Market Segmentation: Types, Benefits, and Strategies

Whether developing a product or crafting a social media ad, it's important to recognize that your target market is not a monolith. Each individual has distinct characteristics, behaviors, and motivations.

Today, we'll explore how market segmentation enables you to better understand the diversity and differences within your audience and improve customer satisfaction while doing so. 

What is Market Segmentation?

Market segmentation is the dividing of a broad market into smaller, more manageable groups based on specific criteria, like demographic, location, psychographic, or behavioral data. 

By dividing a market or customer base into smaller segments, organizations can better understand the different types of people who buy from them and why. With this information, organizations can better tailor their product, marketing, and branding efforts to the most profitable segments, maximizing their ROI. 

The Types of Market Segmentation

Demographic Segmentation

Demographic segmentation divides a market based on age, gender, income, education, occupation, and family size. Getting started with demographic segmentation is relatively straightforward, as the data is easy to collect and analyze.

However, there are some drawbacks. We primarily live in a "post-demographic" world. Consumers continually construct and reconstruct their own identities, rebelling against top-down driven "norms" handed to them by the advertisements of old. The clear delineations between consumers based on gender, age, income, education, or ethnicity are not as helpful as they once seemed. To learn more about this, check out our piece: Segmentation: Maybe You Could Be Doing It Better. 

Geographic Segmentation

Geographic segmentation divides a market based on factors like region, country, city size, climate, and population density. This approach helps businesses target specific locations for summer promotions and others for winter. 

This type of segmentation can be a subset of demographic segmentation or a unique strategy. Understanding the geographical differences in customer needs and preferences helps determine where to sell, advertise, and expand a business. You can collect geographic segmentation data from customer surveys, third-party research, or operational data like IP addresses. 

Psychographic Segmentation

Psychographic segmentation considers psychological and lifestyle factors such as values, beliefs, interests, attitudes, and personality traits. This approach helps businesses understand and target specific consumer groups, such as environmentally conscious consumers or those interested in healthy living and exercise.

Surveys are an excellent way for organizations to get started with psychographic segmentation. Survey research makes gathering data points on beliefs, attitudes, and interests easy. This direct insight into people's beliefs and preferences allows for more effective targeting and messaging strategies.

Behavioral Segmentation

Behavioral segmentation categorizes consumers based on their purchase history, usage patterns, and brand loyalty. 

For example, segmenting an audience based on purchase behavior enables marketers to take a precise approach, centering their messaging and ads around the factors most likely to drive sales. 

Firmographic Segmentation

B2B organizations often use firmographic segmentation to divide their audience based on industry, company size, job titles, annual revenue, or company structure. 

This approach helps businesses understand the nuances of different types of organizations so they can tailor their strategy accordingly.

Benefits of Market Segmentation

Segmentation isn't just a strategy; it's a game-changer for organizations looking to connect with their customers on a deeper level. 

Aberdeen Research Firm found that email conversion rates increased by 10% when using segmentation. But not only were the conversion rates higher. People receiving segmented emails actually spent more. Marketers saw a 760% increase in revenues thanks to a segmented approach. 

Some additional benefits include:

Lower Acquisition Costs

By knowing your segments, you can tailor marketing communications and use advanced targeting on digital platforms to drive leads at lower costs. 

Attracting the Right Customers

Clear messaging that speaks right to your target audience's pain points will draw your ideal customers to your brand.

Market Expansion

Segmentation can uncover new opportunities, giving you ideas on where to expand your customer base and increase market share. 

Cost Efficiency

Targeting specific high purchase-intent segments reduces marketing waste, leading to a more efficient use of budget and resources. 

Product Customization

Understanding the unique needs of different segments allows you to customize your products or services to drive higher customer satisfaction and loyalty rates.

When and How Often Can Market Segmentation Studies Be Run? 

Traditionally, companies would perform segmentation every three to four years due to its time-consuming and expensive nature.

Today, organizations conduct market segmentation studies whenever there is a significant change in the market or target audience, like shifts in consumer preferences, the emergence of new competitors, or changes in market trends. 

Outside of standalone segmentation studies, you can run segmentation analysis on data from other research studies. This is done to understand how different segments react to the ideas in a concept test or to identify high purchase-intent consumers during new product development research.  

While there is no hard and fast rule on timing, waiting more than a year to update your segmentation will make it challenging to work with consumer behavior and preferences shifts. Keeping your segmentation up-to-date ensures that your marketing strategies remain practical and relevant in a constantly changing market.

Market Segmentation Examples

Market segmentation is a versatile tool you can apply across various departments and activities within your business. Here are some use case scenarios to illustrate how you can use market segmentation: 

Market Entry Strategy

Use market segmentation to assess the potential of new markets and identify the most lucrative segments to target. This can help you tailor your market entry strategy and optimize resource allocation for maximum impact.

Customer Acquisition

Segmenting your market allows you to identify high-potential customer groups and tailor your acquisition strategies to their needs and preferences. This leads to more efficient customer acquisition spending and higher conversion rates.

Product Portfolio Management

Market segmentation can help you evaluate your portfolio and identify opportunities for product development or retirement. Understanding the needs of different segments ensures that your product offerings remain relevant and competitive.

Customer Retention

Segmenting your customer base allows you to identify loyal customers and develop targeted retention strategies to keep them engaged. This can include personalized offers, loyalty programs, and exclusive content.

Price Optimization

By segmenting your market based on price sensitivity, you can optimize your pricing strategy to maximize revenue and profitability. This can involve offering different price points or discounts to different segments based on their willingness to pay.

Competitive Analysis

Segmenting your market allows you to analyze competitor performance within specific segments. This can help you identify competitive threats and opportunities for differentiation.

Customer Satisfaction and Loyalty

Market segmentation can help you understand the drivers of customer satisfaction and loyalty within different segments. This can help you tailor your customer service and engagement strategies to improve loyalty and retention.

Brand Positioning

Market segmentation can help you identify the most relevant positioning for your brand within different segments. This can help you develop messaging and branding strategies that resonate with your target audience.

Market Segmentation with SightX

SightX is an AI-driven market research platform that offers you a single unified solution for product, brand, marketing, and pricing research. While powerful enough for insights teams at Fortune 500 companies, our user-friendly interface makes it simple for anyone to start, optimize, and scale their research. 

And with our new Generative AI consultant, Ada, you can harness the power of OpenAI’s GPT to transform your marketing research and insights. Collaborating with Ada is like having an expert researcher, brilliant statistician, and ace marketer on your team, helping you ask the right questions, choose the best experiments, pick out key insights, and seamlessly apply them to your business.