Market segmentation: Definition, types and best practices

What is market segmentation?

At its core, market segmentation is the practice of dividing your target market into approachable groups. Market segmentation creates subsets of a market based on demographics, needs, priorities, common interests, and other psychographic or behavioural criteria used to better understand the target audience.

By understanding your market segments, you can leverage this targeting in product, sales, and marketing strategies. Market segments can power your product development cycles by informing how you create product offerings for different segments like men vs. women or high income vs. low income.

Read on to understand why segmentation is important for growth and the types of market segmentation to use to maximise the benefits for your business.

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The benefits of market segmentation

Companies who properly segment their market enjoy significant advantages. According to a study by Bain & Company, 81% of executives found that segmentation was crucial for growing profits. Bain also found that organisations with great market segmentation strategies enjoyed a 10% higher profit than companies whose segmentation wasn’t as effective over a 5-year period.

Other benefits include:

1. Stronger marketing messages: You no longer have to be generic and vague – you can speak directly to a specific group of people in ways they can relate to, because you understand their characteristics, wants and needs.
2. Targeted digital advertising: Market segmentation helps you understand and define your audience’s characteristics, so you can direct your marketing efforts to specific ages, locations, buying habits, interests etc.
3. Developing effective marketing strategies: Knowing your target audience gives you a head start about what methods, tactics and solutions they will be most responsive to.
4. Better response rates and lower acquisition costs: will result from creating your marketing communications both in ad messaging and advanced targeting on digital platforms like Facebook and Google using your segmentation
5. Attracting the right customers: targeted, clear and direct messaging attracts the people you want to buy from you
6. Increasing brand loyalty: when customers feel understood, uniquely well served and trusting, they are more likely to stick with your brand
7. Differentiating your brand from the competition: More specific, personal messaging makes your brand stand out
8. Identifying niche markets: segmentation can uncover not only underserved markets, but also new ways of serving existing markets – opportunities which can be used to grow your brand.
9. Staying on message: As segmentation is so linear, it’s easy to stay on track with your marketing strategies, and not get distracted into less effective areas
10. Driving growth: You can encourage customers to buy from you again, or trade up from a lower-priced product or service
11. Enhanced profits: Different customers have different disposable incomes; prices can be set according to how much they are willing to spend. Knowing this can ensure you don’t over (or under) sell yourself.
12. Product development: You’ll be able to design with the needs of your customers top of mind, and develop different products that cater to your different customer base areas.

Companies like American Express, Mercedes Benz, and Best Buy have all used segmentation strategies to increase sales, build better products, and engage better with their prospects and customers.

The basics of segmentation in marketing

Understanding segmentation starts with learning about the various ways you can segment your market. There are four primary categories of segmentation, illustrated below.

Types of market segmentation

With segmentation and targeting, you want to understand how your market will respond in a given situation, like purchasing your products. In many cases, a predictive model may be incorporated into the study so that you can group individuals within identified segments based on specific answers to survey questions.

Demographic segmentation

Demographic segmentation sorts a market by elements such as age, education, household income, marital status, family size, race, gender, occupation, and nationality. The demographic approach is one of the simplest and most commonly used types of market segmentation because the products and services we buy, how we use those products, and how much we are willing to spend on them is most often based on demographic factors. It’s also seen as a simple method of predicting future behaviour, because target audiences with similar characteristics often behave in similar ways.

How to start demographic segmentation

Demographic segmentation is often the easiest because the information is the most readily available. You can send surveys directly to customers to determine their demographic data, or use readily available third party data such as government census data to gather further information.

Geographic segmentation

Geographic segmentation can be a subset of demographic segmentation, although it can also be a unique type of market segmentation in its own right. As its name suggests, it creates different target customer groups based on geographical boundaries. Because potential customers have needs, preferences, and interests that differ according to their geographies, understanding the climates and geographic regions of customer groups can help determine where to sell and advertise, as well as where to expand your business.

How to start geographic segmentation

Geographic segmentation data again can be solicited from customers through surveys or available third party market research data, or can be sourced from operational data such as IP addresses for website visitors.

Firmographic segmentation

Firmographic segmentation is similar to demographic segmentation, except that demographics look at individuals while firmographics look at organisations. Firmographic segmentation would consider things like company size, number of employees and would illustrate how addressing a small business would differ from addressing an enterprise corporation.

How to start firmographic segmentation

Firmographic segmentation data can be found in public listings for companies and information that the business makes available, as well as trade publications. Again, surveying existing and potential customers can help to build out this data.

Behavioural segmentation

Behavioral Segmentation divides markets by behaviours and decision-making patterns such as purchase, consumption, lifestyle, and usage. For instance, younger buyers may tend to purchase bottled body wash, while older consumer groups may lean towards soap bars. Segmenting markets based on purchase behaviours enables marketers to develop a more targeted approach, because you can focus on what you know they are looking for, and are therefore more likely to buy.

How to start behavioural segmentation

Of all the types of market segmentation, behavioural segmentation is likely best started with the information you have on an existing customer base. Though it can be bolstered by third party market research data, the information you already have on customer purchase and usage behaviour will be the best predictor of future behaviour.

Psychographic segmentation

Psychographic segmentation considers the psychological aspects of consumer behaviour by dividing markets according to lifestyle, personality traits, values, opinions, and interests of consumers. Large markets like the fitness market use psychographic segmentation when they sort their customers into categories of people who care about healthy living and exercise.

How to start psychographic segmentation

Psychographic segmentation relies on data provided by the consumers themselves. Though market research might provide insights on what particular segments are most likely to believe or prefer, psychographic segmentation is best completed with information direct from the source. You can use survey questions with a qualitative focus to help draw out insights in the customers’ own voice.

How to get started with segmentation

There are five primary steps to segmentation:

1. Define your market: Is there a need for your products and services? Is the market large or small? Where does your brand sit in the current marketplace?
2. Segment your market: Decide which of the five criteria (demographic/firmographic, psychographic, geographic or behaviour) you want to use to segment your market. You don’t need to stick to just one – in fact, most brands use a combination – so experiment with each one and find what works best.
3. Understand your market: You do this by conducting preliminary research surveys, focus groups, polls, etc. Ask questions that relate to the segments you have chosen, and use a combination of quantitative (tickable/selectable boxes) and qualitative (open-ended for open text responses) questions.
4. Create your customer segments: Analyse the responses from your research to highlight which customer segments are most relevant to your brand.
5. Test your marketing strategy: Once you have interpreted your responses, test your findings on your target market, using conversion tracking to see how effective it is. And keep testing. If uptake is disappointing, relook at your segments or your research methods.

Market segmentation strategy

Why should market segmentation be considered a strategy? A strategy is a considered plan that takes you from point A to point B in an effective and useful way. Market segmentation is similar, as there will be times you need to revisit your market segments, such as:

In times of rapid change: A great example is how the Covid-19 pandemic forced a lot of businesses to rethink how they sell to customers. Businesses with physical stores looked at online ordering, while restaurant owners considered collections.

If your customers change, then your market segmentation should as well, so you can understand clearly what your new customers need and want from you.

On a yearly basis: Market segments can change year on year as customers are affected by external factors that could alter their behaviour and responses.

For example, natural disasters caused by global warming may impact whether a family chooses to stay living in an area prone to more of these events. On a larger scale, if your target customer segment moves away from one of your sales regions, you may want to consider re-focussing your sales activities in more populated areas.

At periodic times during the year: If you’ve explored your market and created market segments in the Spring, the same market segments may have different characteristics at a different time of the year.

For example, Winter has several holidays, with Christmas being a huge influence on families. This holiday impacts your market segments’ buying habits, how they’ll behave (spending more than normal at this time than any other) and where they will travel too (back home for the holidays). Knowing this information can help you predict and prepare for this period.

When considering updating your market segmentation strategy, consider these three areas:

1. Acknowledge what has changed: Find out what has happened between one time period to another, and what have been the driving forces for that change. By understanding the reasons why your market is different, you can make key decisions on whether you want to change your approach or stay the course.
2. Don’t wait to start planning: Businesses are always adapting to long-term trends, so refreshing market segmentation research puts you in a proactive place to tackle these changes head-on. When you have your market segments, a good idea is to consider the long-term complications or risks associated with each segment, and forward-plan some time to discuss problem-solving if those issues arise.
3. Go from what to why: Why did those driving forces come about? Why are there risks with your target market? At Qualtrics, we partner with companies to understand the different aspects of the target markets that drive or slow success. You’ll have the internal data to understand what’s happening; we help unleash insight into why with advanced modelling techniques. This helps you get smart market segmentation that is predictive and actionable, making it easier for future research and long-term segment reporting.

Market segmentation use case examples

Where can you use market segmentation in your business? We’ve collected some use case scenarios to help you see how market segmentation can be built in across several departments and activities:

Market and opportunity assessments

When your business wants to enter into a new market or look for growth opportunities, market segmentation can help you understand the sales potential. It can assist in breaking down your research, by aligning your findings to your target audience groups.

For example, When you’ve identified the threats and opportunities within a new market, you can apply your customer segment knowledge to the information to understand how target customers might respond to new ideas, products, or services.

Segmentation and targeting

If you have your entire market separated into different customer segments,  then you have defined them by set criteria, like demographics, needs, priorities, common interests, or behaviour preferences.

With this information, you can target your products and services towards these market segments, making marketing messages and collateral that will resonate with the segment’s criteria.

Customer needs research

When you know a lot about your customers, you can understand where your business is connecting well with them and where there can be improvements.

Market segmentation can help with customer needs research (also known as habits and practices research) to deliver information about customer needs, preferences, and product or service usage. This helps you identify and understand gaps in your offerings that can be scheduled for development or follow-up.

Product development

If the product or service you’ve developed doesn’t solve the problem of your target audience or isn’t useful, then that product will have difficulty selling. When you know what each of your market segments cares about and how they live their lives, it’s easier to know what products will enrich or enhance their day to day.

Use market segmentation to understand your customers clearly, so that you can save time and money developing products and services that your customers will want to purchase.

Campaign optimisation

Marketing and content teams will value having detailed information on each segment, as this allows them to personalise their campaigns and strategies at scale. This may lead to variations in messaging that they know will connect with audiences better, making their campaign results more effective.

If the campaigns are combined with strong calls to action, the marketing campaigns will be a powerful tool that drives your target market segments towards your sales channels.

Ensuring effective segments

After you determine your segments, you want to ensure they’ll be useful. A good segmentation analysis should pass the following tests:

• Measurable: Measurable means that your segmentation variables are directly related to purchasing a product. You should be able to calculate or estimate how much your segment will spend on your product.For example, one of your segments may be those who are more likely to shop during a promotion or sale.
• Accessible: Understanding your customers and being able to reach them are two different things. Your segments’ characteristics and behaviour should help you identify the best way to meet them.For example, you may find that a key segment is resistant to technology and relies on newspaper or radio ads to hear about store promotions, while another segment is best reached on your mobile app. One of your segments might be a male retiree who is less likely to use a mobile app or read email, but responds well to printed ads.
• Substantial: The market segment must have the ability to purchase. For example, if you are a high-end retailer, your store visitors may want to purchase your goods but realistically can’t afford them. Make sure an identified segment is not just interested in you, but can be expected to purchase from you.In this instance, your market might include environmental enthusiasts who are willing to pay a premium for eco-friendly products, leisurely retirees who can afford your goods, and successful entrepreneurs who want to show off their wealth.
• Actionable: The market segment must produce the differential response when exposed to the market offering. This means that each of your segments must be different and unique from each other.Let’s say that your segmentation reveals that people who love their pets and people who care about the environment have the same purchasing habits. Rather than have two separate segments, you should consider grouping both together in a single segment.

Market segmentation is not an exact science. As you go through the process, you may realise that segmenting based on behaviours doesn’t give you actionable segments, but behavioural segmentation does. You’ll want to iterate on your findings to ensure you’ve found the best fit for the needs of your marketing, sales and product organisations.

Common segmentation errors

We’ve outlined the do’s, so here are some of the dont’s:

• Avoid making your segments too small or specialised: Small segments may not be quantifiable or accurate, and can be distracting rather than insightful
• Don’t just focus on the segment rather than the money: Your strategy may have identified a large segment, but unless it has the buying power and wants or needs your product, it won’t deliver a return on investment
• Don’t be inflexible: Customers and circumstances change, so don’t let your segments become too entrenched – be prepared to let them evolve.

Market segmentation doesn’t need to be complicated to be effective. We would advise, though, to get automated from the beginning. Forget spreadsheets – choose market segmentation software to measure and streamline your marketing strategy; as you grow, the technology will scale with you.

Innovative features such as XM Directory allow you to build your own customer segments and start personalising experiences at scale based on the rich insights into your critical customer groups.

If you want to get a feel for your market segmentation upfront, before taking a step towards a streamlined and integrated system, trust us to take you through the research with our Market Segmentation Research service.

Qualtrics solutions for market segmentation

Market segmentation doesn’t need to be complicated to be effective. We would advise, though, to get automated from the beginning. Forget spreadsheets – choose market segmentation software to measure and streamline your marketing strategy; as you grow, the technology will scale with you.

Innovative features such as XM Directory allow you to build your own customer segments and start personalising experiences at scale based on the rich insights into your critical customer groups.

If you want to get a feel for your market segmentation upfront, before taking a step towards a streamlined and integrated system, trust us to take you through the research with our Market Segmentation Research service.