How Market Segmentation Can Skyrocket Your Business Growth (And How to Do It Right)
Are you tired of seeing mediocre results from your marketing efforts? Do you struggle to understand your audience and connect with them on a deeper level?
If so, you’re not alone. Many businesses struggle to stand out in today’s crowded market, but the key to success may lie in market segmentation.
Market segmentation lets you divide your target audience into distinct groups based on shared characteristics like location, age, or buyer preference. By segmenting your audience, you can deliver incredibly personalized and effective marketing that leaves buyers begging for more.
If you’re unclear about what segmentation is or how to do it right, we’re here to help. In this article, you’ll learn everything about market segmentation, including its key benefits, use cases, and insider tips to getting it right.
What is market segmentation?
In simple terms, market segmentation is the practice of dividing your audience into smaller groups that are easier to market and sell to. It’s a tactic that ensures more effective marketing results, especially if you have a large market base.
Most companies have a mix of distinct groups in their audience. For instance, a company producing athletic footwear could have groups engaged in different athletic activities. You’d have some that enjoy tennis, others that are into soccer, and a few that just want running shoes.
Common sense dictates that these buyers won’t all wear the same type of footwear, because they’re into different sports. Likewise, market segmentation says they won’t interact with your marketing in the same way.
Instead, various factors and emotions that are unique to each activity will dictate how these groups respond to your marketing and the overall results you get.
With market segmentation, you can capture the imagination of tennis players with captivating imagery such as the satisfying glide of snug-fitting tennis sneakers over a hard court.
And in a separate campaign, you can turn the heads of athletic runners with the promise of a liberating bounce that makes them feel like they can run forever.
With these examples, it’s easy to see how businesses can evoke powerful responses to their marketing by using segmentation.
Qualities of a good market segment
Marketers divide their audience into market segments for various reasons. Often, segmentation is done based on the distinct characteristics or qualities that specific groups share.
Other times, it may be because they are simply unique from other market groups or just show a similar response to the company’s products. And sometimes, customers aren’t segmented only on what they buy but according to how they behave.
But no matter how you choose to segment your audience, there are two key ground rules to always keep in mind:
- Never make your segments too narrow; and
- Don’t make them too broad
In case of doubt, the following qualities of good market segments can help you identify what amounts to a market segment, and what only pretends to be one.
- Differentiated: Each segment should be unique, with distinct characteristics. That’s because your marketing strategy will depend on catering to those characteristics. In addition, a differentiated segment is easier to identify and track.
- Accessible: A good market segment should be one that you can market to. For instance, some segments are inaccessible sometimes because they cannot be reliably split from a dependent segment.
- Substantial: The potential revenue to be earned from the segment should be worth the cost of personalized marketing. If the segment is too small, too loose, or just not spend-ready, marketing to them separately may not be justified.
- Measurable: The segment should have variables that relate directly to the spend on a product. You should be able to reliably measure income earned from members of the group.
- Actionable: Lastly, your segments should have practical value for your business. This means they should meet the four qualities discussed already and must be exploitable.
Overall, good market segments present compelling reasons why you should focus on them separately. They should not duplicate an already existing buyer group or unnecessarily split others.
Different types of market segmentation (with examples)
Market segmentation falls into four basic categories: psychographic, demographic, geographic, and behavioral.
However, demographic segmentation can usually be thought of from an individual perspective and an organization perspective. As a result, we can say there are five common categories of market segmentation.
We’ll discuss each of these categories below.
Psychographic segmentation classifies buyers according to various psychological traits such as their values, interests, personality traits, and lifestyle.
This image from Qualtrics is an example of psychographic segmentation. Here, buyers are classified according to their personality traits. While couponers enjoy a great bargain, free spirits are more emotional and will be moved by a great display.
As the name implies, demographic segmentation divides buyers into groups based on their demographic qualities. Here you can break your audience into categories based on their age, gender, occupation, income, and education.
As an example, a company selling fashion items will typically classify their products and marketing along gender lines. They may also offer distinct messaging and service offerings according to the age and income level of their buyers.
Just like demographic segmentation, firmographic segments are based on physical buyer traits. However, the emphasis here is on the size, employee number, revenue etc. of organizations.
B2B companies are more likely to be interested in firmographic segmentation. If you were selling a software product, for example, you’d likely have different marketing campaigns for large enterprises and small businesses.
Take a look at this Microsoft 365 landing page for enterprise. It talks about security administration, multiple user licensing, software management — terms often associated with large companies.
Compare with a landing page selling the same product to small businesses.
Here, you’ll segment users according to their geographic location. While this category is kind of a subset of demographic segmentation, it’s a popular segmentation category so it deserves to stand alone.
Practically all businesses segment their buyers according to location. Those with an international audience will want to deliver marketing and product offerings in the language of each buyer group, for instance.
Lastly, behavioral segmentation categorizes buyers in terms of their buying patterns and behavior. For example, one study found that millennials buy more craft beer, compared to older generations who prefer national brands.
Again, all businesses do this. It’s common to divide customers according to their lifetime value to the business. Your top ten clients in terms of revenue will often receive marketing and support at a more personalized level than comparatively low spenders.
How market segmentation can drive business growth
Because it enables greater marketing fit and supercharged results, market segmentation is a game changer for many businesses.
The ability to effectively market to specific buyer segments delivers greater brand reach and elevated conversion rates. Sales immediately benefits as a result, and customer satisfaction soars because you now know more about each customer segment and how to please them.
Unsurprisingly, Bain & Company report that companies implementing market segmentation experience 10% more profit than their peers. But that’s not all.
McKinsey & Co. also found that brands using insights to understand customer behavior enjoy 85% higher sales growth and over 25% in gross margin.
Simply put, market segmentation can be the secret ingredient you need to unlock your business and achieve sky-high growth rates.
The benefits we’ll explain below showcase why this is the case and how market segmentation empowers business growth.
The key benefits of market segmentation
The powerful impact of market segmentation on marketing, sales, and customer loyalty is undeniable.
Here are some of the benefits enjoyed by organizations employing market segmentation.
1. Resource efficiency
Market segmentation helps you save time and money through efficient marketing. It provides a deep understanding of your market and lets you plan marketing campaigns that target your key market segments.
So, instead of depending on wasteful “spray and pray” tactics, you can market directly to high value targets in less time and at lower cost.
2. Effective marketing
Market segmentation lets you target your ideal customers with frightening accuracy. You can deliver personalized content to them with the assurance of high conversion rates and sales volume.
In addition, buyers who engage with your content will relate better with your marketing and are more motivated to promote your brand online.
3. Focused branding
Companies that prioritize market segmentation are 60% more likely to understand their customers and 130% more likely correctly predict their interest.
This means you can design your branding, marketing, products, and entire business in the exact manner that your audience will love. You’ll be able to reach them with messaging that fits like a glove and sell to them in ways that meet their needs.
4. Brand loyalty
Another important benefit of market segmentation is the loyalty it evokes in satisfied customers. According to data from Cison, 71% of people will recommend brands they are emotionally attached to.
They will reward such brands with repeat purchases, valuable referrals, and overall lifetime value that far exceeds the cost to acquire them.
5. Market differentiation
By segmenting your audience, it’s easier to pinpoint the exact message you need to help your leads convert. This can also help differentiate your product by showing how you are different from competitors.
The knowledge you gain from market segmentation will be valuable in designing your service offerings and infusing your brand with messaging that is original and memorable.
6. Greater market share
Segmentation also provides market intelligence. It lets you understand the lay of the market and identify opportunities for your business to gain more customers.
You can choose to expand horizontally by targeting audiences with similar profiles to some of your existing customers. Or you can decide to grow vertically by seeking entirely new audiences that are likely to enjoy the products or services you offer.
Market segmentation use cases
While marketing is one of the clearest use cases for market segmentation, there are other ways in which segmentation can be valuable for businesses. These include:
According to research, between 30%-45% of new products fail. There are many reasons why this happens, from a lack of market fit to funding problems or a poor go-to-market strategy.
While segmentation won’t give you the money to develop a new product, it brings the assurance that there’s a ready market for the product.
Since market segmentation provides insight into your buyers’ traits and what they care about, it’s easier to know what products will enrich their lives and meet their needs.
Segmentation enables supremely effective marketing by targeting specific groups of buyers. This makes it an excellent tactic if you’re interested in separately targeting a single user segment.
It lets you define the target market according to their unique attributes and then pitch them with messages and products that resonate with their attributes.
If you’re launching a new business or product, segmentation can help with customer/market research. It can deliver information about buyer preferences, needs, and service or product usage.
This way, you can approach the market with greater intelligence and identify potential gaps in your offerings.
Even after you have created products or services, put them on sale, and completed your marketing efforts, market segmentation can come in to deliver better results.
If leads aren’t converting at the desired rate, you can use segmentation to identify where your marketing may be misaligned with the customers’ profiles. You can then tweak your messaging or products to achieve the desired conversion rates.
Lastly, your marketing efforts will benefit from detailed information about customers. You can personalize campaigns with this information and refine your marketing campaign for greater efficacy.
You can still employ market segmentation even after the campaign has gone live. However, you should note this will likely come at the cost of having to redesign aspects of the campaign to fit your customer segments.
The common mistakes of market segmentation (and how to avoid them)
So far we’ve discussed what market segmentation means and why it’s important. But the reality for many businesses is that segmentation can be hard to do well.
While some marketers struggle with breaking their audience into actionable segments, others simply cannot find the data they need to correctly (or profitably) classify their audience.
As a result, many fall into the trap of what may seem like obvious mistakes at first glance but which can be surprisingly difficult to avoid.
Challenges faced in implementing market segmentation
Market segmentation can add incredible punch to your marketing. But it also comes with several challenges that may be difficult to handle. Here are a few of them:
Risk of wrong assumptions
Market segmentation is founded on the assumption that similar market segments will share common characteristics. But this may not always be the case.
For example, some sub-segments of a group may have slightly different traits that complicate things. Consequently, market segmentation carries the risk of making wrong assumptions about your audience.
This can lead to ineffective marketing messages and products that don't resonate with your audience.
To overcome this challenge, it's important to conduct thorough research and analysis to understand your audience's needs, preferences, and behaviors. This includes gathering reliable data through surveys, focus groups, and customer feedback.
Need for reliable data
Market segmentation relies heavily on data analysis, which can be challenging if your data is unreliable or incomplete.
Your market segments will only be as strong as their underlying data. But it’s not easy to obtain correct or complete data about every single customer group, meaning the segments may sometimes be formed based on guesswork.
To overcome this challenge, it's important to invest in robust data collection and analysis tools and to work with a team of experienced data analysts.
You can also consider leveraging third-party data sources to supplement your internal data.
Initial high marketing expenses
One of the main challenges of market segmentation is the higher upfront marketing expenses it requires.
You’ll initially spend more time and money creating and targeting multiple marketing messages for different audience segments. This can be particularly daunting for small businesses with limited budgets.
To overcome this challenge, it's important to prioritize your audience segments and focus on the ones that offer the most potential for growth. You can also consider leveraging cost-effective marketing channels, such as social media and email marketing, to reach your audience.
Increased product complexity
Market segmentation can also lead to increased product line complexity, which can be challenging to manage.
The idea behind segmentation is to take large audiences and break them into specific segments that are easier to satisfy. Sometimes, that also means developing products to reach those segments, resulting in the risk of unwieldy or complex product lines.
To overcome this challenge, it's important to develop a clear product line strategy that aligns with your market segmentation goals.
This includes identifying the unique needs and preferences of each audience segment and creating products that meet those needs while maintaining brand consistency.
The biggest mistakes that businesses make when implementing market segmentation
Market segmentation can be a powerful tool for businesses looking to achieve explosive growth, but it's not without its pitfalls. Here are some of the biggest mistakes that businesses make when implementing market segmentation and how to avoid them.
Reliance on inaccurate data
One of the biggest mistakes businesses make when implementing market segmentation is relying on inaccurate data.
This can lead to ineffective marketing messages, products that don't resonate with your audience, and missed growth opportunities.
The only way to avoid this pitfall is to prioritize only unimpeachable data sources. Government sources and recognized think tanks can be a great source of public information.
For internal data, invest in good data analytics tools that let you collect, clean, and distill accurate insights from your data. Even better, outsource the data analytics to an expert who can reliably pull out the insights you need.
Creating too small segments
Another common mistake businesses make is creating segments that are too small.
While it's important to be specific in your segmentation strategy, creating segments that are too small can limit your growth opportunities and make it difficult to scale your marketing efforts.
To avoid this mistake, it's important to strike a balance between specificity and scalability. This includes identifying the most important audience segments and grouping them in a way that allows for effective targeting and messaging.
Defining groups too broadly
On the other hand, defining groups too broadly is another common mistake that can lead to ineffective marketing messages and missed growth opportunities.
When groups are defined too broadly, it can be difficult to identify the unique needs and preferences of each segment, leading to generic marketing messages that don't resonate with your audience.
To avoid this mistake, begin your segmentation process by conducting thorough research and analysis to understand your audience's needs, preferences, and behaviors.
When you’re done, group them in a way that allows for effective targeting and messaging.
Using outdated segments
Market segmentation is not a one-time exercise, and using outdated segments can be a costly mistake.
Audience preferences and behaviors can change over time, and it's important to regularly update your segmentation strategy to ensure that you're targeting the right audience segments with the right messaging and products.
It's important to regularly review and update your segmentation strategy based on the latest market trends and audience data.
Ignoring future buyers
Finally, one of the biggest mistakes businesses make when implementing market segmentation is ignoring future buyers.
While it's important to focus on your existing customer base, it's equally important to consider future buyers and their unique needs and preferences. By ignoring future buyers, you risk missing out on growth opportunities and limiting your long-term potential.
To avoid this mistake, regularly conduct market research and analysis to understand emerging trends and identify new audience segments.
By avoiding these common mistakes and investing in a robust segmentation strategy that's based on reliable data and thorough analysis, you can unlock the full potential of market segmentation and achieve the success you've always dreamed of.
Next, we’ll discuss how to implement market segmentation and insider tips for success.
How to implement market segmentation in your business
In this section, you’ll learn specific steps to segmenting your audience, how to choose the right segmentation criteria, and tools that can help you.
A step-by-step guide to effective market segmentation
1. Set expectations
The first step to effective market segmentation is to set expectations. This includes identifying your business goals and the specific outcomes you hope to achieve through segmentation.
For instance, is the segmentation needed for product development efforts or are you creating customer segments for a new marketing campaign?
2. Evaluate your target market
The next step is to evaluate your target market.
This includes conducting thorough research and analysis to understand your audience's demographics, psychographics, behaviors, and preferences. Look for qualities and experiences that specific buyer groups have in common.
You can leverage tools like customer surveys, focus groups, and market research reports to gain valuable insights into your target audience.
3. Collect data about your customers
Once you've evaluated your target market, it's time to collect data about your customers. Some of the data you’ll collect includes demographic data, user behavior, and purchase history data.
You can collect this data through various channels, including customer surveys, website analytics, and customer relationship management (CRM) software.
4. Identify customer segments
Based on the data you've collected, you can begin to identify customer segments. This involves grouping customers with similar needs and preferences into distinct segments.
The goal is to create segments that are large enough to be profitable, but specific enough to allow for effective targeting and messaging.
5. Define segmentation criteria
Once you've identified customer segments, it's important to define segmentation criteria i.e. the core defining quality of each segment.
This includes identifying the key characteristics that differentiate each segment, such as age, gender, income, location, interests, and behavior.
6. Develop buyer personas
To further refine your segmentation strategy, you should proceed next to develop buyer personas.
A buyer persona is a detailed description of a specific customer segment, including their goals, pain points, behaviors, and preferences.
Developing a buyer persona lets you add a human face and personality to each buyer segment. This way you can create more personalized messaging and products that better meet the needs of each segment.
7. Outline segmentation strategy
With your segmentation criteria and buyer personas in place, it's time to outline your segmentation strategy.
This is essentially how you will position your products and messaging to each segment, as well as how you will differentiate yourself from competitors.
Please note that if you cannot think of ways to engage a particular segment, that might be a sign to either refine the segment or turn your focus elsewhere.
8. Review profit potential
Before launching your segmentation strategy, it's important to review the profit potential of each segment.
Start by assessing the size of each segment, the profitability of each segment, and the potential for growth in each segment.
You don’t want segments that are large in size but unprofitable in terms of revenue. Again, if a segment seems to be worth less than the resources you’ll spend on marketing, you should probably turn elsewhere.
9. Launch and monitor
Finally, it's time to launch your segmentation strategy and monitor its effectiveness over time. This includes tracking key performance indicators (KPIs) such as sales, customer engagement, and customer satisfaction, and making adjustments to your segmentation strategy as needed.
By following these steps, you can create a segmentation strategy that's based on reliable data and thorough analysis, and that ultimately drives growth and increases profitability.
Insider tips for choosing the right segmentation criteria
When choosing behavioral segmentation criteria, think about the core attitudes or behaviors that characterize that group. Some of the ways you can segment buyer groups here include:
- Benefits expected from your products such as discounts, service quality, speed of purchase etc.
- Role played in a B2B buying decision such as initiator, influencer, decider, buyer, or user.
- Awareness stage or buyer readiness
On the other hand, demographic criteria segment users according to various physical attributes such as age, job position, gender, income, social class, and employment status.
You may also segment within a specific life cycle. For example, Pampers, which makes baby wipes and toiletries, divides its market into newborn, babies, and toddlers.
Apart from the usual geographic criteria like region, country, and city/state, you may explore geographic segments like:
- Local tastes
An example of this segmentation is McDonalds, which offers distinct product offerings in some global locations that you may not find anywhere else.
Psychographic segmentation often takes a more scientific approach than other segmentation criteria. That’s because you’re typically looking to divide people into categories based on abstract concepts like their personality and values.
Thankfully, you can rely on tools such as the VALS framework developed by Strategic Business Insights.
The framework divides buyers into different categories based on their motivation and resources. Where your buyers fall on the framework can help determine how to market to them.
Lastly, situational criteria classify buyers according to how they use your products or services.
Some of the indicators you’ll watch out for here include time spent on your platform, social circumstances, reasons for buying, or the physical conditions of the buyer.
Tools and resources to help you segment your audience like a pro
Data and analytics are indispensable when it comes to market segmentation. To properly collect and analyze data, you need the right tools and resources.
Here’s a brief outline of some powerful tools to help segment your audience like a pro.
Marquiz is a powerful survey and quiz tool that can help you gather valuable data about your audience.
With Marquiz, you can create custom surveys and quizzes that allow you to collect data on everything from demographics to preferences and behaviors.
This data can then be used to segment your audience and create more personalized messaging and products.
Baremetrics is a powerful analytics tool that can help you track key metrics such as revenue, churn, and customer lifetime value.
By using Baremetrics, you can segment your audience based on these key metrics and identify opportunities for growth and optimization.
Segment is a customer data platform that allows you to collect, analyze, and activate customer data across your entire organization.
With Segment, you can unify data from multiple sources and use it to create more personalized messaging and experiences for your audience.
Clearbit is a data enrichment tool that allows you to enhance your customer data with additional information such as job titles, company information, and social media profiles.
This can help you better understand your audience and create more targeted messaging and products.
MailChimp is a powerful email marketing platform that allows you to create and send highly targeted email campaigns.
With MailChimp, you can segment your audience based on factors such as purchase history, email engagement, and website activity, and create highly personalized messaging and offers for each segment.
In today's hyper-competitive market, understanding your audience is more critical than ever. By implementing market segmentation, you can create a targeted marketing strategy that resonates with your audience and drives explosive business growth.