Understanding Market Segmentation: Benefits, Importance, and Use Cases
October 11, 2021
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 customers’ pain points. However, in practice, this is extremely challenging for any business, regardless of its industry. Research indicates that 95% of new products fail because of ineffective market segmentation. Thus, the next sections introduce you to the concept of market segmentation, a process that helps companies divide customers into categories in order to improve the ROAS (return on ad spend).
What is market segmentation?
Many business professionals tend to overlook market segmentation. This concept refers to dividing the target market into clusters or subsets based on different criteria. The purpose is not to create a marketing strategy; rather, market segmentation helps you understand your potential customers, according to their behaviors, interests, demographics, priorities, and many others.
Understanding these market segments is the first step to create a successful marketing strategy. Once you understand what appeals to your target customers, you can create efficient targeting strategies, thus increasing your ROAS.
In short, market segmentation aims to answer the question “what do customers want?”. 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.
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, you may assume that your target audience is the youth and you focus on this age group; however, marketing segmentation might show you that the adult population demands your type of product more than teenagers. Thus, creating youth-centered marketing strategies will alienate your key customers. In other words, market segmentation allows you to craft your strategies based on data rather than intuition and guesswork.
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 and create 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.
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-goes seek durability, comfort and support, busy professionals may require quality and comfort, while fashion-conscious women 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.
How are markets segmented?
Market segmentation depends on the type of your business, product, and target audience. 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, such as:
- Demographic characteristics, including sex, age, occupation
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 cereals 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, such as 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 like or dislike, and such preferences depend on age, ethnicity, marital status, occupation, or education. For example, senior consumers may prefer a physical shopping experience rather than using online platforms.
One of the most popular examples of behavioral segmentation is Netflix. When users watch their favorite movies and TV shows, the platform retains the history and predicts similar content, using machine learning. This type of behavioral segmentation ensures that users retain their interest in the platform, thus are more likely to keep paying for their subscriptions.
- Geographic region
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.
In this case, companies can use alternative data collected from sensors to segment their markets. Some examples include CCTV, geo-location, POS data, and satellites.
- Psychographic characteristics or 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.
5. Other criteria
Some businesses prefer to split their customers according to their transaction worth. In other words, this refers to how much they may spend on buying products. These data can also be used by B2B companies.
For instance, if you have a B2B software company, you may want to use alternative data that indicates how much companies spend on their tech assets, the value of their purchases, and how often they purchase software. The choice of alternative data is broader in this category – for instance, you can use credit card transactions, corporate data, or sales data.
Also, B2B companies use alternative data for firmographic segmentation. This is the same as demographic segmentation but for companies. Some characteristics of companies may include industry size, number of employees, revenue, and location.
Why is market segmentation important?
Businesses use market segmentation for many reasons. The most important one is that you can retain and acquire customers with a higher success rate. In other words, market segmentation helps you use your resources efficiently, translating into higher financial performance.
Segmenting the market will help stay up to date with your customers’ wants, needs, and interests. You will have a higher chance of retaining your current customers and even winning your competitors’ clients. Tailoring perfect messages that respond to their requirements can help you earn their trust, build brand loyalty, and exceed their expectations.
Market segmentation is a way of understanding what makes your customers happy. In turn, you will be able to deliver what they need in order to stay with your company and purchase your products and services.
Additionally, market segmentation is crucial if you want to reach more customers. Understanding different categories of consumers will help you identify how to tailor your ads and products to satisfy them. This could help you rebrand or successfully launch new services and products to appeal to new customers.
Finally, market segmentation is a powerful weapon against your competition. You can create highly relevant ads and messages to attract your customers. In turn, these messages will make you unique among other businesses that use a general marketing campaign to appeal to the masses. Instead of blending in the market, your business can stand out from the crowd, promoting its unique selling point loud and clear.
The Benefits of market segmentation with alternative data
Numerous studies indicate the numerous benefits of marketing 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.
Some other benefits of market segmentation include:
- 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 customers 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.
- Lower costs – 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.
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 marketing 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 limited market segment means that your customer base is quite small, thus the profit potential is also small.
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 segmentation
In short, market segmentation is a straightforward process. There are several steps you need to follow to get started:
- Define your market
Firstly, you need to know who you are serving and who needs your products and services. At this stage, you could also use firmographic alternative data to find out more about your competitors, or another type of alt data to analyze the market.
- Segment your market
Once you broadly establish who your main customer is, use segmentation criteria, such as psychographic, demographic, and others, to segment the market. 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.
- 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 and test your marketing strategy
You need to use the insights from the previous step to crafting 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.
Nowadays, buyers have more power, demanding prompt services, high-quality products, and omnipotent brands. This is why market segmentation is a key competitive advantage. 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 – alternative data can be extremely broad, unstructured, and unreliable. This is why 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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