Market Segmentation: Benefits, Types, and Use Cases
February 17, 2022
Customers are the centerpiece of any business. Profit-generating abilities are directly dependent on how successful we are in targeting the right audience and offering products that soothe our clients’ pain points. However, in practice, this is challenging for many businesses, regardless of industry. Research indicates that 95% of new products fail and a lot of the blame can be placed on ineffective market segmentation. Thus, the next sections introduce you to the concept of market segmentation, a process that helps companies divide clients and customers into categories in order to improve lead generation, marketing & sales efforts, and investment intelligence.
What is market segmentation?
Market segmentation refers to dividing the target market into clusters or subsets based on different criteria. The purpose is not necessarily to create a marketing strategy; rather, market segmentation helps you understand your potential customers, according to their behaviors, interests, demographics, priorities, and other factors.
Understanding market segments is the first step to creating a successful marketing strategy. Once you understand what appeals to your target customers, you can create personalized targeting strategies, thus increasing your business efficiency.
In short, market segmentation aims to identify your clientele. In turn, this helps your business drive sales by developing efficient marketing strategies, investing in new products and services, and even expanding the market share.
If you choose not to
Without market segmentation, businesses use guesswork to create marketing strategies. Assuming what may or may not work using intuition leads to lost opportunities.
For instance, let's say you are in the sneaker business. You may assume that your target audience is the youth and you focus on this age group; however, market segmentation might show you that the adult population demands your type of product more than teenagers.
Research shows, that the average annual expenditure on footwear in the US by those under 25 accounts for $446 whereas those in the group of 25-34 spend $456, ages 35-44 spend $407, and those aged 45-54 spend $349. If you added up the age groups of 25 and above, you would see that you're missing out on a huge part of the market.
Even though the youth spends an impressive amount of money on sneakers, the adult audience is much wider and the product is still relevant to them as well. Thus, creating youth-centered marketing strategies will alienate your key customers.
In other words, market segmentation allows you to craft your strategies and create stronger marketing messages based on data rather than intuition and guesswork.
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Market segmentation refers to dividing the target market into clusters or subsets based on different criteria.
Market segmentation use cases
- Lead generation. In terms of B2B lead generation, market segmentation allows you to filter ICP companies that fit your predefined criteria and approach them with a personalized offer.
- Sales & marketing strategies. Market segmentation allows you to personalize marketing and sales campaigns and approach a client with a good base of knowledge of what the client might want, need, and for what reasons.
- Investment intelligence. Segmenting your potential investment opportunities could ease your selection process. By using firmographics, you can segment markets that align with your goals, values, and knowledge.
What are examples of market segmentation?
There are endless examples of market segmentation nowadays. Mature companies know how to categorize their target market in different subsets to boost sales and create more efficient ads. For example, a sports footwear manufacturer is likely to segment and target its market differently according to each cluster identified during the market segmentation process.
Market segmentation strategy
The company may target people who go to the gym frequently, athletes, busy professionals, and fashion-conscious women.
All of these segments require different advertising: gym-goers seek durability, comfort, and support; busy professionals may require quality and comfort; fashion-conscious women might need sports shoes that combine the latest fashion trends with the benefits of sports shoes.
Instead of crafting a marketing message that targets all of these people at the same time, a successful business creates a separate marketing campaign for each of them.
Types of market segmentation
Market segmentation depends on the type of your business, product, and target audience. B2B segmentation requires filtering ICP companies by their firmographic characteristics. B2C segmentation requires identifying customers, end-users, that fit your ICP.
Firstly, you need to know who represents your target audience and what characteristics are the most important. This macro- to micro- process starts by looking into broad categories detailed below.
Demographic segmentation: companies and people
Demographic segmentation could be divided into two parts: segmenting companies and people based on different characteristics.
Companies (firmographic segmentation)
If you're in the B2B business, market segmentation starts with a firmographic segmentation strategy. In order to perform that, firmographic data is required. Our data allows you to filter companies by size, industry, revenue, location, and more. It mitigates a great deal of manual work that would be necessary to analyze and build a company portfolio without leveraging alternative data. Once you have your ICP in place, all you need to do is input the search parameters and retrieve the results.
Free data sample
- See the sample structure of our firmographic JSON record
- Explore the main firmographic data points
- Find out the definition of each data point
For instance, if you have a B2B software company, you may want to use alternative data that indicates prospective clients' technographic capacities alongside the firmographic characteristics to narrow down the client base even further.
Firmographic segmentation is the foundation of B2B lead generation. However, once you combine the foundation with additional relevant information, you can build a complete picture of the company and decide whether it fits your ICP or not.
People (demographic segmentation)
This category requires you to collect data regarding the sex, occupation, or age of your customers, and craft marketing campaigns specific to these subgroups.
For instance, a company that manufactures cereal can use demographic characteristics to target their audience – they can use different messages for kids, health-conscious consumers, or adults looking for a boost of vitamins and energy.
Popular examples that use demographic segmentation include Axe body spray, for instance, which is aimed at teenagers, while Old Spice is targeted towards young men. Yet, in essence, both products are deodorants – with the same purpose of keeping underarms odor-free.
Behavioral aspects: attitudes, knowledge, and usage patterns
Behavioral segmentation is successful when combined with other characteristics, including demographics. This is because it essentially focuses on what customers prefer, and such preferences depend on age, ethnicity, marital status, occupation, or education.
However, not all of the aspects need to be considered all at once in order to understand your customer segments. It depends on the kind of business you are running.
For instance, Netflix segments customers into two markets based on age: they have two sub-platforms, one of which is dedicated to children, and the other—to adults. In the sub-platforms, Netflix offers personalization solutions—the platform retains the history and predicts similar content using machine learning.
This type of behavioral segmentation and personalization ensures that users retain their interest in the platform, thus are more likely to keep paying for their subscriptions.
Geographic segmentation refers to categorizing customers according to their physical location. For instance, if you have a physical clothing store in a city, it is redundant to advertise your services miles away from it, as people are not likely to travel long hours to buy your clothes.
Geographic segmentation is likely to impact buyers’ needs and behaviors. In the example above, your clothing offering depends massively on the season. If you have an online clothing store, you need to target different customers living in different states, based on their local weather.
Psychographic characteristics: opinions, interests, and activities
Psychographic segmentation refers to targeting marketing campaigns based on key customers’ beliefs, perceptions, and thoughts. The background of psychographic segmentation is rooted in the VALS framework developed by Arnold Mitchel in 1980. It stands for “values, attitudes, and lifestyles”, leveraging this information for market research.
For a business professional, this is extremely important since you are more likely to make the correct decisions when you know both what your customer likes and how they think.
One example would be luxury brands. A company that provides high-end accessories needs to identify customers belonging to the upper class with a high buying power.
Psychographic segmentation can help you find such customers, understand how they think (i.e., they have a predisposition for luxury goods), and target them successfully.
- Market segmentation allows you to acquire and retain clients with a higher success rate;
- Customer segmentation allows you to stay up to date with customers' wants, needs, and interests;
- Personalization allows you to respond to customers' expectations more effectively;
- Market segmentation is inseparable from staying competitive.
There are four ways to segment your market: demographic, behavioral, geographic, and psychographic segmentation.
The benefits of market segmentation with alternative data
Numerous studies indicate the numerous benefits of market segmentation. For instance, Bain & Company concluded that about 81% of executives state that segmentation is directly linked to profit growth.
Furthermore, the study showed that companies using market segmentation strategies had, on average, 10% higher profit.
Here are some other benefits of market segmentation.
Specific, clear marketing messages
Market segmentation allows you to speak directly to your targeted group of people in a way that is applicable to them. This is because you understand their needs, wants, and expectations.
More efficient digital advertising
Creating vague, generic digital adverts should no longer be an issue. With alternative data, you can easily segment your market and direct the digital marketing efforts according to locations, ages, interests, spending patterns, and online buying patterns.
Highly effective marketing efforts
Using alternative data, such as firmographics, you can get to know your potential clients before getting in touch with them. This provides you with the advantage of knowing what they are most responsive to since you know what they need.
Since your marketing campaigns are more effective, this lowers your costs since you maximize your revenues from each ad. Also, you can use popular digital platforms, such as Google or Facebook, to craft ads and direct them towards the key potential clients.
Selecting your clientele
Instead of waiting for customers to reach out to you, you can target the right customers – or, only the people you want to buy from you, shaping your brand.
Make your customers loyal
Market segmentation and efficient targeting will make your customers feel understood and you are more likely to retain them, building brand loyalty.
Identify growth opportunities
When you segment the market, you will likely discover new niches. This could help you find underserved markets, new ways of serving your current customer base, and find opportunities for R&D.
The main benefits of market segmentation include: personalized, more efficient and cost-effective marketing communications, the ability to select your clientele, customer retention and loyalty, and identification of growth opportunities.
Common market segmentation mistakes to avoid
Market segmentation may be quite straightforward. All you need to do is break down your target audience into smaller segments, according to different criteria. However, making mistakes when segmenting your market can be detrimental, impacting the success of your marketing campaign. Between segmenting the market and collecting the extra cash from your customers, you can fall into several pitfalls.
First, a common mistake is breaking down your target audience into too many small segments. Although mass marketing is less efficient than market segmentation, many business professionals make the mistake of focusing on a very small category. A market segment that is too limited means that your customer base is too small, thus the profit potential is also small. However, to some businesses that require substantial recurrent payment, one client could bring a lot of profit. Therefore, it's important to keep in mind the type and allowance of your business when selecting a target market.
The second caveat is focusing too much on market segments without using key financial data. More specifically, you may have the perfect market segment, but you are not correlating this information with return on investment (ROI). ROI is a profitability metric and, if it is amiss, you need to revise your marketing strategy, pricing, and other aspects to find out what you can improve.
Finally, the last common mistake is to focus solely on your existing customers. For instance, you may only market your cereal brand to teenagers. In this case, you could miss out on potential customers, such as busy professionals looking for a quick and easy breakfast, health-conscious consumers looking for nutritious meals, and others. Markets and trends change over time, so it’s important to look beyond your current audience, searching for unexploited opportunities. This would also position you ahead of your competition and may turn you into a market leader.
How to get started with market segmentation?
In short, market segmentation is a straightforward process. There are several steps you need to follow to get started.
Decide what market segment interests you
First of all, you need to identify the market that interests you. You must outline the main, specific characteristics of this market in a way that is neither too broad nor too narrow.
Research and understand your market
Next, you need to conduct research and analyze your market. You can do so by using web-scraped data, social media comments, or sensor data to understand customer behavior.
The right methods depend on your product and chosen market segment. A traditional approach would mean that you conduct surveys or interviews to understand your target customers; yet, in the digital era, you can easily collect all the information online or use a data provider.
Create sub-segments of your market
Once you establish who your main customer is, use segmentation criteria, such as psychographic, demographic, and others, to segment the market into several parts. You can use more than one; in fact, many companies use a combination of criteria.
Also, you can use creative factors, too, such as categorizing your customers according to generations, for instance.
Create and test your strategy
You need to use the insights from the previous step to craft your preliminary marketing strategy. This should address your chosen market segment directly, answer its needs, and attract consumers to your brand.
You can use conversion tracking to see how successful the strategy is; this testing stage can be repeated several times as you fine-tune your strategy based on your findings.
Choose a target market
Once you have tested your strategies on different segments of your market, now it's time to select a target market that will be the recipient of your strategy. It is the most important part and it will mold your further marketing messages and the positioning of your product.
Starting with market segmentation: decide on a market, research it, make segments of that market, create and test your strategy, and select a target market.
Using market segmentation, companies are able to identify their target audiences and personalize marketing campaigns more effectively. This is why market segmentation is key to staying competitive. It allows you to understand your customers, anticipate their needs, and seize growth opportunities. This powerful technique allows you to improve your decision-making, marketing efforts, and improve your company’s bottom line.
The key to successful market segmentation remains data quality; therefore, you need to pick your data provider after doing your due diligence, ensuring that you have access to the latest industry information in accessible and easy-to-understand formats.
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