Market Segmentation: Benefits, Types, and Examples

At its core, market segmentation divides your audience into smaller groups based on certain commonalities and similarities. Each of these segments are well defined and measurable – with the end goal of helping you create actionable marketing campaigns.

But do you need to divide your market? After all, it simply limits the number of customers you can market your product or service to.

Well, here’s a simple fact: no matter which industry you are a part of, you are bound to have competitors. They can be in the count of ones, or hundreds, or thousands. Similarly, if you conduct market research, you’ll realize that your customers are not one and the same.

Each buyer has different demographic attributes, goals, challenges, needs, interests, and behavior traits.

You can use marketing segmentation to zero in on your niche audience segments and hyper-personalize your marketing efforts. Companies can further utilize it in brand marketing and product positioning, finding better ways to connect with their prospects.

In this article, we discuss the major types of market segmentation, their key benefits along with examples that will help you understand your target market.

What Is Market Segmentation?

According to Wikipedia, “In marketing, market segmentation is the process of dividing a broad consumer or business market, normally consisting of existing and potential customers, into sub-groups of consumers (known as segments) based on shared characteristics.”

It is a way of clubbing together prospects with common needs, behaviors, and preferences into easily identifiable consumer groups.

Now, these similarities can be in terms of their demographic characteristics, geographical location, psychographic nature, behavioral traits, and transactional habits. Some of these elements are easy to identify while others are not – nonetheless all are equally important.

One can segment customers using a variety of marketing segmentation techniques, such as:

• Demographic segmentation (age, gender, ethnicity, language)
• Geographic segmentation (location, climate, season)
• Psychographic segmentation (goals, pains, lifestyle, habits, interests)
• Behavioral segmentation (benefits, usage, customer journey)
• Transactional segmentation (spending behavior)

You can use one or all of these techniques in combination with each other to segment and pin down your target audience.

Remember, at the end of the day, no two customers will use your products or services in the same manner – they might not need it for the same reason. Marketing segmentation helps brands find these unique reasons and use cases.

You can also build buyer personas, find niche market opportunities, create better marketing campaigns, develop new product features, and increase conversion rates.

What Is a Segmentation Variable?

With market segmentation, you involve groups of similar people. The characteristics and traits used to determine if two individuals can be considered to be similar are called segmentation variables.

For example, if we segment a market based on age, then age will be the segmentation variable. Now, when people talk about variables, they usually mean:

• Only one variable is used to segment people.
• Multiple variables are used to categorize people into a particular segment based on a logical relationship.
• A set of variables are used in a predictive statistical algorithm to predict segmentation membership.
• Certain variables are used in an algorithm used for segmentation.

Let’s look at what each of these variables mean.

1. Only one variable is used to segment people.

Usually, brands segment customers using just one variable. Take the case of a company that sells fitness bands. It divides customers based on their activity levels and gives out discounts to reduce customer churn rates.

2. Multiple variables are used to categorize people into a particular segment based on a logical relationship.

There are times when brands use more than one variable to segment customers based on a set of conditions.

For instance, a major retailer like Tesco will initially segment customers based on loyalty – think loyalty cards and membership programs. Once things start looking good, they could move on to grouping them by annual spend, putting them in a different bracket altogether.

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

When the value of the variable isn't known for all customers, predictive models are used to predict the potential profit of each customer based on other attributes like gender, location, and occupation.

An insurance company might not have the data it needs to guess the profitability of a particular customer. So, they will take other variables into consideration and get a median value.

4. Certain variables are used in an algorithm used for segmentation.

Suppose you have a big number of segmentation variables within a particular segment. In such a case, your best bet would be to use k-means cluster analysis and latent class analysis to find customer groups who are similar to each other.

Market Segmentation vs Customer Segmentation

For those unfamiliar with the two concepts, marketing segmentation and customer segmentation sound quite like each other. Admittedly, they are similar, yet not the same.

It’s like holding a pair of binoculars in the Amazons.

Before you zoom in, all you see is the dense green forest spread out in front of you. It’s only when you properly focus on a particular section of the jungle that you can see the flora and fauna that inhabit it.

It’s the same with market and customer segmentation.

Marketing segmentation gives you the bird’s eye view of your entire market. This market can include all types of people – your past buyers, your current customers, and your future prospects.

Thing is, we can never be too sure of their intent as they may or may not respond to your marketing strategies.

Once you’ve found your target market – the one where you are sure of making profits – you move on to segmenting this market into smaller groups. Generally, you’d want to focus on past and present customers who already endorse your products.

Why? Well, because the cost of acquiring new customers is five times more than the cost of retaining old ones.

Plus, it’s easier to convince them to buy your products. This is also the stage where customer segmentation comes in; you’ve identified your market, now it’s time to analyze high-value customers.

The easiest way to do this is to create customer personas.

Customer personas are semi-fictional representations of your ideal customers based on their age, gender, location, goals, challenges, jobs to be done, hobbies, interest, behavior, personality traits, and more.

They represent specific market segments with customers who need your products and have entered or are ready to enter the marketing funnel.

So, What About the Target Market?

Segmentation, targeting, and positioning (STP) is a popular marketing model that helps brands identify, attract, and capture their target audience in a crowded marketplace.

• Segmentation – divide a heterogeneous audience mix into smaller homogenous groups.
• Targeting – evaluate customer segments and select the one that meets business objectives and revenue goals.
• Positioning – create a unique brand positioning that resonates with the target market.

STP helps you develop marketing messages that efficiently convey each segment's value proposition and brand personality. Furthermore, you can highlight specific product benefits to particular customer segments.

Just keep this in mind when selecting a profitable market segment.

• Your market size should justify the time invested.
• There should be measurable differences between two segments.
• The target audience must be receptive to marketing messages.
• Focus on delivering distinct benefits tailored to each segment.

You can collect all the necessary customer information for STP via audience insights tools. It will empower you to optimize your marketing efforts and create a messaging strategy that drives more sales and revenue.

Benefits of Market Segmentation: Is It Important in Marketing?

One of the best benefits of market segmentation is the ability to develop personalized marketing campaigns and deliver customized products and services to your target customers.

According to a Cintell study, segmentation makes brands 130% more likely to know their customers’ motivations and 60% more likely to understand their pains and challenges.

Segmentation and targeting further enables you to thoroughly understand your market and provide the right solutions to the right people at the right time. Thus, helping you find leads who are most likely to convert into paying customers.

Now, the advantages of marketing segmentation are many, but here are the most common ones.

• Know your customers. Marketing segmentation helps you understand your buyers’ perspectives in a way you couldn’t before. You’ll be able to know your customers’ goals, motivations, communication preferences, purchasing patterns and buying behavior.
• New market opportunities. Segmentation is a market strategy that lets you divide your total addressable market into smaller segments. Doing this, you can discover niche markets and build a new customer base.
• Beat the competition. Niche segments in a larger market allows you to gain a competitive advantage. When you know your audience, you can offer features they don’t get from your competitors. You don’t just fulfill their goals but also establish your credibility in the market.
• Personalize marketing campaigns. The efficiency of your marketing campaigns is directly proportional to the offer you place in front of your target audience. This is why marketing plans should always be built around specific customer groups – they help you create personalized messaging with better response rates.
• Reduce marketing costs. Segment-specific marketing lets you save time, money, and resources. You will be able to allocate resources to segments with a high conversion potential, thus reducing ad spend and wastage of marketing dollars.
• Targeted advertising efforts. The counterpart to organic marketing, paid advertising greatly benefits from segmentation. Remember, a normal customer persona comes with elements like age, gender, language, location, and interests. All of these variables are a must have to create highly-targeted advertising campaigns.
• Boost profits. With proper segmentation, you will be able to develop better pricing plans. By judging their price sensitivity and willingness to pay, you can maximize company revenue and profitability.
• Improve customer experience. It's a marketing mistake to send messages to customers who don’t want to receive them. It negatively impacts your brand reputation. When you send messages that address their individual needs, you improve their experience and satisfaction with your brand.
• Build brand loyalty. When consumers are satisfied with your services, they are more likely to remain loyal and turn into brand advocates. This helps build deeper connections with different customer segments and ensure long-term growth.
• Increase customer retention. An existing customer is much more valuable than a new customer. Once you segment your customers and know their preferences better, you will be able to offer a much more personalized product to them.
• Guide product development. Customer segments play a crucial role in the development and enhancement of new products. You can create solutions that match the needs of your ideal customers, thereby increasing product adoption rates.

These are but a few ways in which marketing segmentation can benefit your business. To discover more use cases and related how-to articles, read our blog posts on the same.

Major Types of Market Segmentation

We have discussed the benefits; now let us explore the different types of market segmentation options in detail so that you can use them to segment your audience into profitable customer groups.

1. Demographic Segmentation

Demographic segmentation is one of the most common types of segmentation options available. It divides the market into different groups based on age, gender, education, occupation, income, ethnicity, religion, and marital status.

Job title, function, seniority levels, company size, revenue, and industry are added in B2B market segmentation.

We also have generational segmentation wherein buyers are grouped according to their age and the corresponding marketing generation they belong to – Baby Boomers, Millennials, Gen Z, and Gen Alpha.

One advantage that it has over the others is that demographic information is cheap and easily accessible. You can collect demographic data from the following sources:

• Surveys and interviews
• Public records and census reports
• Google analytics
• Social media networks
• Third-party data providers

Most businesses start out with demographic segmentation to eliminate irrelevant audience segments to form the foundation of their product strategies.

A prime example of this is Gillete, a brand famous for its line of razors, skincare, and shaving products. It employs gender-based segmentation to target men with ad campaigns that focus on masculinity, establishing itself as the go-to choice for male grooming products.

2. Geographic segmentation

Considered to be a subset of demographic segmentation, geographic segmentation divides a particular market segment based on their physical locations. It helps target consumers with messages tailored to their location, climate, and urbanicity.

• Location: Countries, regions, cities, neighborhoods, or ZIP codes.
• Climate: Day, time, seasons, and weather conditions.
• Urbanicity: Urban, suburban, or rural areas.

If you are in the B2C industry, your approach to marketing and product positioning is greatly determined by your customers’ location.

Take for instance, McDonald’s.

McDonald’s uses geographic segmentation to plan out its menu items to suit local taste palates, culinary traditions, and cultural norms. So even though the Big Mac is popular in the United States, it serves the Veggie Maharaja Mac in India to cater to vegetarian customers.

3. Psychographic Segmentation

Psychographic segmentation focuses on consumer psychographic traits like personality, social status, lifestyle, values, beliefs, interests, hobbies, attitudes, and opinions.

It falls second to demographics in the race to being one of the most common types of audience segmentation.

Personality: Unique characteristics defining customer identity. Built with the 5 factor OCEAN model, it includes traits like openness, conscientiousness, extroversion, agreeableness, and neuroticism.

Lifestyle: The way people live their lives, express themselves, and spend their time, money, and energy. It is a good indicator of their interests, habits, and purchase patterns.

Attitudes: Beliefs and emotions towards certain subjects, products, or brands influenced by culture and family values.

Social Status: Position in society according to income, occupation, and education that greatly affects spending capacity.

Activities, Interests, and Opinions (AIO): Activities people engage in, their topics of interest, and the beliefs that guide their buying decisions.

Compared to demographic attributes, psychographic elements are harder to find. You can use the same resources as you did in the former but you’ll have to incorporate focus groups and observational data to get psychographic insights.

4. Behavioral Segmentation

Behavioral segmentation is a unique form of marketing segmentation – it uses customer behavior to segment users into different groups based on how they engage and interact with your brand, product, or website.

It can be based on one or more of the following variables:

• Occasion – universal, seasonal, and rare.
• Purchase patterns – complex, variety seeking, dissonance reducing, and habitual.
• Usage – light, moderate, and heavy users.
• Loyalty – truly loyal, accessible, trapped, and high risk buyers.
• Benefits – advantages they seek from the product.
• Customer journey – attention, interest, desire, and action.

You can gather information about user behavior from your website or app using Google Analytics, such as the number of sessions on the website, pages visited, URLs, shopping cart value, referral sources, and campaign history.

Spotify is the best example of a brand using behavioral segmentation. It analyzes listening history, genres, artists, and activity levels to create a personalized playlist for users.

5. Transactional Segmentation

A segmentation option that creates different market segments based on their buying behavior and transaction history, transactional segmentation groups customers according to their purchase frequency, types of products purchased, and amount spent.

• Frequency: how often customers buy from you.
• Spend: the amount spent to make a purchase.
• Product preferences: the types of products they generally buy.
• Timing: the occasion when consumers make a purchase.

You will be able to answer questions, like:

• When did the customer register?
• When was the last time they ordered?
• What did they order?
• And, how many times have they ordered from you?

You can determine your customer’s spending behavior, customer lifetime value (CLV), and identify high spenders at the same time.

Amazon uses transactional segmentation to make product recommendations based on past purchases and browsing history. If you have bought cosmetics in the past, chances are that you’ll receive emails suggesting related products and services.

B2B Customer Segmentation: Technographics and Firmographics

It is common knowledge that segmentation for B2B (business-to-business) industries greatly differs from B2C (business-to-consumer) markets. This makes sense, as the former focuses on businesses, while the latter targets individual prospects.

Firmographic and technographic market segmentation can help B2B brands identify key decision-makers within a company, along with their technological needs and preferences.

Firmographic Segmentation

Firmographic segmentation is the best method to segment B2B customers – businesses and organizations – based on their traits and characteristics.

It is a kind of segmentation technique that uses the following elements:

• Industry: sector or industry businesses operate in.
• Company size: number of employees.
• Location: the geographical area the company is based in.
• Designation: key decision-makers within the organization.
• Performance: financial health and performance of the company.
• Revenue: annual revenue or turnover.
• Ownership: privately owned, publicly traded, NGOs, or government-owned.

Using firmographic data, brands can analyze and classify their B2B buyers. Salesforce is a leading CRM platform that uses firmographic segmentation to target organizations across different industries, sectors, and sizes.

Technographic Segmentation

In a nutshell, technographic segmentation helps companies identify the tech stacks clients have used in the past, the technology they are using in the present, and the tools they would prefer to use in the future.

You can use these technographic variables to create market segments:

• Device type (smartphones, tablets, desktops)
• Applications (CRM, marketing automation tools, web analytics tools)
• Cloud services (data storage, management, collaboration)
• E-commerce (online shopping, transactions, payment gateways)

According to a study, 50% of users switch to a new solution within three years. This underscores the role that technographic segmentation plays for businesses that want to launch a new product or add new features. It lets you know whether customers will be willing to adapt to the new technology or simply reject it.

Examples of Market Segmentation

Many brands and organizations use marketing segmentation in their day to day marketing strategies. Some prime examples include Ikea, Apple, and Netflix.

Demographic Segmentation: Ikea

IKEA serves customers of all ages, genders, and family types, offering furniture for diverse needs. Whether it is students, couples, families with children, or seniors, they have something for everyone.

The brand provides space-saving furniture for bachelors, along with family-friendly options. IKEA's ads depict relatable scenes of families bonding or individuals setting up their homes, thus connecting with different family dynamics and reaching out to a broad audience.

Psychographic Segmentation: Apple

Lifestyle-based segmentation is the key to Apple’s product strategies. It targets people who want sophisticated and high-end things in life.

Apple demonstrates how its products fit into different lifestyles, whether you're working or staying active. Their ads emphasize how their devices enhance everyday experiences and perfectly fit into your lifestyle, inspiring a sense of belonging to the brand.

Behavioral Segmentation: Netflix

Netflix's personalized recommendation system uses behavioral segmentation to keep subscribers engaged and enhance their viewing experience.

The platform collects extensive user data, like user viewing habits, pauses, and searches to predict individual preferences. So, if you repeatedly watch comedies, Netflix will start suggesting similar content.

Netflix even customizes thumbnail images, highlighting actors, genres, or visuals that you're likely to click on. This personalization ensures that each recommendation is tailored to your interests, keeping you hooked on the platform.

Wrapping Up

Market segmentation is a way to define your target market, a way to find your profitable customers. It is a fundamental part of a marketing strategy that wants to see customer engagement, conversions, and business success.

Without a proper segmentation plan, chances are that your messages will fail to reach and spark the interest of your target audience.

The benefits of market segmentation are many — you just have to find the right ones for your brand. Start off by following the strategies that we have listed, and you will end up identifying customer groups that are a perfect match for your brand, products, and services.