It’s crucial that brands understand the experiences they provide and whether or not they satisfy the needs of customers, employees, and beyond. Effective market segmentation is critical to that goal. Every business should know the ins and outs of how their marketing, advertising, and sales team measure up.
What Is Market Segmentation?
Market segmentation is a research strategy that separates different consumers in order to study their preferences, needs, and perspectives in order to optimize business practices, products, and experiences.
Hopefully, your business has more than one customer. If not, that’s okay because market segmentation isn’t primarily concerned with how many customers you have. It’s more about what type of customers. Each customer has their own needs but oftentimes some customers align in a significant way. Market segmentation recognizes this reality and is a process to capitalize on that. The main ethos is this: what if we could split our customers into distinct groups—based on specific factors—so we can learn how to market our products to the right people?
The 4 Types of Market Segmentation with Examples
There are four common types of strategies that businesses use to segment their customer base. Note that this list is not exhaustive and businesses have found other relevant factors that influence their customers’ needs.
Geographic segmentation divides the market based on geographical units such as region, country, city, neighborhood, climate, population density, and urban/rural areas. This segmentation recognizes that consumers’ needs, preferences, and behaviors may vary depending on where they live.
Imagine a retail store selling to two customers, one who lives in a cosmopolitan city and the other in a rural town. Each would have different expectations and wants for the clothes they wear. Depending on the climate, how often they’re outside, or the appropriate clothing for a social setting, these two customers are unique enough to warrant a customized marketing strategy.
Demographic segmentation categorizes consumers based on demographic variables such as age, gender, income, education, occupation, marital status, and family size. Demographic factors are among the most commonly used segmentation variables because they are relatively easy to measure and often correlate with consumer needs and behaviors.
An example of this may look like fast food restaurants having a totally different menu in another country. This is because food preferences are hugely influenced by one’s ethnic background. That’s why McDonald’s serves a Cheese Tsukimi burger in Japan. It’s also the reason why the items supplied in grocery stores change depending on the most common ethnicities in the surrounding local community.
Psychographic segmentation categorizes consumers based on their lifestyle, values, interests, attitudes, and personality traits. This approach delves into the psychological aspects of consumer behavior, aiming to understand what motivates individuals and how they perceive themselves and the world around them.
Let’s say a large portion of a brand’s customers are Millennials. This generation has been widely characterized as one who cares about the ethical impact of what they purchase. From the environment to social justice movements, millennials want their experiences to mean something. So the business decides to create a policy where 10% of all proceeds go directly to a refugee charity.
Behavioral segmentation divides the market based on consumers’ purchasing behavior, product usage, brand loyalty, benefits sought, occasions, and readiness to buy. This approach focuses on understanding how consumers interact with products and services and what drives their buying decisions.
Brands frequently provide deals that only apply when customers shop online. It usually looks something like, “Buy up to $50 to get 10% off” or “Free shipping with a purchase of $25 or more”. Businesses offer these not because they like their online customers more, but because online shoppers have different spending tendencies. There could be many factors that contribute to that case. It could be how easy it is to click so many items into one’s cart or the instant gratification of purchasing online. Whatever the reason, the reality is that shoppers are more willing to buy into those deals when it’s done digitally.
Disadvantages of Market Segmentation
While market segmentation offers numerous benefits, it also presents certain disadvantages and common pitfalls. These are some common mistakes associated with market segmentation.
1. Potential for Segmentation Errors: Market segmentation involves making assumptions about customer characteristics, needs, and behaviors based on available data. However, segmentation errors can occur if the chosen segmentation variables are inaccurate or if the segmentation process is based on faulty assumptions.
2. Complexity and Cost: Market segmentation can be complex and resource-intensive, requiring extensive data collection, analysis, and segmentation strategy development. Small businesses with limited resources may struggle to implement segmentation effectively.
3. Ignoring Changing Market Dynamics: Market segmentation strategies must be dynamic and adaptable to changes in market dynamics, consumer preferences, and competitive landscapes. Failing to update segmentation strategies in response to changing market conditions can result in outdated or ineffective segmentation approaches.
4. Inflexible Targeting: Over-reliance on segmentation can lead to inflexible targeting strategies that fail to account for individual variation within segments. Businesses must balance the benefits of targeting specific segments with the need to remain responsive to individual customer needs and preferences.
5. Difficulty in Segment Identification: Identifying meaningful and actionable segments within the market can be challenging, particularly in industries with complex customer behaviors or rapidly changing market conditions. Businesses must invest time and resources in thorough market research and analysis to identify viable segmentation opportunities.
Benefits of Market Segmentation
Market segmentation can look different depending on your business model, but at the end of the day the goal is the same: better understanding your target market. And that can lead to significant business value:
Increased Customer Retention
Knowing your customers well will lead to a sharpened customer journey because your brand will know how and which marketing messages will resonate with customers. And we don’t have to tell you that an excellent customer experience will increase the likelihood of customers staying loyal to your business.
Differentiation from Competitors
As your company shapes exactly how their products and services can appeal to a variety of consumers, your branding will evolve along with that process. This allows your brand to differentiate from competitors because your target audiences aren’t just a big question mark.
Opens Up Marketing Opportunities
Segmenting your market will open up opportunities to strategize and restrategize. Since market segmentation is an ongoing process, it informs and guides your marketing teams throughout business decisions. Customers don’t stay stagnant forever, they transform as the world transforms but segmenting your market can make your brand aware of opportunities when they arise.
By diversifying your customer base across multiple segments, businesses can reduce their exposure to risks associated with fluctuations in demand, changes in consumer preferences, or competitive pressures within specific market segments.
Better Resource Allocation
Segmentation helps businesses allocate resources more effectively by directing investments toward the most promising market segments. By identifying high-potential segments with strong growth prospects and attractive profitability, companies can allocate resources strategically to maximize returns.
What Does Effective Market Segmentation Look Like?
One of the biggest challenges marketers face is making sure the products actually align with a customer segment. You may have market access to a large customer base but do those customers have enough buying power or will they even want the product you’re offering? That’s why it’s more important to focus on targeting the money instead of the segment. Market segmentation doesn’t necessarily mean you have to market to each and every segment you discover. Choose the ones most likely to engage with your product and that will lead to a positive return on investment (ROI).
How to Conduct Market Segmentation
In order for market segmentation to be effective, it needs to be done the right way. So, if you are about to undertake a market segmentation process, be sure to follow these steps:
1. Define Objectives: Clearly define the objectives of the segmentation initiative. Determine what specific goals the organization aims to achieve through segmentation, such as better targeting, increased customer satisfaction, or enhanced competitiveness.
2. Gather Data: Collect relevant data to understand the characteristics, needs, preferences, and behaviors of your target market. Data sources may include customer surveys, interviews, focus groups, demographic data, purchasing history, website analytics, social media insights, and market research reports.
3. Identify Segmentation Variables: Choose the criteria or variables that will be used to segment the market. Common segmentation variables include demographic factors (age, gender, income), geographic factors (location, climate), psychographic factors (lifestyle, values), and behavioral factors (purchasing behavior, product usage).
4. Segmentation Analysis: Analyze the collected data to identify meaningful segments within the target market. Use statistical techniques such as cluster analysis, factor analysis, or regression analysis to group customers based on similarities and differences in their characteristics or behavior.
5. Develop Segment Profiles: Develop detailed profiles for each segment, including demographic, geographic, psychographic, and behavioral characteristics. Describe the needs, preferences, motivations, and behaviors of customers within each segment to gain a deeper understanding of their unique requirements.
6. Evaluate Segment Attractiveness: Assess the attractiveness of each segment based on factors such as size, growth potential, profitability, competition, and alignment with organizational objectives. Prioritize segments that offer the greatest potential for business success and competitive advantage.
7. Select Target Segments: Select the target segments that align with the organization’s strategic priorities and marketing objectives. Consider factors such as market potential, resource availability, and competitive positioning when determining which segments to focus on.
8. Develop Marketing Strategies: Develop tailored marketing strategies and tactics for each target segment. Customize product offerings, pricing strategies, distribution channels, and promotional messages to address the specific needs and preferences of each segment.
9. Implement and Monitor: Implement the marketing strategies and tactics designed for each target segment. Monitor and evaluate the effectiveness of segmentation initiatives through key performance indicators (KPIs) such as sales growth, market share, customer satisfaction, and return on investment (ROI).
10. Iterate and Refine: Continuously monitor market trends, customer feedback, and competitive dynamics to refine segmentation strategies over time. Update segment profiles, adjust marketing tactics, and explore new segmentation opportunities to stay responsive to changing market conditions and customer needs.
InMoment Can Perfect Market Segmentation For You
Don’t know where to go from here? InMoment can help! InMoment is committed to aiding businesses with our award-winning technology through the understanding that experiences involve the needs of customers, employees, and the business. As one of the top (MX) brands, we’re dedicated to teaching and guiding businesses on how to utilize their data when making key business decisions. Our specialized Market Experience Cloud along with expert consultants is available to help you in garnering as much intelligence from the market as possible. Contact us today for a demo.