Imagine that you spend heavily on marketing only to find that your actions failed to influence the right customers, appealing instead to a mass of individuals who do not truly want or need your product.
This is the challenge businesses face with audiences who have diverse desires, needs, resources, priorities, and buying behaviors.
Segmentation helps companies solve this problem by allowing them to break down what would otherwise be an overwhelming mass of customers into manageable groups of individuals with shared characteristics or behaviors.
This enables business owners and marketers to make their efforts with products and messaging better tailored to the people they are targeting.
What Is Market Segmentation?
Market segmentation refers to dividing a broad target market into groups of audiences that share similarities.
For example, businesses often segment based on age, income, educational status, or job, location and geography, interests and lifestyles, and purchasing behaviors and attitudes.
However, effective market segmentation goes beyond basic categorization and aims to ensure that firms understand the differences and similarities of buyers, their likes, dislikes, decision-making processes, and preferences.
A company may find, for instance, that the buyers of its product fall into three broad categories: budget-savvy students, time-poor professionals, and serious sportspersons. Understanding these differences in a market is critical, since any misstep may render a business’s marketing ineffective.
Why Is Market Segmentation Important?
Developing a segmentation strategy can benefit a firm in numerous ways, influencing all aspects of its marketing activities, from advertising to product development.
Below are five benefits of market segmentation.
1. More Relevant Marketing
People are significantly more receptive to marketing that resonates with them.
Instead of developing a uniform marketing strategy that targets all, businesses can develop targeted initiatives that speak directly to the customers in each segment.
2. Better Insights Into Customers
Market segmentation enables businesses to go beyond the surface level and obtain powerful insights into their customers.
Firms can understand customer buying behaviors, motivations, concerns, and the impact of various approaches on their audiences.
The process can generate valuable qualitative and quantitative information that can inform a business’s broader marketing strategy and overall perspective of customers. For example, a
American Marketing Association
study found that the likes, dislikes, and opinions of individuals who buy from a company can give it valuable ideas on what to do differently.
3. More Value for Marketing Expenditure
Firms must ensure that each marketing dollar spent achieves value, and segmentation can play a critical role here.
While general audiences may present an attractive opportunity, they are not always the most attractive option. Businesses therefore strive to invest in the most receptive audiences.
4. Closer Connection to Customers
Personalized marketing can make customers feel valued as individuals, which can be tremendously advantageous in winning over an audience in an intensely competitive marketplace.
5. Identification of Niche Markets
In addition to helping businesses serve audiences better, segmentation can also help firms find and capitalize on niche markets.
A company can discover that certain customer segments have specialized or underserved needs and develop methods to appeal to them uniquely.
The Main Types of Market Segmentation
There are different ways of conducting market segmentation, and businesses may use a combination of them to gain a comprehensive perspective of their customers.
Below are the main types of market segmentation.
1. Demographic Segmentation
Demographic segmentation is the practice of breaking the market down into segments based on several factors, including age, gender, ethnicity, marital status, income level, education, and occupation. With this type of segmentation, businesses can target certain categories of people, such as women or members of the Generation Y.
Demographic information is relatively simple to identify, compared to many other methods. As such, businesses tend to use it extensively when segmenting markets. However, demography alone can be misleading, since it does not always identify the decision-maker or provide insights into the motives behind purchase decisions. As such, businesses may need to combine demographic segmentation with other approaches, such as behavioral segmentation.
2. Geographic Segmentation
This practice refers to organizing individuals according to the location they live in. A business may, for instance, base its segmentation on political, geographic, or climatic divisions. This approach can be applied at different levels, ranging from national to local.
Organizations may engage in geographic segmentation to determine whether the audiences they seek to target are local or international. In addition, the approach might inform a firm’s production strategy, particularly when different geographical areas have different preferences or appetites. Another example of geographic segmentation is a clothing retailer that decides to advertise its summer collection in warm climates and its winter collection in cold climates. This approach may be particularly informative for businesses that operate primarily at a local level or whose products or services vary significantly depending on the location. (
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3. Psychographic Segmentation
Psychographic segmentation involves grouping audiences based on personality, interests, opinions, and values. For example, businesses may decide to focus on customers who lead active lifestyles or who seek to minimize their environmental impact.
Unlike demographic segmentation, psychographic segmentation does not rely on easily identifiable traits such as age or gender. Instead, it looks at more complex characteristics, such as the attitudes and motivations of target audiences. For example, a young woman with a degree may have different preferences and purchasing behaviors from an older woman with a degree.
4. Behavioral Segmentation
With behavioral segmentation, businesses segment audiences based on behaviors demonstrated toward a business’s products and services. A firm may analyze purchasing habits and patterns, website traffic and behavior, and brand interactions to segment its audience. Some examples include first-time visitors to a website, repeat buyers of a company’s products, and customers who abandoned a purchase in the middle of a transaction. Understanding these behaviors can enable companies to create more effective marketing initiatives. According to the
American Marketing Association, behavioral segmentation allows researchers to identify consumers objectively, based on what they do or do not do. It is crucially important to update behavioral data regularly, as it reveals constantly evolving trends.
5. Attitudinal Segmentation
Attitudinal segmentation refers to analyzing the attitudes that customers have toward a brand, including their views, opinions, and thoughts. Businesses often use this type of segmentation to uncover different groups that share similar attitudes. An example is a business that recognizes that some customers are dissatisfied with the complexity of its products, whereas others are happy with them and even desire more intricate features. Attitudinal segmentation can be exceptionally informative. For instance, it can provide a business with a breakdown of its customers’ opinions about its pricing strategy.
Examples of the Uses of Market Segmentation
Market segmentation can cut across all elements of a business’s operations.
Below are examples of how a company might use market segmentation in its operations.
Product Development
Segmentation can play a crucial role in product development. Companies can use buyer personas and attitudes to identify unmet needs and develop products and services that meet them.
Pricing
Segmentation can help firms create pricing strategies that appeal to particular groups of customers.
Advertising
With an awareness of the different segments they can target, businesses can optimize their advertising, tailoring messages and media channels accordingly.
Customer Retention
Businesses can segment customers based on loyalty, then create retention strategies that apply to their particular segment.
Content Marketing
Companies can use segmentation to produce content marketing initiatives that apply to different audience segments, such as first-time visitors and those who revisit the company’s content.
How to Develop a Market Segmentation Strategy
It is possible to develop a market segmentation strategy without complex procedures.
Below are some steps a company can take to begin developing a segmentation strategy.
Step 1: Outline the Target Market
First, a business must outline the target market. In other words, it must identify the customers it is targeting. To do this, it may ask these questions: Who has the problem the company is seeking to solve? Who is the ideal customer for the firm? and What options do these customers have when considering buying from a business?
Step 2: Begin Collecting Information About the Customers
Next, a firm must start gathering information about its potential customers. It can do this through surveys, reviewing sales data, studying web analytics, and utilizing other relevant data. Businesses can also use CRM systems, social media, and customer reviews. Lastly, a company can carry out interviews and research and engage with customers to learn more about their needs and buying behaviors. The purpose of this step is to ensure the company has actual information about its customers, without simply relying on assumptions.
Step 3: Examine Patterns That Identify Customers and Their Differences
At this stage, a business must study the data to determine what trends or patterns indicate differences in customers. Some customers will buy frequently from a business, whereas others may only make a one-time purchase. Some people may be price-sensitive, whereas others will always buy the most expensive options. At this stage, it does not suffice to simply separate customers; a business must identify meaningful differentiators that it can use to form effective segments.
Step 4: Construct Personas Based on the Most Useful Segments
Once a company has developed useful segments, it can base personas on them. A customer persona is a representation of an actual customer, outlining key attributes, values, motivations, and behaviors. This helps a business to have a vivid picture of the customers it seeks to target.
Step 5: Test the Segmentation Model and Refine It if Necessary
Once a business has developed a segmentation model, it must begin testing and evaluating it. This involves testing different approaches, messaging, and strategies. It may also involve identifying which customers respond favorably to different initiatives and which are not as receptive. Businesses must also realize that segmentation is a living process that should continue to evolve. If new data emerges, the segmentation approach may need to change.
Some Common Mistakes to Avoid
Below are some of the mistakes that businesses may make as they engage with market segmentation.
Creating Too Many Segments
As mentioned above, a company must pursue meaningful segmentation that it can implement effectively. Creating small segments that have too little potential simply because they are different does not always make sense. Businesses must consider the cost-effectiveness and practicality of the different segments.
Relying Heavily on Demographics
Demographics might seem like an easy option for market segmentation. However, businesses should understand that data on age groups and other demographic categories can be misleading.
Using Outdated Information
If a company bases its market segmentation on outdated information, it is likely to fail. Business owners and marketers must realize that the behaviors of the market or audiences change over time.
Creating Segments That Are Irrelevant to the Decisions Made by Customers
Unless a business can identify meaningful differences and develop differentiating rules, market segmentation is unlikely to yield useful results. In other words, if two customers are treated the same and respond to the same advertisements, they are not likely to have responded differently to a segmentation model, and it does not make sense to split them.
Market Segmentation and the Future of Marketing
Today, business owners can rely on significantly more information about the audiences they wish to target and the market in general.
Digital interactions enable individuals to leave a trail of data about their behaviors, purchasing choices, and lifestyles. As such, businesses can utilize a wide range of techniques to analyze this data and understand their customers.
However, businesses must realize that more information does not always equal useful information. In other words, they must take their audience’s data and transform it into actionable steps to make better marketing choices.
Market segmentation can be an incredibly powerful approach to ensuring that businesses invest heavily in the right people. Modern markets are extremely competitive, and understanding the needs and decision-making processes of different customers can place a firm light-years ahead of the competition.
Final Thoughts
Ultimately, market segmentation is about making the crucial realization that individuals are not the same and that appealing to everyone is not always an effective approach.
Instead, businesses must recognize that audiences have different characteristics and behave differently and take advantage of this information to improve marketing options.
The most effective market segmentation strategies are nuanced enough that they allow businesses to tailor their approaches to specific individuals and flexible enough to evolve alongside changing needs or preferences.
With an awareness of the right information and its application, businesses can make the best choices in terms of market se
