It's too expensive for marketers to ask everyone to buy your next new thing. That's why, instead of scouring the entire ocean with a dragnet, successful marketers line bait with irresistible messaging to get the consumers to bite. The trick is to fish at the right spot—that's where market segmentation comes in.
Let's dive deeper into everything you need to know about market segmentation. After we cover what the process is, we’ll share the four best market segmentation practices to help your business garner the success you're looking for.
What is market segmentation?
Market segmentation refers to dividing your target customer base into approachable groups. It allows you to create subsets within a market based on shared interests, needs, and other behavioral or psychographic criteria.
Segmenting your markets helps you create more focused sales, product, and marketing strategies. Moreover, market segmentation helps you:
- Attract the right customers
- Increase brand loyalty
- Identify niche markets
- Improve response rate
- Lower acquisition costs
- Build stronger brand
- Drive growth
Companies like Best Buy and Mercedes Benz all use segmentation strategies to consistently increase sales, improve customer engagement, and build better products.
Interesting fact: The concept of market segmentation is over 100 years old. In his book New and Improved: The Story of Mass Marketing in America, Richard Tedlow tells us that in 1920, car manufacturers used it to design different models to meet the needs of demographic and psychographic market segments.
Types of market segmentation
Dividing your market into smaller, more specific segments requires extensive research and understanding of your target audience.
With a complex digital environment and endless competition, you can’t just define your market by audience demographics or geography. You must also add behavior and psychographic segmentation to understand your customers' interests and values better. Psychographic segmentation is the one that looks at behavior, rather than population characteristics, such as age, gender, income, etc.
For example, McDonald's segments its market based on geographical location (catering ramen-flavored French fries in Hong Kong); Sephora, on the other hand, attracts the behavioral segment by providing appealing rewards programs to its loyal customers.
YouTube Video: See how McDonald's leverages geographical segmentation.
Now that you understand how brands use different market segmentation types to appeal to different customers, let's discover how to implement these types into your marketing strategies.
There are five major steps you can follow for market segmentation:
- Define your target market: Assess the needs of your product in the marketplace. Define the market's size, your brand position, and potential segments that align with your business objectives.
- Segment your market: Choose your market segmentation criteria. A comprehensive segmentation strategy uses a combination of different criteria, including demographic, geographic, firmographic, psychographics, and behavior.
- Understand your market: Gain insight into your chosen market segment with thorough research methods, such as surveys, polls, and focus groups. Customize questions to understand your target customers' needs, preferences, and motivations. Use both quantitative and qualitative methods.
- Create your customer segment: Analyze the data you collect to create the most relevant customer segments for your businesses. Look for commonalities, patterns, and distinctive characteristics within every segment. This approach helps you tailor your marketing effort and maximizes your chances of success.
- Test your marketing strategies: Develop targeted marketing campaigns and promotional initiatives (best done with automated emails) for each identified segment. For instance, an effective reminder email can be a part of these automated emails, keeping your audience engaged and informed.
Use conversion rate tracking metrics to test their effectiveness. Consistently monitor and evaluate the outcomes to yield optimum results.
4 Effective Market Segmentation Practices
Market segmentation is the key to thriving marketing and sales strategies. To reap maximum benefits, here are the four best practices you can’t afford to miss:
Too many market segments lead to bloated and ineffective planning. Too few, and it won't be detailed enough to create personalized marketing and sales strategies. As a general rule of thumb, 6-8 segments work great for most businesses.
Choose only the most relevant and profitable segments based on your resources, goals, and competitive advantage. Then, focus on the segment with the highest demand, profitability, and growth potential that aligns with your value proposition and positioning.
Pro Tip: Use SWOT analysis or BCG matrix to evaluate the feasibility and practicality of each market segment.
With today's constantly evolving competition, trends, customer behaviors, preferences, and technology, you must stay on top of your data-tracking and monitoring game.
When creating market segments, use metrics to track and measure the performance of each group. Use tools such as surveys, CRM, analytics, and feedback for monitoring and updating your segments. Calibrate your metrics to look at the market shares and lifetime value in regard to your market segments.
Using data-powered methods will help you keep up with the changes and find new opportunities—giving you a competitive edge.
Pro Tip: A well-built mobile application is an excellent tool for collecting your market’s demographic, behavior, and interest data. Consider adding features like user analytics, in-app surveys, and tracking tools in your mobile app to gain better insights into your customer's patterns and preferences.
Both under- and over-segmenting your market comes with pitfalls.
For example, dividing your market into too narrow of segments can increase operational costs and complicate marketing communication. Similarly, too few broad segments lead to missed opportunities and reduced relevance.
The key lies in finding a balance between the benefits and costs of segmentation. Therefore when segmenting:
- Consider the size of your market and segments
- Ensure the cost of segmentation is worth it; benefits outweigh the costs
- Use a combination of criteria and methods to find the most effective way to segment your market.
One significant benefit of market segmentation is the ability to tailor your brand messaging and product for the group. Savvy marketers use customized and consistent marketing based on each segment's expectations, preferences, and behaviors.
Adapt your product features, benefits, design, distribution channels, and pricing strategies to suit every segment. This strategy empowers you to deliver more customer satisfaction, value, and loyalty.
For example, if you are targeting a group of young professionals, you might want to offer trendy yet affordable products. Plus, you might emphasize more on social media advertising and online marketing.
Pro Tip: Use the 4 Ps (product, place, price, and promotion) and 7 Ps (additional three Ps: people, process, and physical evidence) framework to develop a tailored marketing mix for your market segments. Start by focusing on the 4 Ps to create a concise and easy-to-use framework and expand to the 7 Ps for a more comprehensive view of the marketing mix later on.
It’s clear that market segmentation can reap meaningful benefits. Still, many businesses find implementing the best practices tough. Therefore when talking about this process, it's vital to acknowledge the limitations and challenges you must overcome.
- Data collection and analysis: Collecting data for segmentation can be a time-consuming and expensive process.
- Segmentation criteria: There are many different criteria to segment a market, and choosing the one that is right for your business and industry can be difficult.
- Segmentation accuracy: Market segmentation is not a science, and many times, it can be incorrect, which can lead to a waste of various marketing efforts.
- Segment management: Managing different market segments can be challenging as every segment has its own needs and wants.
Fortunately, there are ways to minimize such challenges and errors. Don't let your segments become too entrenched—be prepared to let them evolve and be flexible. Use multiple data sources and segmentation criteria to create more accurate, valuable, and personalized segments.
Market segmentation does not need to be complicated to produce the results you desire. Ultimately, it boils down to knowing your customer database and providing them with a personalized experience.
The above guide can be a great starting point for your business. Use our guide as a base and begin segmenting your market into targeted customer groups to take your business success to new heights.
We are cheering for you!
