Market Segmentation | Speak Your Customers’ Language
If you give a speech to a thousand random people, some may love it, some hate it, and some feel indifferent. The same thing happens when you send marketing messages. You may hit the mark with a small part of your audience, but others will dismiss the message and move onto something that meets their needs. Similarly, you may be able to create products and services that a few members of the audience like, but the rest are turned off because the approach doesn’t work for their unique needs and preferences.
This is where market segmentation can help. It allows you to create more personalised products and services, and market them in a way that is relevant and compelling to your target consumers. This can do wonders for your sales and revenue. Here’s how it works.
What is market segmentation?
What is market segmentation, exactly? In a nutshell, it’s a way to group customers with similar needs
The products and services we buy are driven by who we are, where we live, and how we think and behave. An elderly man from Darwin wants different things to an executive businesswoman living in Sydney. And a teenager in Brisbane may want different things to both. So if you’re a global company targeting diverse customers, how do you meet their wants and needs? Market segmentation.
Market segmentation is the process of dividing broad groups of consumers with a variety of needs into smaller groups with similar needs. This allows you to design products and services that are suited to each segment, and market them in a way that speaks their language. It’s a differentiated approach to marketing and product development that recognises the common attributes of groups and then capitalises on them. In theory, it allows you to better understand your customers, and target customer segments that move the dial for your business.
Markets are usually segmented in four different ways, each with their own attributes:
- Demographic—age, marital status, income, etc.
- Geographic—country, city, climate, etc.
- Psychographic—personality traits, beliefs, fears, etc.
- Behavioural—consumer buying behaviour, product usage, etc.
Take ketchup as an example. A company that produces ketchup may segment their customers to identify new variations of their sauce. People in their teens and early twenties are probably happy with the original ketchup with full sugar and salt, whereas older, health-conscious people may reach for the ketchup with reduced sugar. And seniors who need to watch their heart-busting salt consumption may reach for the ketchup with reduced salt. So the company can create three unique products for three segments, and then choose the marketing methods and channels that best sell them.
Types of market segmentation
There are four common type of market segmentation, but you may use a variety of attributes from each method when segmentating your own customers. If you stick to just one (like their demographics), you may not get a clear enough picture of the customer.
Here’s an overview of how each segment works.
Demographic segmentation is based on attributes like age, gender, and marital status. This is one of the most common ways to segment because the information is tangible and can be easier to find (compared to a psychological attribute like “beliefs,” for example).
Demographic attributes like age, income, and religion can tell you a lot about what people may want. You won’t sell death metal t-shirts to an elderly Christian, but you may have some luck with atheist teenagers. Similarly, there’s no point trying to sell designer suits to people who don’t earn enough money to buy them, but business executives might snap them up.
Geographic segmentation focuses on where your customers are
Geographic segmentation is based on where your customers live, as well as some other useful attributes like their climate and cultural preferences. If you’re a company that relies on local customers, or targets customers in a particular town, city, or country, this is already one of your most important market segments.
Geographic segmentation is crucial if you’re thinking of expanding into a new city as part of a market development strategy. You’ll need to create a new customer segment for the city, and identify any key differences between your current customers and this new segment. What works for your current customers may not work for the new market, especially if it’s an unfamiliar country. On a smaller scale, even customers who live in different towns can have distinct preferences, especially if the cultures of those towns vary.
Psychographic segmentation is based on the customer’s mental traits, and includes attributes like their personality, values, and motivations. It’s qualitative data that can speak volumes about why the customer may (or may not) buy from you. Somebody who believes strongly in animal conservation is unlikely to buy a fur coat. A highly religious conservative voter might not have much interest in an LGBTQ event. Our psychology is who we are, which makes psychographic segmentation a valuable asset.
While psychographic segmentation is about why your customers behave in certain ways, behavioural segmentation is what they actually do. Attributes include their purchasing behaviour, how they use a product or service, and the benefits they get from them. Examining how your customers behave can help you to predict how similar customers might behave in the future.
10 benefits of market segmentation
Here’s 10 benefits of market segmentation, and why you may want to consider doing it for your company.
1. Sharper marketing
As you develop accurate market segments for your business, your consumers change from a shapeless blob into a selection of distinct, describable groups. You’ll know who your consumers are, where they live, and what they might want from your business.
Billions of years of evolution has taught us to hone in on the information that helps us thrive, and dismiss information that is irrelevant. As our ancestor stalks a deer through a forest, his full focus is on the shape and movement of the deer. He blocks out rustling leaves, the calls of birds, and the rabbit that scurries past his feet, because at that moment they are irrelevant to him. It’s the same with marketing messages—we move through our days with short and long term goals, and (usually) have a good understanding of how to achieve them. So when an advert pops up that has nothing to do with them, we ignore it in the same way the hunter ignores the leaves, the birds, and the scurrying rabbit. They’re not relevant to him at that point because he needs the deer.
That’s the power of market segmentation. It allows you to create campaigns that are relevant to the needs of your segmented customers, so they hone in on them and are much more likely to take action. Take EDMs for example. They are easy to send to one big customer list, but you won’t reach people on a personal level. Individual EDMs to segmented customers require more work, but if your segments are rooted in solid research and experience, your messaging will resonate and encourage them to click. Segments allow you to move away from feeble mass marketing and closer to ultra-personal marketing. They’re a way to speak to your customers more directly.
2. Better product and service development
With rigorous knowledge of your market segments, you can create products and services that are suited to them, and that they are more inclined to buy. People who fit within the segments can also be introduced into your development process, to help you create something that they not only need, but want.
3. Helps you achieve your business goals
Market segments are ultimately a way for you to achieve your business goals, and should be developed with these in mind (more on this below). As you create market segments with a view to reach your goals and revenue targets, you’ll find that both become easier to hit.
4. Better sales process
Market segmentation is a way for you to understand your customers better, which can turn your salespeople into maestros. If you know a person’s rough age, interests, and cultural preferences, you already have a much better understanding of what they might want, which makes it easier to sell to them.
Your sales team can help you to develop your market segments too. They speak to prospects every day, so they should be able to describe a lot of their qualities with little effort.
5. Better customer service
The better you know your customers, the better you can help to meet their needs and resolve their problems. Your customer service becomes much more personalised and successful.
6. Lower acquisition costs
With your marketing now razor-sharp, you’ll spend less on acquiring new customers, and can either re-invest the savings into the marketing techniques that are most profitable, or another key area of your business.
7. Attract the right leads
Attracting unsuitable leads is expensive for a business. There’s money wasted on advertising, staff time, and software for managing them. With market segments, you can promote your products and services to the people who create revenue for your firm.
8. Greater brand loyalty
One of the best things about market segments is that they allow you to speak your customer’s language. Communication becomes easy when you know someone intimately, and eventually, the enjoyable “conversation” between consumer and brand helps to turn them from cold leads into full-blown advocates who gleefully tell their friends and family about you.
If you’d like to learn more about how to measure customer loyalty, check out our article on the Customer Loyalty Index.
9. Identify new markets
While creating market segments, you’re encouraged to think about your company’s vision—your most daring long term ambitions that would set you apart from your competitors. With this ultimate vision in mind, you may uncover new market growth opportunities (like market penetration) and decide to take them on, creating brand new competitors as you slowly realise your goals.
10. Know your customers better
Your customers pay your bills and keep your business successful, so the more you know about them, the better you can sell and market.
Market segmentation examples
Here’s a breakdown of market segmentation examples across each type:
|Attribute||Example of usage|
|Age||A sports shop targeting its skateboards towards teenagers, and road bikes to people who are 30+|
|Gender||A soap company is likely to sell more skin-enhancing bars to females, and everyday bars to males|
|Marital status||A dating app may benefit from creating a marketing segment for single people.|
|Income||Teenagers with little disposable income aren’t likely to buy new BMWs.|
|Life stage||Retirees are a good target for caravans.|
|Education||Older people who are university-educated might have more money to spend on expensive products.|
|Homeowner||Homeowners are more likely to need basic toolkits to keep their property in shape.|
|Ethnicity||An authentic Chinese food supplier may want to market their products differently to Chinese and non-Chinese people.|
|Religion||A shop selling religious products should market their crucifix necklaces to Christians only.|
|Attribute||Example of usage|
|Postcode||A postcode area with a large soccer club may be more interested in soccer balls.|
|City||Glaswegians are more likely to buy authentic haggis than Londoners.|
|Country||A stationary company could make a killing selling red envelopes to the Chinese.|
|Climate||You’ll sell and service more air conditioning units in hot and humid places.|
|Cultural preferences||Southern Californians prefer wearing shorts, t-shirts, and other casual clothing to work. So you have a good chance of selling these clothes to them, but not many suits.|
|Language||People who speak Thai are unlikely to need snow jackets, but they may be interested in sandals.|
|Urban or rural||People living in rural communities are more likely to need cars to get around.|
|Attribute||Example of usage|
|Personality traits||People who are introverted and curious may be more likely to buy books.|
|Values||Someone who values adventure and discovery may be a good choice for marketing a hiking holiday.|
|Beliefs||A government’s vaccination marketing is likely to fail with anti-vaxxers.|
|Interests||People who like golf may be more likely to enjoy other outdoor sports like tennis or cricket.|
|Lifestyle||A hard-working business owner would be a good target for productivity or time-saving apps.|
|Motivations||A high school student motivated to get excellent final grades will be a good candidate for a scholarship.|
|Priorities||Couples with newborn children are often tired and stressed, so could be a good candidate for food delivery services.|
|Status||A rich executive is more likely to buy a Rolex.|
|Attribute||Example of usage|
|Purchasing behaviour||Someone deciding between two cars may need a lot of technical information to help them (complex purchasing behaviour).|
|Product/service usage||A person who learns and uses all of a camera’s features may be more likely to buy accessories like tripods, microphones, and cases.|
|Loyalty||Loyal customers are more likely to purchase new products.|
|Desired benefits||Homeowners in densely populated areas may be a good candidate for privacy plants or fencing.|
|Buyer journey stage||Someone in the “decision” stage is helped by providing as much information on a product/service as possible.|
|Timing||Snow shovels are a bigger hit in winter.|
|Social channels they use||There’s little point paying for Instagram ads if your customer spends most of their time on Facebook.|
Identifying market segments and targets
With so many methods and attributes, where do you start with identifying market segments and targets? You may be surprised to hear that you don’t start with segmentation at all—you go back to the foundations of your company, to your mission vision values statements.
1. Review (or write) your mission and vision statements
As with many endeavours in business, market segmentation works best when you remind yourself of your company’s purpose and goals. These are the very reason for your business, and when you bring them into the picture for market segmentation, you’ll have a better chance of creating customer segments that help you to achieve them.
Review your mission and vision statements to clarify the purpose, short-term goals, and long-term goals of your business (if you don’t have any, check out our article on how to create them). Your mission statement should remind you why your products or services exist, who they exist for, and who they could exist for.
Your vision statement is an aspirational declaration that describes where you want to be, and gives you an idea of what kind of customers you could target. It’s also useful to recall which customer segments (groups) you targeted in the past, and how profitable they were.
2. Consider your target customer segments
Once you’ve reviewed your mission and vision statements, you can start writing down potential customer segments that you would like to reach and sell to. These should have one thing in common: similar needs. It doesn’t matter if they come from different age groups, genders, or cities, what matters is that they share a common need that your company can fulfill. For example, if you run a music store, you might want to start selling more electric guitars to people in their twenties, more pianos to school administrators, or more amplifiers to local bands. If you’re a local AFL club, you may want to attract more up-and-coming local athletes to the club, and encourage their parents to sign up for membership and attend weekly events.
Try to identify as many new customer segments as possible, finishing with a list of at least five. The segments should be broad enough to target a profitable number of customers, but refined enough to be personal. You should be able to visualise what a person who belongs to them might look like—a segment like “local community” is too broad and nondescript.
Also, try not to create customer segments for the sake of it. They must have genuine potential value for your business. And don’t worry if there’s some overlap between segments (e.g. age groups), because you’re focusing on their needs first and foremost.
3. Identify your most valuable groups
With your customer segments in front of you, consider how valuable they are to your business. How much money are they likely to spend on your products, and will they keep coming back for more? How often will they attend your events, and spread the word to their friends and family? And most importantly—will they help you achieve your short and long term business goals, and drive growth?
Pick the top three customer segments that seem to be most valuable to you.
4. Add attributes to your segments
So far your customer segments are just a single descriptive label, but to market to them effectively, you’ll need more info. This is where the real work begins, and it comes in two phases: selecting the attributes that you believe are most useful, and then populating those attributes for each customer segment.
The attributes that you select can come from any of the four common market segmentation types (demographic, geographic, psychographic, and behavioural). For example, the music store who wants to sell more amplifiers to local bands will want to know their postcode, income, interests, and priorities. They may also want to know their age group, how often they might use the amplifier, and their lifestyle. These are a mixture of attributes from various market segmentation types—whatever is valuable should be used, and as with the segments themselves, don’t add attributes that aren’t useful because you’ll just be creating more work for yourself.
Once you’ve identified your attributes, you’ll need to populate them. This information can be sourced in a variety of ways:
- Your customers’ data
- Analytics software
- Customer surveys
- Your employees
- Focus groups
- Customer interviews
- Your intuition/experience
You’ll find that some attributes are easier to populate than others. You might quickly be able to identify their age group using analytics software, but their lifestyle can only be determined by talking to similar people through surveys, focus groups, and interviews. Having accurate market segments can take a lot of work and analysis, but the result is a more precise picture and thorough understanding of your customers, and how you can effectively sell to them.
5. Consider new products or services for each group
If you’re wanting to create new products or services for your customer segments, now is the time to brainstorm what they might want. Think about your current offerings, and how they might be adapted or improved to suit each segment. Or come up with something brand new that could be your next hit. This kind of innovation is fun and exciting, and the more people that are involved, the more creative ideas you’ll come up with.
6. Consider how you will market to each group
Based on the attributes for each customer segment, think about which marketing methods will be most successful and help you to reach your business goals. You might want to create finely-targeted Google or Facebook adverts to achieve your short term goals, and start producing weekly content marketing blogs for your long-term goals. You may want to print some eye-catching posters for local businesses. Or if you’re wanting to promote something new to your existing customers, email marketing can work well. Work through your segments and decide which marketing methods will give you the best return on your investment, based on your experience and data.
7. Create your final strategies
Collate everything that you’ve worked on into strategies, for both your marketing and product development (if applicable). This should include your goals, methods, and how you’ll be measuring your success. If you’d like a way to visualise your market segments, you can create buyer personas for each of them and create posters for everyone to see.
Once done, you’ll be ready to start targeting your market segments!
Market segmentation is a powerful tool that allows you to speak directly to your customers in a language they understand. When done correctly, it can drive immense growth for your business. Good luck!