Market Segmentation

Market segmentation is a crucial strategy that helps businesses target specific groups of customers based on shared characteristics. This article will give you a clear understanding of what market segmentation is, why it’s important, and how it works. Whether you’re familiar with the term or new to it, we’ll cover everything you need to know in this article to leverage this key marketing tool effectively. 

What is market segmentation? 

Market segmentation is the process of dividing a broad consumer or business market into sub-groups of consumers based on shared characteristics like demographics, behaviours, or needs. This allows businesses to create more personalised and effective marketing strategies, ensuring they meet the specific preferences of different customer groups. 

Once you understand market segmentation, you can easily find ways to increase sales. In fact according to this article, when Bain & Company recently surveyed executives about their experiences with customer segmentation, 81% said it was a critical tool for growing profits, but fewer than 25% believed their companies used it effectively. Flawed segmentation stunts profit growth. Bain & Copany analysis shows that, over a five-year period, businesses that successfully tailor product and service offerings to desirable customer segments post annual profit growth of about 15%. By contrast, companies that fail to connect the right value propositions to the right customer segments realise annual profit growth of only 5%. 

What are the benefits of Market segmentation 

• Effective marketing messages 

When you divide your market into segments, it is easy to communicate the audience you can now speak directly to a specific group in a way that they would engage because segments are grouped according to their different needs and wants 

• Targeted advertising 

Market segmentation helps you understand customer behaviuor as a result you will come up with the perfect customer profile which shows their character, age, income and lifestyle. Once you have a profile you can easily create an ad specifically tailored for each segment 

• Develop effective marketing strategy

When you know who your target audience is, you can easily figure out the best methods and solutions that will catch their interest. 

• Improving response rates and reducing acquisition cost

Achieve this by tailoring your marketing messages and using advanced targeting on digital platforms like Facebook and Google based on your audience segmentation. 

• Increase Brand loyalty

When customers feel you understand what their needs and wants are they are most likely to stay loyal to your brand simply because you understand them.  

Customer Segmentation Types 

• Demographic Segmentation: 

This divides customer based on measurable characteristics like age, gender, income, education, occupation, and family size. For instance, a store selling hand-crafted shoes might target affluent professionals aged 30-50 who value quality and exclusivity in their footwear. 

• Geographic Segmentation:

Here, customers are grouped based on their location, such as country, region, city, climate, or population density. For example, a restaurant chain might adjust its menu offerings based on regional preferences or climate. In South Africa, a fast-food chain might offer different menu items in Johannesburg compared to Durban, considering local tastes and preferences. 

• Psychographic Segmentation:  

This segmentation focuses on customers’ lifestyles, beliefs, attitudes, and values. For instance, a beauty salon might target environmentally conscious consumers who prefer organic and cruelty-free beauty products and treatments. 

• Behavioural Segmentation: 

This categorizes customers based on their purchasing behaviour, usage patterns, brand loyalty, and benefits sought. For example, a coffee shop might offer loyalty cards to frequent customers to encourage repeat visits and brand loyalty. 

• Technographic Segmentation: 

This looks at how customers use technology, such as social media platforms, smartphones, or online shopping habits. For example, an online retailer might target tech-savvy customers who prefer to shop via mobile apps for convenience and quick transactions. 

• Firmographic Segmentation: 

In Business 2 Business markets, businesses are segmented based on firmographic factors like industry type, company size, annual revenue, and geographic location. For instance, a software company might target large financial institutions needing advanced security solutions tailored to their industry regulations and scale of operations. 

Each type of segmentation helps businesses understand their target audience better, allowing them to tailor their marketing strategies, product offerings, and customer experiences to meet specific needs and preferences effectively.

Steps to start segmentation 

Step 1: Define Your Market 

What to Ask: Is there a need for your products and services? Is the market large or small? Where does your brand fit in the current marketplace? 

Step 2: Segment Your Market 

How to Do It: Decide which criteria to use—demographic, psychographic, geographic, technographic etc. Most brands use a combination, so experiment to find what works best. 

Step 3: Understand Your Market 

Research Methods: Conduct surveys, focus groups, polls, etc. Ask questions that relate to your chosen segments. Use both quantitative (multiple-choice) and qualitative (open-ended) questions. 

Step 4: Create Your Customer Segments 

Analyse Data: Review responses from your research to identify which customer segments are most relevant to your brand. 

Step 5: Test Your Marketing Strategy 

Implementation: Test your findings on your target market and use conversion tracking to measure effectiveness. Keep testing and adjust your segments or research methods if results are disappointing. 

How to update your segmentation strategy 

1. Acknowledge What Has Changed 

What to Do: Identify what has changed over time and the reasons behind these changes. This helps you decide whether to adjust your approach or stick with your current strategy. 

Why It Matters: Understanding market changes allows you to make informed decisions and stay relevant. 

2. Don’t Wait to Start Planning 

What to Do: Continuously update your market segmentation research to stay ahead of long-term trends. Consider potential risks and complications for each segment and plan for solutions. 

Why It Matters: Being proactive keeps your business adaptable and prepared for future challenges. 

3. Go from What to Why 

What to Do: Investigate the reasons behind market changes and risks. Partner with experts to gain deeper insights using advanced modeling techniques. 

Why It Matters: Understanding the “why” behind market behaviors helps you create predictive and actionable segments, improving your research and reporting in the long term. 

Ensuring effective segments: Simple guide 

Once you have identified your market segments, it’s important to ensure they are useful. Here are four key tests your segmentation analysis should pass, with practical examples for different types of businesses: 

1. Measurable

What It Means: You need to be able to measure how much each segment will spend on your product. This helps you understand their buying potential. 

Example: Ice Cream and Coffee Shop – One segment might be families who come in for weekend treats. You can measure how much this group spends on average per visit. 

2. Accessible

What It Means: It’s crucial to know how to reach your segments effectively. Knowing their characteristics and behaviours will help you choose the best communication channels. 

Example: Hand Crafted Shoes Store – You might find that your key segment, fashion-conscious professionals, prefers to hear about new products through social media platforms like Instagram. This helps you focus your marketing efforts on these channels. 

3. Substantial

What It Means: Your market segment should have enough potential customers who can actually afford to buy your product. 

Example: Restaurant – If you run a fine-dining restaurant, targeting affluent couples who enjoy gourmet experiences will be more effective than targeting college students. This group is more likely to afford your high-end menu. 

4. Actionable

What It Means: Each segment should respond differently to your marketing efforts. If two segments behave the same way, consider combining them. 

Example: Beauty Salon – If you find that both young professionals and middle-aged women are equally likely to book appointments for spa treatments, you could group them into one segment. This way, your marketing efforts can target this combined group more efficiently. 

By ensuring your segments are measurable, accessible, substantial, and actionable, you can create more effective marketing strategies that reach the right customers and drive sales. 

Common Segmentation Mistakes 

Avoid Making Segments Too Small or Specialised 

Why: Small segments may not provide accurate data and can be more of a distraction than a help. 

Tip: Aim for segments that are large enough to be meaningful and measurable. 

Focus on Buying Power, Not Just the Segment Size 

Why: A large segment without the ability or desire to buy your product won’t generate sales. 

Tip: Ensure your segments not only exist but also have the financial means and interest in your product. 

Be Flexible and Adapt to Changes 

Why: Customer needs and market conditions change over time. 

Tip: Regularly review and adjust your segments to stay relevant and effective. 

We hope you find this article useful. BoostIT offers a range of marketing services, let us help you with your business by visiting our page.