Market segmentation

A practical guide to market segmentation

Market segmentation is not just for big businesses. Small businesses benefit the most from segmenting their customers. Well-performed segmentation allows us to find and understand segments or market niches underserved by the competitors. With your products, services, and communication adjusted to meet their needs and wants, you can avoid direct competition, earn more satisfied and returning customers, and improve your sales results.

When a farmer opts for organic farming, he practically segments his market. People who do not value food without pesticides will hardly pay more for his products. Barbershops are for men. Hairstylers are more female-oriented. Both of them provide some specific services for their customers, segmented by sex. A local hairdressing salon can offer an adequate set of services for both men and women who are satisfied with having a decent haircut as long they do not have to go from their neighborhood to get it. That would be a geographic segmentation, combined with some psychographic and behavioral elements.

What is market segmentation about?

By definition, market segmentation is the process of aggregating prospective buyers into smaller, more defined categories. We segment customers and audiences into groups with similar characteristics such as location, demographics, interests, needs, or benefits to extract valuable market insights.In practice, market segmentation is more than matching customers with suitable product offers. It is also about the way you communicate with your customers based on what you know about them. Furthermore, it is about identifying your most profitable customers and tailoring your products and services to meet their specific needs. Ultimately, customer segmentation is about creating buying experiences that build brand loyalty.

Table of content:

  1. Benefits of market segmentation
  2. Steps in market segmentation
  3. Introduction to market segmentation
  4. Geographic segmentation
  5. Demographic segmentation
  6. Psychographic segmentation
  7. Behavioral segmentation
  8. Benefit-based segmentation
  9. Firmographic segmentation
  10. Market segmentation variables
  11. Selecting the market segments
  12. Proper market segmentation pays off
  13. What is in the end?

Benefits of market segmentation

On its way to success, every business is doing a kind of market segmentation. Only, some companies are doing that intentionally and systematically. They use segmentation as a kind of shortcut to achieving optimal results. Other businesses are segmenting randomly and unintentionally, which is a bumpy road that requires more time and recourses to bring the results.

  • Market segmentation allows you to sell your products and services to the right customers in the right way instead of targeting the entire audience with a generic offering. 
  • Segmentation will improve the performance of your marketing campaigns. When your marketing messages are clear, direct, and targeted, they attract the right people who are more likely to become your customers.
  • Market segmentation also helps you to develop products and services that better meet the needs of your customers. Being more specific also allows you to stand out from competitors. 
  • Segmentation identifies segments that are not currently in the focus of your marketing efforts and indicates possibilities to expand into new markets. 
  • Market segmentation helps you make other important business decisions regarding our product to customers. These decisions may involve matters such as pricing and distribution. 

Steps in market segmentation

The first step in segmenting markets is to select the market and the product category to deal with. It can be the existing market and product category, or new ones.

The second step is to choose bases for segmenting the market. This step requires managerial insight, creativity, and market knowledge. There are no scientific procedures for selecting segmentation variables. However, a successful segmentation plan must produce market segments that meet the basic criteria of substantiality, identifiability, accessibility, and responsiveness.

The third step is selecting segmentation descriptors. After choosing one or more bases, the marketer must select the segmentation descriptors. Descriptors identify the specific segmentation variables to use.

The fourth one is to profile and analyze segments. The analysis should include parameters like the segment’s size, expected growth, purchase frequency, current brand usage, brand loyalty, and long-term sales and profit potential. This information can then be used to rank potential market segments by profit opportunity, risk, consistency with organizational task and objectives, and other factors which are important to the company.

The fifth step is to select a target market or markets. This step is not a part of the segmentation process but its outcome. It is a decision that affects and often directly determines the firm’s marketing mix.

The last step is designing, implementing, and maintaining appropriate marketing mixes. The marketing mix has been described as product, distribution, promotion, and price strategies that are used to bring about mutually satisfying relationships with target markets.

Steps in market segmentation

Introduction to market segmentation

Your success in marketing is pretty much dependent on proper segmentation. Market segmentation presumes your ability to identify and group customers so similar that the same product or service will appeal to all members.

There are four basic types of consumer segmentation: geographic, demographic, psychographic, and behavioral segmentation. Each of these segmentation types has a specific purpose. Usually, just one is not sufficient for practical segmentation. That is why you should know them all and combine them cleverly for the best results.

Firmographic segmentation is the process of analyzing B2B audiences and grouping them based on their shared characteristics. Firmographic data is gathered and analyzed to understand the business organizations, including non-profit organizations and government entities.

Demographic data focuses on information tied to individuals. Firmographic data shifts the focus to enterprises. Benefit-based segmentation and outcome-based segmentation are two additional types of segmentation that can be very useful in practice.

Geographic segmentation

Splitting up the market based on location is a basic segmentation strategy. You can divide the market into geographical units such as nations, states, regions, counties, cities, or neighborhoods.

Also, you can identify consumers based on the characteristics of the area they live in, such as its climate, population density, language, and whether it is urban or rural.

Geographic segmentation is the right approach when serving customers in a particular area or when your broad target audience has different preferences based on where they live or work.

Examples of geographic market segmentation

Multinational companies typically design websites adjusted to the markets where they operate, at least in language. That is a basic example of geographic segmentation.

A bakery that counts only on neighborhood customers does not have to have parking space. If they are hoping for buyers from other parts of the city or drivers passing by, it is good to build a parking lot. That is a simple outcome of geographic segmentation.

A clear example of geographic segmentation is a clothing retail chain that presents customers with distinctive products based on the climate or season in the region they reside. A customer in New York will require much different clothing in the winter months than one living in Los Angeles.

Demographic segmentation

Demographic segmentation refers to splitting up markets based on observable, people-based differences. Variables for this type of segmentation include age, sex, marital status, family size, occupation, education level, income, race, nationality, religion, and social class.

One reason demographic variables are so popular is that they are often associated with consumer needs and wants. Another reason is that they are easy to measure. Some products can be targeted explicitly towards a specific demographic.

Income segmentation is about dividing the market into groups of people having similar annual or monthly incomes. Since premium products are high priced, there is no point in targeting them to all the customers. You can offer your premium products to people who have an income above a certain level. Simple products are a better fit for lower-income segments. Many companies that operate internationally are starting with their simplistic products on the emerging markets, while premium products sell on developed markets.

Men and women have differences in how they perceive similar products and services. One personal care company, for example, might make two shampoo products — one for male and the other for female consumers. For perfumes, clothing, shoes, and even cars, there are gender specifics that product manufacturers understand and work based on those needs.

Examples of demographic market segmentation

Family structure plays a significant role in forming needs and desires. Large families may prefer low-cost, bulk products, while singles may spend more money on themselves. Changes in family dynamics then lead to changes in those needs and desires. Couples having their first child will likely show a difference in how much they are willing to spend on themselves and what types of products they buy.

Education and occupation can also play a role in the choice of products and services. Doctors and athletes may make different food choices compared to truckers and construction workers. Lawyers and C-suite executives would not make similar clothing choices compared to factory workers and gardeners.

Demographics will always play a role in identifying your target customer. But it is vital to combine demographics with other types of market segmentation to get a complete view. Just because we have two people in the same demographic segment does not mean they want the same things.

Target market

Psychographic segmentation

Psychographic segmentation is similar to demographics, but it deals with characteristics that are more mental and emotional. This type of segmentation is mainly conducted based on “how people think and “what” do they aspire to their life to be. Demographic data is quantitative. Psychographic is qualitative. People within one demographic group can show very different psychographic profiles.

In psychographic segmentation, you can divide potential buyers into different groups based on personality traits, lifestyle, social status, attitudes, and activities, interests, or opinions.

There is a strong correlation between personalities and buying habits. Women do not buy candles just because they are women. Some of them collect candles as part of decorating their homes. Others purchase candles as gifts. And some women buy candles simply to enjoy the fragrance. 

Belonging to a higher, middle, or lower class implies differences in consumer preferences, especially when choosing cars, clothes, furniture, and leisure activities. There is a relation between a particular class behavior and products or service preferences. For example, if the middle-class family pays a lot more attention to education, cleanliness, and modernity than lower-class families. But in some regions, like in Scandinavia, the differences between classes are negligible and consequently of little use for segmentation.

Using psychographic segmentation, you can adjust your messages to different customer segments for a single product or service. You can highlight its value that is beneficial for the consumers belonging to one target group.

Examples of psychographic market segmentation

Some parents may allow their children to spend more time using electronic devices. They believe it is appropriate for their children to use new technology. On the other hand, other parents might feel it is important to limit screen time for their children. They think that technology is for educational purposes only, rather than just purely for entertainment. 

The buying result for each consumer profile will be the same — they will purchase an electronic device. But, their psychographic profile reveals significantly different motivations for each purchase. Therefore, the power of psychographics allows you to fine-tune your messaging. We can appeal to the values and priorities of each group of customers.

Behavioral segmentation

Behavioral segmentation is a harder nut to crack, but the effort is worth the reward. It gets you closer to understand why someone chooses to buy your products or services.

There are many types of behavioral segmentation that help form a complete customer profile throughout their purchasing process. Each of them provides actionable insights, which you can use in different marketing channels to encourage customers to make their purchase decisions.

Purchasing behavior pattern

You can break purchasing behavior pattern into four main categories:

  • Complex: A customer is highly involved in purchasing when buying an expensive, infrequently bought product. There is a notable difference between possible solutions. The impact of the purchasing decision on the customer is significant. Imagine buying a house or a car – these are typical examples of complex buying behavior.
  • Variety-seeking: The customer is not very involved in the purchasing process. There is still some difference in the product offered by various brands. Consumers purchase a different product because they want to try something new. Like when you are trying out new shower gel scents. The outcome of the purchase is usually inconsequential.
  • Dissonance-reducing: The customer is making a rather major purchasing decision. There is no notable difference between the similar products offered by different brands. The consumer will choose the product based on price or convenience and then seek further confirmation, after the purchase, that they made the right choice. Examples include financial services products, such as insurance or investment.
  • Habitual: Purchase decision does not require much involvement. The offered product does not vary much across brands, and it is mainly just a personal preference that matters. Imagine grocery shopping – you go to the store and buy your preferred type of apple juice. You are exhibiting a habitual pattern, not strong brand loyalty.

Although it is a very generic classification, it is still showing some typical purchasing patterns. For someone who can afford to change a car very often, purchasing a new one can be a variety-seeking challenge more than a complex buying decision.

The buying decision process

Many people think that the most important stage in a sale is when a customer hands over the money. But, when it comes to influencing consumer behavior, every single step in the consumer decision-making process plays an important role. You must pay attention to every stage in the buying process to maximize your sales.

When making a buying decision, a consumer typically passes through five stages: problem recognition, information search, evaluation of alternatives, purchase decision, and post-purchase behavior. The buying process starts long before the actual purchase and has consequences that continued afterward.

A purchase cannot take place without the recognition of the need. The need could come from internal stimuli (such as hunger or cold) or external stimuli (such as advertising or word of mouth).

Having recognized a problem or need, the next step a customer takes is the information search stage. You can categorize information sources into four groups:

  • Personal: family, friends, neighbors, coworkers;
  • Commercial: advertising, websites, salespersons, dealers, packaging, displays;
  • Public: mass media, social networks, consumer-rating organizations;
  • Experiential: handling, examining, trying the product.

The relative amount and influence of these sources vary with the product category and the buyer preferences. Consumers receive more information about a product from commercial sources. But, the most influential information often comes from personal, experiential sources or public sources.

Once the initial information search is complete, consumers begin to evaluate their options. They want to determine the best solution for their problem. The consumer perceives each product or service as a set of attributes with varying abilities to deliver specific benefits.

When the consumers have evaluated the different solutions available, they can choose the product or service that best solves their problem, meet their need, or reduce the buying risk. 

After the purchase, customers will compare products with their expectations and will be either satisfied or dissatisfied. Therefore, this stage is critical in retaining customers. It can affect the decision process for similar purchases from the company in the future. If your customer is satisfied, this will result in brand loyalty. You should create positive post-purchase communication, to engage customers and make the process as efficient as possible.

Roles in decision making process

For many products, it is easy to identify the buyer. Men usually choose their shaving foam, while women pick their lipsticks. But, many products involve a decision-making unit consisting of more than one person.

Five typical roles in a buying decision are initiator, influencer, decider, buyer and user.

Consider the selection of a family car. The teenage son suggested buying a new car. A friend advises on the kind of car a family should buy. The wife has desires about the color and interior of the vehicle. The dealer offered discounted model. The father is paying for the new car. Both parents are driving the car when they need it. Who is deciding which car they will buy?

  • An initiator is a person who first suggests the idea of buying a particular product or service.
  • An influencer is a person whose view or advice influences the decision.
  • A decider is a person who decides on any component of a buying decision.
  • A buyer is a person who makes the actual purchase.
  • A user is a person who consumes or uses the product or service.

You need to identify these roles because they have implications for designing the product, determining messages, and allocating the promotional budget. If the husband makes decisions about buying your products and services, you will direct advertising efforts to reach him. If his wife is participating, you have to think of some features to please her as well. Knowing the main participants and their roles helps you to fine-tune your marketing program.

User status

Some people have no clue that our products exist. Others heard about it, but they are not currently interested. Some people are informed but not convinced, while others are interested and desire the product.

Every product has its non-users, potential users, first-time users, regular users, and ex-users. Potential users are also consumers who will become users in connection with some life stage or life event. Family house owners are potential roof windows users, while flat owners are generally not. Mothers-to-be are potential users of baby equipment who will eventually turn into heavy users.

Market-share leaders tend to focus on attracting potential users because they have the most to gain. Smaller firms focus on current users to win them over the market leaders.

Usage rate

Usage rate measures the quantity of a product consumed by a user in a given period. We can divide users as heavy, moderate, and light. 

Heavy users are often small slice that generates a high percentage of total consumption. You are probably familiar with the Pareto principle, that 80% of consequences come from 20% of the causes. In our case, it means that 80% of the revenue is generated by 20% of customers.

Segmentation based on usage is simple. Different customers have diverse needs, and therefore they require a different quantity of products to satisfy them. A family car owner buys less fuel than a heavy truck owner. A company owning a fleet of heavy trucks uses more than a single truck owner.

If you are giving quantity discounts to your customers, you have already started with usage-based segmentation.

Loyalty status

You can learn a lot by analyzing degrees of brand loyalty:

  • Loyal users can help us identify our strengths;
  • Switchers can show which brands are most competitive;
  • By looking at customers dropping our brand, you can learn about your marketing weaknesses.

A high degree of customer loyalty provides you with two main positive effects: reducing marketing costs and increasing revenue. It is well known that gaining new customers is much more expensive than keeping existing ones.

Aaker’s Brand Loyalty pyramid describes five types of consumer behavior:

  • Switchers are buyers who are not loyal to the brand, and the brand itself does not influence their purchase decision. They tend to switch brands that they buy.
  • Satisfied and habitual buyers are the consumers who buy the brand out of habit. They tend to be reasonably happy customers. Although, when they have trouble finding their regular brand, they switch to another brand relatively easily.
  • Satisfied buyers with switching costs are buyers who are unwilling to switch to a competing brand due to existing obstacles. Such obstacles can be expenses incurred in terms of time, financial loss, or making concessions to quality.
  • Brand likers are true brand enthusiasts. Their brand preference is affected by emotional benefits and rational benefits such as price, time, and quality.
  • Committed buyers are the proud users of the brand. The brand itself plays a big role in their life. Committed buyers buy the specific brand because it has close ties with their values.

Generally speaking, customers do not like to change or admit that they were wrong by choosing a particular brand. Moreover, some level of inertia exists in customer choices. Still, without a clear strategy for creating and maintaining loyalty, no firm can build a loyal customer base.

Benefit-based segmentation

Segmentation based on benefits is when you group your customers based on the unique value they are looking to gain from your product or service.

Benefits are the outcomes or results that users will experience using your product or service – the very reason why a prospective customer becomes an actual customer. You can take an umbrella as an example. A feature can be its wind-resistant construction. An advantage is that it will remain open even on strong winds. The benefit for the user is staying dry despite the wind and rain.

Benefit-based segmentation classifies your customers by the value they will receive from your product or service. Use benefit segmentation to identify customers who would profit the most from your products and services. By targeting these customers, you can improve lead acquisition and ensure customer success.

When you know how potential customers benefit from your product or service, you can deliver the exact value they are looking for. Those customers are more likely to become repeating customers over time. For example, one toothpaste producer has toothpaste specifically made for teeth whitening and another for sensitive gums. Customers who preferably value a nice smile will benefit most from the first one. Those who have sensitive gums will opt for the second one to avoid possible pain, although they want to have nice teeth, as well.

You can also use benefit-based segmentation to create acquisition campaigns targeted toward a specific group of customers. Smartphone producers use benefit segmentation to personalize ads for different target audiences. In the cell phone industry, age is a significant determining factor for customer needs. Need from cell phone features changes from fun features, like cameras and apps for young users, to more practical, like battery life and security for adults.

Firmographic segmentation

Demographic segmentation focuses on characteristics tied to individuals. Firmographic segmentation shifts the focus to organizations — or companies — to collect and analyze information about your business-to-business customers.

You can segment business markets with some of the same variables used in consumer markets, such as location, usage rate, or loyalty status. But, business marketers also need another approach.

Firmographic market segmentation

According to Benson, Shapiro, and Bonoma, knowledge of the industry affords a broad understanding of customer needs and perceptions of purchase situations. They have identified five general segmentation criteria for B2B markets: demographics, operating variables, customer purchasing approaches, situational factors, and personal characteristics of the buyers.

Demographic criteria for B2B market segmentation

  • The industry type: Knowledge of the industry affords a broad understanding of customer needs and perceptions of purchase situations.
  • Company size: you will probably not approach large companies whose volume requirements exceed your production capacity.
  • Location: When closeness is a requirement for doing business, customer location is what matters. For example, in situations when transport costs are high or when close personal service is essential.

Operating variables for B2B market segmentation

  • Technology: The technology used by a company determine its requirements for raw materials, equipment, components, and services.
  • Product and Brand-Use status: Users of a particular product or brand generally have some characteristics in common. Also, your current customers are a different segment from prospective customers using a similar product purchased elsewhere.
  • Customer capabilities: Technically weak customers depend on suppliers for different kinds of assistance and technical support. Think about what kind of services you have to provide for your product to make it usable for various customers.

Purchasing approaches as segmentation variables

  • Purchasing function organization: A centralized approach may merge individual purchasing units into a single group.
  • Power structures: A company may have a financial or engineering department that strongly influences purchases. An offer with better financial terms or clear technical advantages would better suit different customers.
  • Buyer-Seller relationships: You can probably have stronger ties with some customers than with others.
  • General purchasing policies: Customers may prefer to do business with long-established companies or small, independent suppliers.
  • Purchasing criteria: In the industrial market, consideration of the criteria used to make purchases approximates the benefit segmentation approach for consumer markets.

Situational factors for segmenting B2B markets

  • The urgency of order fulfillment: It is worthwhile to differentiate between products ordered as routine purchases and those for occasional needs or urgent situations.
  • Product application: Product application has a significant impact on the purchase process and purchase criteria.
  • Size of order: Depending on your company profile and capacity, you can concentrate only on orders with large unit volumes. On the other hand, you might prefer small-quantity orders to achieve better prices and lower your risks.

Users may seek different suppliers for the same product under different circumstances. It is not necessary or even desirable to use every variable for each market segmentation. Although you can skip irrelevant criteria, it is useful that you completely understand the approach before deciding on variables to use.

Market segmentation variables

There are many variables for developing market segments, but not all segmentation schemes are efficient. We could divide buyers of icing sugar into blond and brunette customers. Although, hair color is surely irrelevant to the purchase of icing sugar.

Market segments must rate favorably on the following criteria:

  • Measurable: You must be able to measure differences that exist between customer segments.
  • Substantial: Your market must be large enough to justify segmenting. The segments must be profitable enough to serve. A market segment should be the largest possible homogeneous group worth going after with a tailored marketing program.
  • Accessible: the segments must be in your reach and able to receive marketing messages.
  • Differentiable: Different segments must need different benefits. Properly made market segments respond differently to marketing mix elements and programs you can offer to them.
  • Actionable: You should be able to formulate effective programs for attracting and serving the segments. Anticipated profits must exceed the costs of additional marketing plans and other changes.

Segmenting customers is not a one-fits-all process. Chosen segmentation variables are unique to every business. There is no right or wrong answer here — it depends on the specific market, customers, and the goals you want to achieve.

You can also experiment with new ways of grouping your customers to decide what makes the most sense.

Selecting the market segments

After gathering detailed information on all your segments, you need to spend some time deciding which ones are the most viable to use as your target audience.

The key is identifying which segments provide value in terms of potential, lifespan, accessibility, and profitability.

When different groups of consumers have different needs and want, you can divide the market into multiple segments. For each target segment, you can offer specific quality, price, information, or delivery. Hence, you can fine-tune the marketing program to meet their demands. In differentiated marketing, you can sell different products to each segment. Or you can sell the same products to more segments, but make a variation in other marketing elements.

Single-segment concentration is when you target only one particular segment. Through concentrated marketing, your business gains deep knowledge of customer’s needs and achieves a strong market presence. It also enjoys operating economies by specializing in its production, distribution, and promotion. If you capture segment leadership, your firm can earn a high return on its investment.

A niche is a more narrowly defined customer group seeking a distinctive mix of benefits within a segment. The niche is small but has a profit and growth potential. It is unlikely to attract many competitors. So, you can differentiate your business to gain through specialization.

Proper market segmentation pays off

To compete more effectively, many companies are now embracing target marketing. Instead of scattering their marketing efforts, they’re focusing on those consumers they have the greatest chance of satisfying.

Targeting the wrong customers can cost you—not just in wasted marketing dollars, but in higher operational costs associated with processing product returns, handling customer service calls, and responding to obscure customer reviews.

Conversely, targeting the right customers, with the right messages at the right time can pay off in terms of higher conversion rates, higher average order values, and increased profits. Targeting the right customers can also lead to brand advocacy and word-of-mouth advertising, valuable product insights, and greater overall customer satisfaction.

What is in the end?

“The ends are spent,
the beginnings always last.
The beginning – that’s what it is in the end!”

These wise verses can be applied to whole marketing efforts, including segmentation as an important part of it. Market segments are constantly changing. As the market is so complex and multidimensional, constant monitoring and adoptions are necessary. Marketing is an ongoing process. It never stops, whether you manage it or not.

Step forward toward your customers!

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