What is market segmentation?

Market segmentation is the process of categorizing a target market into smaller and more defined groups. These divisions are based on demographic, geographic, firmographic, psychographic, and behavioral traits. The information is then used to optimize a company’s products, services, or marketing and advertising campaigns.

The purpose of market segmentation

Market segmentation aims to identify target audiences of consumers who recognize the full value of a product or service to tailor it according to their needs, preferences, interests, location, and demographics. It makes your offering more attractive and seeks to eliminate risks and hurdles in the journey of the buyer. It also offers clarity about the development, piloting, marketing, and delivery of a product. This allows companies to focus their resources on efforts that are both responsible and profitable.

The benefits of market segmentation

  • You understand your consumer better

Market segmentation helps identify unaddressed aspects of a buyer’s persona. Apart from the market fit, it pervades advertising design and planning, package design, pricing, marketing strategy development, merchandising, and e-commerce.

  • You have a better positioning

Defining consumer preferences gives you the perspective you need to develop better brand positioning strategies that are directly linked to consumer loyalty, consumer-based brand equity, and the willingness to buy your product or service.

  • You attract and convert quality leads

Marketing and advertising tactics are too many to count. But finding your ideal audience needs a surgical approach. Besides, it is possible to make the best use of your budgets when you know when, where, and how to advertise.

  • You stand out from competitors

Market segmentation allows you to be more specific about your value propositions and messaging which sets you apart from competitors. 

  • You develop customer loyalty and retention

Staying relatable, attractive, and engaging is key to retaining them. Repeat customers are the loyal ones. This distinct value and messaging leads to a stronger bond between brands and customers securing a lasting brand affinity.

  • You know your strengths and weaknesses and optimize them

What’s appealing to your customers is a humanized image of your brand. An awareness of your strengths and weaknesses along with a knowledge of who your target groups are helps iron out gaps and tread upon the complex terrain of market demand. 

  • You minimize risks

Market segmentation aims to stay committed to your consumer and understand the inadequacies of data and its misinterpretation. A good segmentation technique foresees risks and manages them in good time with ease.

  • Your messaging is stronger

Market segmentation infuses your brand’s messaging with simplicity, clarity, and directness. The data and insights allow you to speak to your target groups in a way that is attractive to them. It avoids vague, generic language and speaks to the needs, wants, and unique characteristics of your target audience.

  • You make sounder decisions

Segmentation analysis must not be a siloed effort but a pervasive priority. It helps avoid arbitrary criteria and make informed decisions based on verified facts.

  • You find optimal opportunities and set doable goals

Understanding your audience personas clarifies the best channels to reach out to them on, the partnerships that can add value to your campaigns, and the objectives that you need to achieve.

How to do a market segmentation analysis

Fix the objectives

Define for yourself what the purpose of a market segmentation analysis is. Identify the customer segmentation models and variables that apply to your specific target groups and niche market. Then develop objectives and a hypothesis based on your findings.

Identify existing and possible customer segments

A segmentation analysis will need a research design, data collection, analysis of the results, and their interpretation before you pin down your target segments. Each of these steps will either validate or refute your predetermined hypothesis. Data can be collected from interviews with your customers, with your sales team, researching your business data, customer interests, needs, preferences, location, demographics, keyword search terms, and website analytics. 

Evaluate the target segments and create buyer personas

Segment audiences and choose viable options before you go forward with the product piloting, marketing, distribution. You may do this through online focus groups or surveys or get a market research enabler to do it for you. A buyer persona is a semi-fictional character sketch of your ideal customer which allows you to clearly visualize the audiences you are targeting. 

Develop a segmentation strategy

Select a target group, identify the implications of it to the business, test the viability of your product, set project goals and your product status. A segmentation strategy may require you to answer some key business questions like:

  • What problems do you address? How do the competitors address these issues?
  • What are the strengths, weaknesses, opportunities, and threats?
  • How do customer segments stand out because of size or uniqueness?
  • Which characteristics and traits are common and how can your brand relate to them?
  • Can certain customer segments imply an adjacent or emerging market for your brand?
  • Which segments fit with your product or service well?

Identify the best way to launch

Before you launch, it is good to check in with stakeholders, brainstorm, ideate, communicate, pilot your offering, learn, unlearn, and make a decision for the launch of your project. 

The 5 types of market segmentation

There are many ways to categorize your audiences but five of them have not been challenged yet. They are: behavioral, psychographic, demographic, geographic, and firmographic.

Behavioral Segmentation

Behavioral segmentation is done based on a customer’s choices. Choices, in turn, depend on behavior patterns that depend on factors like loyalty, engagement, usage, and occasion. Other behavioral segmentation variables may be the benefit of a product or service, the readiness to buy, usage and utility-based segmentation, and common characteristics.

It is important to also determine the engagement levels of the consumer throughout the purchase journey, specific trends in the timing and occasion of the customers, and your definition of the ideal customer. These variables help figure out future customer leads and which prospects are more likely to buy, most likely to return, and most likely to leave. Your target’s digital footprint may also be studied and the data may be compiled to understand preferences. Key insights may also be communicated with the marketing and support teams to cushion the pre and post-purchase journey of the consumers. 

Psychographic Segmentation 

Psychographics focus on inner qualitative traits and variables like lifestyle, opinions, interests, values, habits, personalities, and social status. These attributes are layered and more nuanced than behavioral and demographic traits.

Ideally used to develop a “brand personality,” or brand personification which helps communicate with appropriate audiences better. 

Furthermore, it is becoming increasingly popular to establish the brand’s voice through detailed quantitative and qualitative feedback surveys that evaluate the beliefs, values, and habits of online focus groups.

A.I technologies are also becoming increasingly efficient which allows for a deeper understanding of consumer insights. Voice search through devices like Google Home and Amazon’s Alexa is also an essential part of psychographic segmentation and sculpting of consumer profiles. 

Ethical concerns on data privacy, identity tracking, voice, and facial recognition arise in this arena. The onus is on the corporates to use data with consent, transparency, and responsibility. Trust has a direct correlation to efficiency in the marketplace and tech innovations in market research and segmentation.

Demographic Segmentation

Demographics are a breakdown of customer personas for variables like age, gender, family size, income, occupation,  religion, education, marital status, political party status, race, living status. Moreover, these traits are usually less intrusive and are simpler to collect. You may also find them in the census data.

Geographic Segmentation

Geographics study consumer data like location, city, state, country, zip code, population density, weather. This type of data is well paired with abstract data like behavioral. Studying customer geography makes sense for region-specific products and services like food delivery and taxi rentals.

Firmographic Segmentation

Firmographics are to firms and investors what demographics are to people. This segmentation is used to determine whether a smaller firm is apt for an investment.

Firmographic data includes information about the industry, sales volume, size, methodologies, the vision of the executive team, the product’s target market, performance, and annual revenue, average sales cycle, size and employee population, ownership, etc

Firms are of different kinds: non-profits, businesses, government entities, agencies, small retail shops, and independent contractors. Investing in smaller firms is a risk. Venture opportunities need to be segmented before investments to minimize that risk.

Ensuring effective market segments

Aftermarket segmentation, you’ll need to make sure your findings are useful. A good segmentation analysis should be:

Measurable: Your segmentation variables should be directly related to purchasing the product or service.

Accessible: The insights you gather about your target groups should determine the best ways to meet them.

Substantial: The market segments you identify must not only be interested in you but can be expected to purchase from you. 

Actionable: Each of the segments you identify must be unique from the other.

Time-bound: Finally, make sure your segmenting is based on specific timelines and that you don’t miss goalposts.

Segmentation mistakes to avoid

Market segmentation is not a precise science. The process may need iteration to arrive at a good market fit be it a sales, marketing, or product organization.

  1. Your segmentation does not align with your goals.
  2. You segment based on instinct, not verifiable data.
  3. You’ve created segments based on scarce, old, or superfluous data.
  4. You ignore channels, time, and influencers while developing segments.
  5. The segments are too broad or too narrow.

Summing up segmentation analysis 

Market segmentation identifies targeted groups of consumers to contour products and branding in a way that is most relevant to them. Segmenting may be done based on demographics, behaviors, geography, psychographics, and firmographics. Good segmentation analysis is measurable, accessible, substantial, actionable, and time-bound.