What is market segmentation?
Market segmentation is the practice of dividing a into smaller groups of customers who share common characteristics, such as age, location, behavior, or values. Grouping buyers this way lets you tailor products, messages, and experiences to each segment instead of marketing to everyone at once.
Every market contains customers with different needs, preferences, and buying criteria. Focusing on individual segments makes the best use of a limited marketing budget and directs your efforts toward the customers most likely to buy.
This guide covers what market segmentation is, how to do it, and the benefits of getting it right.
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What is market segmentation?
Market segmentation involves sectioning the total addressable market into discrete, smaller groups. This marketing technique groups—or ‘segments’—buyers with common characteristics so you can tailor to 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. With customization, customers feel more valued and appreciated since the brand caters directly to their needs and wants. It’s also essential in determining different consumer groups’ purchasing habits. For a brand, it helps identify the social, cultural, or economic factors influencing different customer groups’ purchasing behaviors.
Market segmentation also allows businesses to identify the most promising customer groups to focus their marketing efforts on. With a well-segmented market, brands align better with their goals and sharpen their focus on different customer groups, delivering better business results.
Five types of market segmentation
The types of market segmentation used today include:
1.
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 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 the 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, geographic 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 or 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 . 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 toward your brand and how those play out in their actions.
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. It allows a brand to understand why customers make certain choices—the attitudes and beliefs driving behavior.
Benefits of market segmentation
A segmentation-driven marketing strategy offers several business benefits. Here are some of the key ones:
1. Improves campaign performance
Market segmentation allows companies to know their target audience and tailor the message that appeals most to them. When a business identifies and understands its key audience, it can communicate the brand values and benefits of its products or services appropriately.
2. Informs product development
Segmentation also encourages the development of new products that cater to customers’ needs. Once a brand focuses on its target audience, it can learn what they need and identify product gaps in the market. Companies can then 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 about 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 target segments with the right products or services, and clear objectives automatically enhance the firm’s business focus.
5. Informs other business decisions
With insights gathered from identifying the target audience, a business can make better-informed decisions. Market segmentation allows companies to weigh decisions like pricing and distribution strategies. A company will consider the customer’s price sensitivity and how to boost sales while satisfying its target audiences.
6. Build customer loyalty
Market segmentation is also an excellent way to retain customers. When you tailor products or services to meet , satisfaction improves. increases, and customers become more loyal to the brand.
7. Reach new markets
With 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
By tailoring marketing campaigns, businesses make more cost-effective use of marketing resources and save on customer onboarding costs. Market segmentation lets a business focus resources on attracting its 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 concerning certain products. With that information, companies can develop better products that meet their customers’ needs and address their challenges.
How to determine your market segment
There’s no single way to determine your market segment, but the following steps can help.
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 give you a macro-level view of the marketplace as a whole. You can do this through online , in-person interviews, research surveys, or polls. Web and audience analytics tools can also give you an overview of your customers. The US Census Bureau site is helpful for gathering demographic information such as income, education, gender, and age.
Step 3: Create buyer personas
Buyer personas are semi-fictional representations of the target audiences. To help you create , 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’ve 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 most relevant to your brand. Many firms use a combination of segmentation strategies to build a marketing strategy. Choose one that fits naturally with the identified target market. Some of the marketing strategies to consider 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, making changes where needed. Then create segmented marketing campaigns that speak directly to the . 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 firms use 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, which have overwhelming market share and mass-market appeal. They sell products that don’t require , 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 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 than a concentrated strategy. Its drawback is the higher cost of developing multiple marketing and programs.
Hyper-segmentation
This strategy allows for customization for each particular individual. It focuses on creating unique, targeted experiences tailored to each customer. Hyper-segmentation relies on data analytics, artificial intelligence, and automation to personalize products and services. For instance, Amazon provides suggestions based on an individual customer’s previous purchases and specific 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 where those customers live and advertise its products accordingly. Based on location, the firm may also sell seasonal products like winter or summer clothing. In a region that’s cold most of the year, the business may promote warm, cozy outfits.
- Streaming services like Netflix segment the target market based on the age of their 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 its products and communications to cater to the needs of each distinct group.
Limitations of market segmentation
Although market segmentation offers many benefits, the technique also has limitations, including the following:
It needs extensive research and therefore can be expensive
Brands often spend significant resources gathering data and researching their broad customer bases. Companies may also need to create customized marketing strategies for different segments of customers (if they aim to cater to multiple segments). Brands may also have to spend more on production costs to satisfy the different segments they choose to target.
Has a higher reliance on up-to-date data
Market segments evolve, so keeping up with them can be expensive and time-consuming. Segmentation requires businesses to be mindful of changing trends so they can 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 isn’t feasible for most brands. Tailoring specific products for many different market segments costs more than mass production and mass marketing to all potential customers. And being very specific with your targeting risks alienating potential customers who fall outside your segments.
It increases the risk of inappropriate targeting
Market segmentation increases the risk of marketing products to the wrong audience. And since segmentation assumes that similar demographics share the same values and traits, a company may lump together the needs and preferences of people within a segment and miss important individual nuances.
Three common segmentation errors
Here are the common mistakes 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, so run quarterly or yearly surveys to capture the target audience’s changing needs.
2. Creating segments that are too small
When you choose and focus on a market segment that’s too small, there’s 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 don’t 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.
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