Marketing segmentation: Benefits & types

At its core, segmentation is the separation of a group of customers who have similar preferences and characteristics. With the help of segmentation, a business can cater to its clientele with more accuracy. Segmentation divides the marketplace into various parts, each of which can be defined, measured, and actionable.

Most businesses will find it difficult to target the entire market as it would involve huge costs, resources, strategies and whatnot.

Every business owner knows that not everyone is their customer.

So why target the entire market in your niche?

At this juncture, segmentation gains relevance.

What is segmentation?

According to Investopedia, “Market segmentation is a marketing term that refers to aggregating prospective buyers into groups or segments with common needs and who respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.”

With the help of market segmentation, businesses can target customers based on some of their unique attributes, find more opportunities in the market, create better marketing campaigns, increase conversion rate, find new product lines, and so on.

Types of market segmentation

Let us look at the different types of market segmentation that businesses can do in order to attract more customers and send the right offers.

Psychographic segmentation

This part of segmentation focuses mainly on the customer’s personalities, beliefs and interests. Here are some of the attributes that are used here: hobbies, life goals, lifestyles, values, attitude and personality traits. When you compare them with Demographic attributes, these are harder to obtain and if the information is collected properly, it can be used for effective marketing campaigns.

For example, the digital sports watch that a brand introduced recently has a customer base predominantly of people in their early 30s to late 40s. Apart from this piece of information, they also know that these people value independence and being informed. The brand can use this finding to feature in brand style and messaging.

Demographic segmentation

It is one of the most common forms of segmentation as some of this information is readily available in the majority of the cases. In this, you will be dividing the customers based on differences such as age, sex, occupation, designation, educational qualifications, race, quality of living, nationality, and religion.

The advantage of demographic segmentation apart from the fact that this information is easily available is that it is also cheap to obtain them. It also makes it possible to eliminate irrelevant audience segments with ease. In fact, this is the most basic of segmentation that all businesses indulge in.

A company that makes productivity tools might only be targeting C-suite executives and independent business owners. A watch manufacturer might target men and women separately since they have different products for them. Automobile companies will target people from a particular income group instead of trying to grab the attention of everyone.

Behavioral segmentation

One of the most important attributes when grouping different customers is through their behavior patterns. Most of the data for this can be gathered from your website itself. It involves grouping customers based on the following: spending habits, browsing habits, brand loyalty, interactions with the brand, product ratings, and so on.

Behavior such as the number of sessions on the website, number of pages visited, URLs spent time on, shopping cart value, referral source, exit intent, campaign history, are some of the datasets that have immense value when it comes to delivering relevant and highly effective marketing campaigns.

For example, someone who has spent a lot of time on your website browsing through the landing pages of a few products is closer to conversion than someone who is visiting you for the first time.

A new customer can be given an offer to persuade them to make a sale while a loyal customer can be offered a loyalty card when they are on the website. When you know their behavior patterns, this is how you can treat them to get more from each interaction.

Transactional segmentation

It is based on previous interactions that the customer has had with your brand. When did the customer register? When was the last time they ordered? And, how many times have they ordered from you? These are some examples of the attributes that are taken into account. There are many other transactional records which will help you determine a customer's spending behavior and their CLV (Customer lifetime value). Using this, you can gauge how much to spend on acquiring and retaining them.

By taking a look at transactional data, you will also get to know who your big spenders are and send marketing messages to them accordingly.

Geographic segmentation

One of the easiest to identify, geographic segmentation groups customers based on their physical location. It could be narrowed down based on country, region, city, or pin code.

Let’s say you have a local business, then it only makes sense for you to market it to people who live in that area. Or the weather conditions of a particular location would only allow for a certain type of clothing to be sold.

Also, when you are aware of your customer’s location, it will allow for all sorts of considerations when you are marketing to them.

If you are a large retailer, you could present the different products available based on the local weather patterns, which is also called seasonal segmentation.

Other types of market segmentation

There are also other types of segmentation that are worth considering. Let us look at some of them:

Generational segmentation

Here, customers are identified based on their age. It groups customers based on factors such as marital status, whether they have children or not, home-owners, and so on.

Technographic segmentation

It segments customers based on how technology plays a role in their lives. It recognizes early adopters when they market new technologies. For businesses that are launching new products or adding features, customers who are happy to adapt new technology will be the ones preferred.

Firmographic segmentation

For businesses that are in B2B, firmographic segmentation is the best method to segment customers. Using firmographic data, businesses can analyze and classify B2B customers. This segmentation strategy allows B2B companies to target their audience appropriately and create marketing campaigns.

The following attributes are used for firmographic segmentation: Industry, Company size, Location, Designation, Number of employees, Performance, Sales cycle stages.

Benefits of market segmentation

The ability to create personalized marketing campaigns and deliver customized service is one of the biggest advantages of market segmentation. By segmenting your customers, you will be able to provide your customers with the right kind of products. It will help you engage with the leads who are most likely to turn out to be your customers. Let us look at some of the benefits of market segmentation:

#1 Unearthing market opportunities

It enables you to identify the various opportunities that are available in the market. By comparing with the offerings of the competitors, the business can identify areas that require new services/products. The segments where customers are less satisfied with competing brands are also one more area for the business to focus and establish their brand.

#2 Customer retention

An existing customer is much more valuable than a new customer, and that makes it extremely crucial for businesses to concentrate more on the former. Once you segment your customers and know their preferences better, you should be able to offer a much more personalized offering for them.

#3 Better marketing campaigns

The efficiency of your marketing campaigns is directly proportional to the offer that you place in front of your target audience. If a 50-year old professional is a part of your email list when you are trying to sell video games, you can expect the conversion rate to be zero in this case. This is why being aware of your various segments of customers puts you in a position where you can have better targeted marketing campaigns.

#4 Reduce your costs

When you segment your customers correctly, you will not spend time on chasing leads who will never become customers. You will end up saving time, money and resources. The market campaigns become a success when there is brilliant segmentation at play, as it will help you conduct it smoothly and help you fetch better results.

#5 Understand your customers better

Market segmentation helps you understand and know your customers through different perspectives. You will be able to tell what motivates a particular set of customers, which are the channels that they prefer using, why do they spend so much time on one particular product, and so on.

#6 Happy customers

When your target market receives messages that they do not want to see, they are more likely to avoid any communication from you in the future, or even worse, they send your emails to spam. That’s what happens when your targeting and the subsequent messaging is wrong. When you understand your target market and send them the right kind of messages, you will be able to serve them better and they will also feel happy.

What is market segmentation analytics?

Data analytics is not just for the final part where we are required to measure the success of a marketing campaign, but we also need it during every step of the market segmentation process. Using analytics, we need to monitor our brand presence, the progress that we make and accurately segment our target audience.

The two main methods of collating and analysing data for businesses with digital presence are through social media and web analytics. Let us look at both of them.

Social Media

No matter which social media channel you use, you will have access to audience data. It will tell you the areas where you are gaining traction and those that require a lot more attention from your side.

Apart from tracking behavioral insights like the amount of time visitors spent on the website or the URLs that were visited the most, social media sites also keep track of demographic, geographic and psychographic data. If you can use this data effectively and segment customers accordingly, you will have a goldmine of information that you can leverage to the fullest.

Web analytics

There are a lot of ways to collect data from your website, but the most reliable and simple tool out there in the market is Google Analytics, so let’s use that. From measuring your conversion rates to measuring your performance and KPIs, web analytics gives you a lot of helpful information.

By adding a simple tracking code on your web pages, you will be able to track your website data. Google Analytics tells you about your users based on their demographic, geographic, psychographic and behavioral data. It displays your traffic sources, shows page views, bounce rate, conversions such as email signups or a purchase and more.

What is a segmentation variable?

When you do market segmentation, you involve groups of similar people. The characteristics of people that are used to determine if the people can be considered similar are called segmentation variables.

For example, if we segment a market based on their income, then income is the segmentation variable.

When people talk about segmentation variables, they are talking about the following:

1. Just one variable is used to segment people
2. A bunch of variables are used to allocate people to a particular segment based on a logical relationship
3. A set of variables that are used in a predictive statistical algorithm to predict segmentation membership
4. A set of variables are used in an algorithm used for segmentation

#1 Just one variable is used to segment people

Usually, just one key attribute is considered when segmenting. For example, a fitness band might segment customers based on how active they are. This attribute can be used to extend offers or perks that will keep them loyal users of the product.

#2 A bunch of variables are used to allocate people to a particular segment based on a logical relationship

There are occasions when a business would use more than one variable to segment customers based on a set of conditions. For example, a big retail giant like Tesco will initially segment customers who have a loyalty card. Then they could be segmenting loyalty card customers and look for the ones who spend a certain amount of money annually and put them in a different bracket altogether.

#3 A set of variables that are used in a predictive statistical algorithm to predict segmentation membership

A single variable is used to segment the customers, but the value of the variable is not known for everyone. So in cases like this, predictive models are applied to predict the profit of the customers based on other attributes such as sex, occupation, location, and so on. For example, an insurance company might not know how much profit they get from a particular customer. In such cases, they take other variables to find a middle number.

#4 A set of variables are used in an algorithm used for segmentation

When a large number of variables are there for a particular segment, k-means cluster analysis and latent class analysis to identify groups of people who are essentially similar to each other.

Segmentation Targeting Positioning (STP) model

The STP marketing model or the Segmentation Targeting Positioning model is one of the most popular modern marketing models, next only to the SWOT (Strengths, Weaknesses, Opportunities, and Threats) matrix.

The STP model works like a charm when creating marketing messages for customers as it gets the targeting right and then works on delivering personalized messages to engage with different audience segments. STP focuses on the most profitable segments and develops a marketing mix and product positioning strategy that is customized for each segment.

How to use STP in Marketing?

The objective of STP is to design marketing messages for each segment of customers so that the accompanying benefits and features can be provided for each segment accordingly. Delivering the right mix to the correct group of people is more important than sending random messages.

We have taken a detailed look about segmentation in this article, so let’s see how targeting and positioning works in STP.

Market targeting

To understand the commercial viability of each audience segment, you need to look at the following parameters. It should have a large market to justify the time invested there. There should be measurable differences between the segments. The targeted audience should be in a position to receive marketing messages. You should also focus on different benefits for different segments of customers.

Product positioning

It presents the benefits of your product to the target audience. With the help of segmentation and targeting, you know which are the audiences for whom a particular benefit can be shown. Knowing this information helps you optimize marketing efforts and create a messaging strategy that will drive more sales.

Businesses can use information from the STP model to communicate the benefits of their product in an attractive way.

Criteria for effective marketing segmentation

When you indulge in marketing segmentation, you need to have certain things in mind. It should ensure that the marketing segments being considered are useful and relevant. For that reason, we have a list of criteria, which is a standard list that you will find in most marketing textbooks, which businesses should use during this exercise.

#1 Measurable

A market research exercise should be able to identify the size of a marketing system at least to a reasonable degree of accuracy. Based on this data, the marketers should decide whether this segment is worth considering and putting extra efforts for.

#2 Accessible

Can you reach the market segments through conventional channels of communication and media? Most of these segments of customers will respond to outdoor advertising, billboards, blog posts, social media campaigns, etc.

#3 Differentiable

The ideal marketing segment should be internally similar (that is how they become a part of the same segment) while being dissimilar on the outside. The differences between market segments should be discernible for the marketer so that it becomes easy to come up with marketing campaigns for different segments without any of them overlapping.

#4 Substantial

If the spending capacity of a particular marketing segment is nil or if there are less people in it, then it is best not to spend a lot of time on them. An ideal marketing segment group are a homogenous group who have clearly different attributes and have the capacity to spend on your product.

#5 Responsive

The people who are a part of the marketing segment should be influenced by advertisement campaigns, be aware of promotions, and can be swayed by the right offers. Without this, it is ill-advised to spend time on such a market segment.

Apart from the above-mentioned criteria, the marketer should also note if the segment has the following features:

1. They have a potential for growth and won’t be stagnated
2. Profitable
3. Prone to taking less risks
4. They are less competition intensive

How to create a market segmentation strategy

Research and analysis are crucial fixtures of a market segmentation strategy, that’s what will give you good results. The best way to create a market segmentation strategy is to build one for yourself based on your goals. Now that you know how important market segmentation is, let us look at how you can create a market segmentation strategy.

#1 Research your market

The first step is to understand everything about your market. You can use all the publicly available information from different sources. Most of the information can be availed for free from libraries and other governmental bodies.

Check out the marketing channels of the other competing brands. Their social media handles, websites, consumer forums, annual reports, etc., will be a treasure trove of information. Each of these sources will tell you how their audience interacts with their marketing strategy.

You can also conduct your own research in the form of face-to-face interviews, focus group discussions, telephonic interviews, case studies, etc., to take a peek into their minds. Since the above type of research is more intensive and in-depth, the answers that you get from here will also be worth the effort and time that was required to complete this.

#2 Analyze your existing customers

Once you have a clearer understanding of the market in which you operate including how your competitors fare, the next step is to look inwards. You should start your market segmentation process with the help of audience analysis. Audience analysis helps you to learn about your customers and assists in identifying trends that exist within your current customer base.

Here are some of the ways in which you can get information from your company:

1. Interviewing your customers
2. Interviewing your sales team as they are the ones who interact closely with your customers
3. Use your web analytics including social media reports
4. Refer to the business data that is already available
5. Find out where your audience lives
6. Know your audience’s interests to identify psychographic segments within your customer base
7. See what your customers majorly search for and create a report of topics and subjects important to them

#3 Sort the data and divide them into segments

There are many ways in which you can segment your customers. You can use expensive analysts, marketers, etc., all of which will take hours of your time.

If you do not have the time and budget for it, here’s what you can do. You can compile the data into a single source and manually group the prospects and companies together as segments.

Here are some of the questions that you need to ask yourself when segmenting:

1. Is the segment of customers large enough to make a profit?
2. Is the segment stable and can it last for a long time?
3. Is the segment measurable?
4. Will normal marketing strategies work for customers of this segment?
5. Is the segment homogenous?
6. Can the segment of customers be thought of as a set of people who are more likely to make a similar decision when it comes to your particular aspect.

#4 Create buyer personas

You might want to create a buyer persona for each of the segments after you complete your audience analysis and segmentation. Having a buyer persona helps you visualize the kind of person that you are going to target. It becomes easy to put them into a box of customers according to their characteristics. You can use a tool like Live Persona by Delve AI which helps create AI-generated buyer personas.

#5 Change your positioning according to the new market segments

Take a look at the different buyer personas that you have, based on this, create a graph which will show where each of your products fits in with your audience. By ensuring that you offer customers the type of products that they are looking for (based on their segmentation), you will be able to create a pleasant shopping experience for them.

#6 Create personalized messaging

Now that we have different segments of customers who are looking for a variety of products, the next step is to craft messages for each type. You will have an increased ROI, get better results, and see happier customers all around.

Since you know the requirements of each segment of customers, you will be able to come up with content that will speak specifically to their interests. Since the customers get customized messages, they are more likely to convert into a paying one.

Below are a few scenarios that can happen if your market segmentation is on point.

You will be able to write a compelling email describing how you will solve a pain point to a segment of customers who are looking to go past that issue.

You will be able to add small additions to your existing features to a set of customers who complained about not having them at a competitor’s.

You can nurture the prospective leads by sending a set of emails based on how deep they are in the sales funnel.

All the above will make the customer feel closer to the brand. The advantage of doing this is that the customers will feel closer to the brand.

Once you have segmented your audience, you do not have to rely on mass marketing campaigns anymore. You do not have to buy contacts in bulk with the hope that at least some of them will convert.

Conclusion:

Segmentation of your customers is fundamental for your business success. Without a proper segmentation strategy, your sales will be dull and your marketing messages wouldn’t even evince an ounce of interest among your audience. If you follow the strategies that we have mentioned in creating a marketing strategy for your brand, you will end up reaching out to your target segment of audiences with the right offer.

The right customer at the right time with the right service/product offering. That’s what market segmentation can do for your brand.