

Step 4: Build marketing strategies

Based on the collected responses, identify the market segments that are most relevant to your brand. Many firms use a combination of segmentation strategies to build a marketing strategy. However, choose one that fits naturally with the identified target market. Some of the marketing strategies to use include:

  • Pricing

  • Expansion opportunities

  • Niche markets

Step 5: Test a marketing strategy that works

Once the segments are in place, test the findings and review the customer segments while making appropriate changes where needed. Then, create segmented marketing campaigns which communicate directly to the customer persona. For instance, consider communicating around unique values or beliefs that resonate best with them. 

What are some market segmentation strategies?

The four market segmentation strategies used by firms to segment their target population are:

Undifferentiated strategy

This involves using a mass marketing approach to sell products to customers. Under this strategy, the entire market is targeted instead of a small segment. An example is generic consumables such as salt or sugar. You can advertise products using this approach, as many consumers have the same needs for the products. 

Companies that use the strategy include Coca-Cola and Colgate, who have overwhelming market share and mass market appeal. They sell products that do not require customer segmentation, as they target all consumers within a population. 

Concentrated strategy

This is where a business chooses only one market segment to focus its resources on. The market segmentation strategy is common among smaller businesses starting out in the marketplace. The advantage is that it allows companies to analyze the needs of only one segment and design product and communication strategies to match. 

 Differentiated strategy

This is where the business focuses on two or more market segments. Under this strategy, the firm develops a distinct marketing mix for each segment. The advantage of a differentiated marketing strategy is an increase in total sales, as it targets a larger proportion of the addressable market versus a concentrated strategy. However, its drawback is the higher costs of developing multiple marketing and product development programs. 

Hyper-segmentation

This is a strategy that allows for customization for each particular individual. It focuses on creating unique and targeted experiences tailored for each customer. Hyper-segmentation strategy utilizes data analytics, artificial intelligence, and automation to personalize products and services. For instance, Amazon may provide suggestions based on previous purchases unique to an individual customer based on specific individual customer data. 

Examples of market segmentation

You can see market segmentation in everyday advertising campaigns. Some examples include:

  • A clothing store may segment its target consumers based on the location of where these customers live. The brand may advertise its products to accommodate customers based on these locations. Also, based on the location, the firm may sell seasonal products like winter or summer clothing based on its geographic segmentation. For instance, in a region that is cold most of the year, the business may want to promote the sale of warm and cozy outfits.

  • Streaming services like Netflix segment the target market based on the age of their target audience—for instance, child versus adult content. They may also section their market based on the tech-savviness of their users. Spotify, for example, may target younger adults, especially Gen Z and millennials, rather than older adults. 

  • A sports brand like Nike sections its target market based on customers' interests. For instance, it will tailor products for athletes, gym lovers, sportswomen, and sportsmen. The sportswear manufacturer may modify their products and communications to cater to the needs that appeal to each distinct group. 

Limitations of market segmentation

Although market segmentation offers many benefits, the technique also has limitations that include the following:

It needs extensive research and therefore can be expensive

Brands often spend significant resources gathering data and researching their broad customer bases. In addition, companies may need to create customized marketing strategies for the different segments of customers (if they aim to cater to multiple segments). Brands may also have to spend an increased amount on production costs to satisfy the different segments, again, if they choose to target multiple ones. 

Has a higher reliance on up-to-date data

Market segments evolve; thus, keeping up to date with them can be expensive and time consuming. Segmentation requires businesses to be mindful of the changing trends to tailor services and products that cater to their customers' needs. 

It is expensive and time consuming to cater to small numbers of individuals

Producing products for every individual is not feasible for most brands. Tailoring specific products for many different market segments is more expensive than mass production, and mass marketing to all potential customers. Also, being very specific with your targeting risks alienating potential customers who may fall outside your segments. 

It increases the risk of inappropriate targeting

Market segmentation increases the risk of inappropriately marketing products to the wrong audience. In addition, since you base market segmentation on the idea that similar demographics have the same values and share similar traits, there is a risk the company may lump together the needs and preferences of people within that segment and not capture important individual nuances.

Three common segmentation errors

Here are the common mistakes that businesses make when sectioning their target markets:

1. Segments becoming obsolete

By not updating your market segments frequently, you risk losing customer relevance and loyalty. Customer trends change fast. Thus, it is crucial that you perform quarterly or yearly surveys to ensure you capture the target audience's changing needs. 

2. Creating segments that are too small

When you choose and focus on a market segment that is too small, there will be less potential for revenue and turnover, which in turn affects the profitability of the business.

3. Not focusing on the return on investment

Market segments do not always guarantee profits. For instance, a larger customer segment may not have the purchasing power for your product or services compared to a smaller but more affluent segment, which may lead to lower overall profitability or negative returns.

Learn more about market research platforms

FAQs

What are the five essentials of effective market segmentation?

An effective market segment should be measurable, actionable, accessible, substantial, and identifiable.

Which companies use market segmentation?

Many companies use market segmentation to target various categories of their customer base—for example, Proctor and Gamble, Netflix, Apple, and Unilever.

Does Amazon rely on market segmentation?

Amazon has segmented its market to include potential new customers as well as frequent shoppers. In addition, it uses behavioral segmentation to understand its target audience. 

What is Nike's market segmentation?

Nike incorporates four types of market segmentation (geographic, demographic, behavioral, and psychographic) to create personalized products for its customer base.

What is McDonald's segmentation?

McDonald's marketing segmentation focuses primarily on demographic segmentation. Their products mainly target families, children, and students interested in fast and convenient foods.

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