Marketing involves understanding and meeting the desires and needs of target customers. An important first step revolves around determining who a target customer is in order to align with the broader company strategy, maximize marketing efficacy, and increase revenue.
By separating the broader market into segments and evaluating them, it’s easier to identify the right segment to target. Segmentation also helps you design the right marketing mix for your target market so you can add more value for your customers and gain the benefits that follow.
Types of Segmentation
The four overarching types of market segmentation are:
- Demographic: Using characteristics such as age, education level, gender, income, and household size to differentiate within the broader market. To obtain this type of data, the United States Census Bureau is a great resource.
Income level is a powerful influencer on customer wants and purchasing capacity. Targeting a high-earning segment directly influences your pricing, product, distribution, and promotion strategies.
In a B2B context, demographic segmentation includes segmentation by company size and the number of employees in a firm. This categorization scenario is called firmographic segmentation.
- Geographic: Classifying customers based on their geographic context—their physical location, the climate at that location, and the urbanization level. Consider a manufacturer of state-of-the-art tires with patents for optimal road grip in any condition. It makes sense for this company to target customers in rainy or snowy areas.
- Psychographic: Categorizing the market based on the personalities, characteristics, and values of customers. For a fledgling company that creates biodegradable soap with a process that has minimal carbon impact, it’s clear they should target eco-conscious consumers.
- Behavioral: Using information about how consumers act such as what they purchase, how they spend their money, and how they interact with your brand and that of others. In contrast with the preceding three types of segmentation, behavioral segmentation focuses less on who the customer is or where they are, and more on how they act. A premium car dealership may target customers who have previously purchased a luxury vehicle in the last five years.
Market segmentation refines understanding of the target customer, their needs, and how you can effectively meet those needs. Segmentation is a foundational step before creating marketing strategies, informing you of the most effective group to target.
As a result, you’re able to create more resonant messaging, promote more effectively, attract quality prospects who are more likely to become customers, and ultimately, build a differentiated brand.
Creating a Segmentation Strategy
Market segmentation involves defining a particular sub-market within a broader market, determining segments and their profiles, and evaluating their attractiveness. Market segmentation involves:
- Defining the specific market of interest. If you are looking to segment a market for a firm that owns a chain of ice cream shops globally, the market shouldn’t be too broad—the entire foodservice industry, for example. The appropriate market of interest could be dine-in ice cream parlors in the APAC region.
- Determine the segments of this market. To determine the different types of customers in this market, recall 2-4 variables of segmentation. For demographic segmentation, age group is a segmentation variable. With regard to the ice cream parlor scenario, we can employ two variables: family size (demographic) and frequency of ice cream consumption (behavioral). As a result, you’re able to divide the APAC dine-in ice cream parlor market into the following segments:
- Frequent (3+ ice cream parlor visits/week) consumers who are single
- Infrequent consumers who are single
- Frequent consumers who are married
- Infrequent consumers who are married
- Frequent consumers who have children
- Infrequent consumers who have children
With this example, it’s evident that there are numerous ways to segment the same market. Segmentation is an exercise to enable a greater understanding of the market, the needs of different consumer groups, and this, in turn, can inform marketing strategy. It’s not a one-size-fits-all analysis.
3. Evaluate the viability of these segments. To ensure the segments you determined are useful and logical, it’s important to assess the viability of these segments against a set of criteria. An ideal market segment is measurable, substantial enough to be profitable, stable, reachable, internally homogeneous (the same segment has similar needs), externally heterogeneous (different segments have different preferences), accessible, and responsive (more receptive to a distinct and targeted marketing strategy).
If they fail to meet these requirements, you can reiterate the process with different segmentation variables.
After determining segments and their viability, it’s valuable to assess a segment’s attractiveness or potential in the context of your business.
Assessing a Segment’s Potential
There are numerous ways to determine a segment’s attractiveness. The specific questions to ask are nuanced and unique to your business. The following are factors to consider:
Cost of Customer Acquisition
- How much does it cost to acquire a typical customer from this segment?
- Is customer acquisition for this segment scalable?
The Size of the Market
- How large is the revenue potential from this segment?
- What is the growth rate of this segment?
- Is the competition embracing and prioritizing the targeting of these segments?
- Do competitors differ for each segment?
- Does your product strategy and vision support these segments?
One of the core goals of market segmentation is to determine the right marketing mix, or set of actions to provide value to customers—and capturing some of it.