10 MIN READ

Market Segmentation

Identifying Your Different Target Markets

Market Segmentation - Identifying Your Different Target Markets

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JANIFEST

Segmenting your market can radically increase your profits.

How do you know your product or service is really hitting the mark with all of your customers? While some of your customers find a new product feature delightful, others may detest it.

After all, you may have thousands, even millions of customers and they're all different, with often very different preferences, tastes and thoughts.

Market segmentation can help you to divide your customer base into groups of people with similar desires. This means that you can tune your product, services and marketing strategy to meet each segment's specific requirements.

In this article, we'll take a deeper look at market segmentation, as well as the benefits of using it, and how you can apply it to your organization.

Market Segmentation: Definition and Benefits

Market segmentation is the process of dividing your target market into clearly defined subgroups of consumers who have common charactistics and priorities. When you identify these segments, you can tailor your marketing strategy so you are better able to meet your customer's wants and needs.

This approach enables you to focus your marketing and sales efforts where they're most likely to pay off, thus maximizing your return on investment. Tailoring products and services to market segments can also help to increase customer loyalty and engagement.

Even if you sell the same basic product to all customers, you can use market segmentation to develop packages of products or services that are tailored to each group that you identify.

In many cases, marketers intuitively understand who their subgroups are. However, a formal analysis is useful to ensure that you don't overlook an important segment – particularly as products develop over time.

Market Segmentation: An Example

A fitness center, with thousands of customers, wants to improve it's marketing strategy and product offering. It begins by analyzing it's customer base using market segmentation.

The fitness center already knows that its daytime users are mainly parents and retirees. To appeal to parents, it could advertise family-friendly facilities on billboards, leaflets or targeted websites.

The fitness center also explores how it can improve its product offering to meet the needs of its parent customer base. One option could be to offer childcare services and fitness activities for older children while their parents work out. It also considers offering a reduced price for customers belonging to this category in the afternoons, to boost attendance during the quieter period of the day.

Another customer segment identified by the fitness center is retirees. These customers have entirely different expectations and needs.

To meet the needs of this segment, the center considers employing personal trainers who specialize in helping older adults keep fit, or running special exercise classes during the day.

These new products could then be advertised on channels that older customers tend to prefer, such as the radio, local newspapers, or targeted websites and social media groups. The fitness center also considers offering lower-priced packages to encourage older people to visit the center outside of peak times.

Finally, the fitness center considers how to tailor its offering to its evening crowd. Generally, these include busy professionals, who want to attend outside of working hours.

The fitness center could showcase cutting-edge machines that might interest these customers, or it could make more personal trainers available in the evenings to customize workouts.

Marketing and promotions could then be sent to customers on targeted channels, such as text, social media, or the web. These activities would significantly boost the fitness center's profits, since the number of people using the clubs tends to increase in the evening.

Types of Market Segmentation

Typically, markets are segmented in four main ways:

Geographical

This involves tailoring products or marketing activity by customer location. For example by your customers' country, language, region, state, city, or zipcode.

Demographic

This is often the most common form of segmentation as it focuses on basic customer demographics, such as age, gender, occupation, income, or ethnicity.

Psychographic

This type of data is often harder to collect, as it deals with customer emotions and feelings. However, it can add valuable insight into your customers' motives and preferences.

Psychographic segmentation focuses on things like lifestyle, values, hobbies, or interests.

Behavioral

This form of market segmentation includes buying behaviour, spending habits, social media interactions, or previous customer feedback.

Behaviorial segmentation is often the easiest to explore, as organizations can build up a picture of customers' behavior relatively easily using web analytic tools, which collect data such as page clicks, past orders, usage, and social media interactions.

For example, online retail giant Amazon® advertises products to customers based on items that they have purchased in the past. While film streaming service Netflix™ recommends movies to users based on the ones that they have already expressed interest in. Both of these organizations track consumer purchases and activity, and segment their market based on actual behavior.

Other Types of Market Segmentation

Although the four categories described above are typically used in market segmentation, you can segment your customers any way you want.

Here are some other forms of segmentation you may want to consider:

  • Generational/Life Stage – this expands on the demographic approach, but segments customers into generational groups, such as Baby Boomers, Gen X, Gen Y (millennials), and Gen Z (also known as "zoomers"). You can also split customers up by life stage. For example, whether they're going to college, getting married, having children, or are retired.
  • Technographic – this type of segmentation looks at customers based on their use of technology. For example, whether they are early adopters of a certain piece of tech, majority users, or late adopters. Tech giant Apple®, for instance, often offers a “luxury,” cutting-edge model of its newly-launched products to early adopters for a premium. These particular customers are a highly diverse group, but they are all willing to spend more to have the newest Apple products first. At the same time, Apple continues to sell its previous generation items, which are less expensive and so more appealing to cost-conscious users.
  • Value – some organizations segment their customers according to the value that they can provide. In other words, how much they're likely to spend on products based on their previous purchase history.
  • Firmographic – this type of segmentation is most often used by organizations that target the business-to-business (B2B) market. It works by splitting up business customers into groups depending on shared characteristics, such as by industry, revenue, size, or location.

How to Use Market Segmentation

Whatever way you decide to segment your market, it's important to first clarify the common characteristics of each group, as well as the differences between them.

Also consider the following questions:

  • Accessible: are you able to reach the subgroup you've identified through cost-effective and practical marketing and distribution channels?
  • Measurable: can you estimate each subgroup's size easily, so that you can allocate marketing spend accordingly?
  • Substantial: is the segment large, established and stable enough to justify its own marketing activity?
  • Viable: can people within the subgroup afford your product, and will they see clear and desirable advantages of using it, compared with other products and services?

Tip:

Segments that represent small sections of an overall market are known as "niche markets." Organizations may focus on these when their product's price is high, or when the market is especially large. A segment representing only two percent of the total market may be big enough to sustain a good-sized business.

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Hyper Segmentation

Hyper segmentation means breaking down large customer segments into ever smaller sub-groups. It goes beyond niche segmentation, and can even encompass one-to-one marketing.

New technologies have enabled companies to collect a vast amount of data on their customers and their buying habits. This has allowed them to gain a a great deal of insight into their customers' personal interactions with their brand, as well as their spending habits and online activity.

Big Data has stimulated this trend, and allowed companies to become more and more effective at personalizing their ads and messaging even to specific, individual customers.

Hyper segmentation can have a number of benefits:

  • The ability to offer personalized solutions, products or tailored marketing content to customers.
  • Customers feel seen and heard by the brands they use, which can increase customer loyalty and intimacy.
  • Companies are better able to match the specific needs and wants of their customers.

However, hyper segmentation has a number of limitations, particularly in terms of the ethics and legalities involved in collecting customer data. It can also be very difficult and costly to tailor items and marketing to each individual customer, and so some, more generalized market segmentation is still required.

Key Points

Market segmentation is the process of dividing your customer base into different sub-groups that have shared characteristics.

This can help you to understand more about your customers' wants and needs, to tailor products and marketing activity to meet these specific needs, and to identify segments of the market that will be most profitable to you.

Markets tend to be segmented in four main ways:

  1. Geographically – country, region, city, or zipcode.
  2. Demographicly – age, gender, occupation, income, or ethnicity.
  3. Psychographic4ly – lifestyle, values, hobbies, or interests.
  4. Behaviorially – buying behavior, spending habits, social media interactions, or customer feedback.

However, customers can segment their customers in any way they want, so that it is most useful to them.

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Comments (13)
  • Over a month ago Michele wrote
    Hi Dishaskills,

    Welcome to the club! It's great to see you jumping right in to find the resources you need. We appreciate your feedback on the article. If you need support finding resources, let us know. A member of the Mind Tools Team will be happy to help you. Remember to check out the Forums too.

    Michele
    Mind Tolls Team
  • Over a month ago Dishaskills wrote
    Excellent , very effective & clear
  • Over a month ago Midgie wrote
    Hi Lillian_Flowers,
    Great to hear that you appreciate the idea of applying things to your life! There are indeed many parallels. That could be a great discussion in the Club forum area to see how other members apply this to their lives. Why not hop over there and start a discussion to see what everyone has to offer.

    Midgie
    Mind Tools Team
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