Market segmentation is a marketing strategy that identifies specific groups of consumers in order to present specific products or product lines to them in a way that appeals to their interests. Market segmentation allows businesses to target different types of consumers who perceive the full value of different products and services differently. The term “market segmentation” refers to the classification of potential buyers into groups or segments based on similar needs and responses to marketing actions. Market segmentation enables a company to improve its overall efficiency by directing limited resources toward efforts that yield the highest return on investment (ROI).
Market segmentation acknowledges that not all customers have the same interests, purchasing power, or consumer needs. Instead of catering to all prospective clients, market segmentation is important because it aims to make a company’s marketing efforts more strategic and refined. A company can increase its chances of generating sales and being more resource-efficient by developing specific plans for specific products with target audiences in mind. Market segmentation allows you to target specific groups of consumers and send the right message every time.
Companies can generally identify different market segments using three criteria:
- Homogeneity, or a segment’s shared needs
- Being distinguished from other groups
- Market reaction or a similar response
An athletic footwear company, for example, may have market segments for basketball players and long-distance runners. Basketball players and marathon runners are two distinct groups that respond to very different advertisements. Understanding these various market segments enables the athletic footwear company to appropriately market its branding.
Market segmentation is an extension of market research that seeks to identify targeted groups of consumers in order to tailor products and branding to the group. The goal of market segmentation is to reduce risk by determining which products have the best chances of gaining market share and the best way to deliver products to the market. This allows the company to improve its overall efficiency by directing limited resources toward efforts with the highest return on investment. Understanding your market segments enables you to target them in your product, sales, and marketing strategies. Market segments can help drive your product development cycles by informing how you create product offerings for different segments, such as men vs. women or high-income vs. low-income.
TYPES OF MARKET SEGMENTATION
There are five common types of market segmentation.
Demographic Segmentation
Demographic segmentation is a simple and widely used method of market segmentation. It entails segmenting the market based on customer demographics like age, income, gender, race, education, or occupation. This market segmentation strategy is based on the assumption that people with similar demographics will have similar needs. Because the products and services we buy, how we use those products, and how much we are willing to spend on them is often based on demographic factors, demographic segmentation is one of the most basic and widely used types of segmentation.
For example, a new video game console’s market segmentation strategy may reveal that the majority of users are young males with disposable income.
Firmographic Segmentation
Demographic segmentation and firmographic segmentation are interchangeable terms. Instead of analyzing individuals, this strategy examines organizations, including a company’s number of employees, customers, offices, and annual revenue. For example, a corporate software provider may approach a multinational firm with a more diverse, customizable suite, whereas a smaller company may be approached with a fixed fee, simpler product.
Geographic Segmentation
Geographic segmentation is, in theory, a subset of demographic segmentation. This approach categorizes customers based on their physical location, assuming that people in the same geographical area may have similar needs. This strategy is more appropriate for larger corporations looking to expand into new branches, offices, or locations. Understanding the climates and geographic regions of customer groups can help determine where to sell and advertise, as well as where to expand your business, because potential customers’ needs, preferences, and interests differ depending on their geographies. For example, a clothing retailer may stock more raingear in its Pacific Northwest locations than in its Southwest locations.
Behavioral Segmentation
Behavioral segmentation is heavily reliant on market data, consumer actions, and customer decision-making patterns. This method categorizes consumers based on their previous interactions with markets and products. This approach assumes that consumers’ previous spending habits predict what they will buy in the future, despite the fact that spending habits can change over time or in response to global events. For example, millennials are more likely to purchase craft beer, whereas older generations are more likely to purchase national brands.
Psychographic Segmentation
The goal of psychographic segmentation, which is sometimes the most challenging method of market segmentation, is to group customers according to their interests, opinions, lifestyle, and personality. This may be more difficult to achieve because of the following characteristics:
- might quickly change, andÂ
- objective data may not be readily available.
However, because it groups people based on intrinsic motivators rather than external data points, this approach may produce the best market segment results. A fitness apparel company, for example, may target individuals based on their interest in participating in or watching a variety of sports. Other less well-known types of segmentation include volume (how much a consumer spends), use-related (how loyal a customer is), and other customer characteristics (i.e. how creative or risk-taking a client is).
How to Determine Your Market Segment
There is no single method for performing market segmentation that is universally accepted. Along their market segmentation journey, companies frequently ask themselves the following questions to determine their market segments.
Phase I: Setting Expectations/Objectives
- What is the goal or purpose of market segmentation?
- What does the company hope to learn from marketing segmentation?
- Does the company have any ideas about what market segments might exist?
Phase 2: Identify Customer Segments
- What market segments do the company’s competitors serve?
- What publicly available information (for example, data from the United States Census Bureau) is relevant and available to our market?
- What information do we want to collect, and how can we get it?
- Which of the five market segments do we want to focus on?
Phase 3: Evaluate Potential Segments
- What are the dangers of our data not being representative of the true market segments?
- Why should we prioritize one type of customer over another?
- What are the long-term consequences of selecting one market segment over another?
- What is the ideal customer profile for the company, and which segments best overlap with this “perfect customer”?
Phase 4: Develop Segment Strategy
- How will the company test its hypotheses on a sample test market?
- What makes a marketing segment strategy successful?
- How will the company know if the strategy is effective?
Phase 5: Launch and Monitor
- Who are the key stakeholders who will be able to provide feedback after the market segmentation strategy is revealed?
- What are the obstacles to execution, and how can they be overcome?
- How should the marketing campaign’s launch be communicated internally?
Benefits of Market Segmentation
Marketing segmentation necessitates time and money to implement. However, successful marketing segmentation campaigns can boost a company’s long-term profitability and health. Among the many advantages of market segmentation are:
Increased resource efficiency: Marketing segmentation enables management to concentrate on specific demographics or customers. Instead of attempting to promote products to the entire market, marketing segmentation allows for a more focused, precise approach that is often less expensive than a broad-reach approach.
Stronger brand image: Management is forced to consider how it wants to be perceived by a specific group of people as a result of the marketing segment. Management must then consider what message to craft after identifying the market segment. Because this message is aimed at a specific audience, a company’s branding and messaging are more likely to be deliberate. This may also have the unintended consequence of improving customer experiences with the company.
Greater potential for brand loyalty: Marketing segmentation increases consumers’ chances of developing long-term relationships with a company. Director, more personal marketing approaches may resonate with customers and foster feelings of inclusion, community, and belonging. Furthermore, market segmentation increases the likelihood of landing the right client who fits your product line and demographic.
Stronger market differentiation: Market segmentation allows a company to pinpoint the exact message it wants to convey to the market and competitors. This can also aid in product differentiation by clearly communicating how a company differs from its competitors. Instead of taking a broad approach to marketing, management creates a more memorable and specific image.
Better-targeted digital advertising: Marketing segmentation allows a company to implement more targeted advertising strategies. This includes social media marketing plans that target specific ages, locations, or habits.
Limitations of Market Segmentation
The aforementioned advantages cannot be realized without some potential drawbacks. Here are some drawbacks to consider when implementing market segmentation strategies.
Higher upfront marketing expenses: The long-term goal of marketing segmentation is efficiency. However, in order to capture this efficiency, businesses must frequently invest resources upfront in order to gain insight, data, and research into their customer base and broad markets.
Increased product line complexity: Marketing segmentation attempts to break down a large market into more specific, manageable pieces. This has the disadvantage of resulting in an overly complex, fractionalized product line that is overly focused on catering to specific market segments. Instead of a unified product line, a company’s marketing mix may become overly complex and inconsistently communicate its overall brand.
Greater risk of misassumptions: Market segmentation is based on the assumption that people with similar demographics will have similar needs. This isn’t always the case. A company may risk misidentifying the needs, values, or motivations of individuals in a given population by grouping them together with the belief that they share common traits.
Higher reliance on reliable data: Market segmentation is only as good as the underlying data that backs up the claims made. This entails being aware of the sources used to collect data. This also entails being aware of changing trends and market segments that may have shifted since previous studies.
Examples of Market Segmentation
Market segmentation can be seen in everyday products, marketing, and advertising. Automakers thrive on their ability to correctly identify market segments and develop products and advertising campaigns that appeal to those segments.
Cereal manufacturers actively market to three or four market segments at a time, pushing traditional brands that appeal to older consumers and healthy brands that appeal to health-conscious consumers, while building brand loyalty among the youngest consumers by tying their products to popular children’s movie themes, for example.
A sports shoe manufacturer may define several market segments, such as elite athletes, frequent gym goers, fashion-conscious women, and middle-aged men looking for quality and comfort in their shoes. In all cases, the manufacturer’s marketing intelligence about each segment enables it to develop and advertise products with high appeal more efficiently than attempting to appeal to the general public.
Market segmentation is the process by which businesses divide their potential customers into different groups. This enables the company to allocate the appropriate resource to each individual segment, resulting in more precise targeting across a variety of marketing campaigns.