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What is Market Segmentation: Best Practices & Benefits

Stuart Crawford

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Market segmentation is one of the most effective ways to segment your market and gain insight into consumer behaviour - improve your ROI today!

What is Market Segmentation: Best Practices & Benefits

Today, we're talking about market segmentation, the idea of grouping potential customers into different groups based on their characteristics or needs.

Market segmentation implies that buyers have differences within a single product or service category.

Differentiating products by customer type and creating targeted marketing messages based on their interests, needs, and behaviours can increase conversions by up to 60%—even if you're selling the same product or service. When you're ready to start segmenting your market, take the first step by answering these four questions:

  1. Who are your customers?
  2. What do they want?
  3. How can you meet their needs?
  4. How can you make them feel special?

Once you've answered those questions, it's time to take the next step. To understand the value of segmentation, let's look at the market's current state.

How Market Segmentation Works

What Is Market Segmentation

Before diving in, let us explain the term Market Segmentation. Market segmentation is defined as breaking up a target audience into a group of distinct subgroups or segments that differ based on the characteristics of the audience members.

In other words, Market Segmentation is a process where a company collects information from its target audience and then derives critical insights into the consumer persona using these insights.

The process of market segmentation can be divided into three stages:

  1. Market Identification
  2. Market Definition
  3. Market Segmentation

The basic idea behind segmentation is that companies can gain valuable insights into their customer base by identifying different groups of consumers. Based on the insights derived from the consumer data, a company will define a set of segments.

Once the segmentation is done, the company will clearly understand their customers based on specific characteristics.

Let's now understand how market researchers identify, define, and segment the target audience.

A brief description of the three methods used to define a market segment will help us understand the methodology behind market segmentation.

Method 1. Data Analytics Approach

This is the most widely used method of market segmentation. The method is also known as market definition by profiling.

It is a standard practice for companies to segment their target audiences into distinct groups based on specific demographic traits.

The company first identifies the target audience and then analyses the collected data. Based on the analysis, the company defines the critical insights about the target audience.

The process is repeated multiple times, and the market segmentation is refined to a higher level each time.

Method 2. Conjoint Analysis Approach

The conjoint analysis approach is an example of market segmentation by targeting.

According to the conjoint analysis, the target audience is segmented into different groups based on the product features.

In segmenting the target audience, a company first collects data about the product features. Based on the collected data, the company will define the critical insights about the product.

The process of defining the target audience for a product is the same as the process of segmenting the target audience.

The conjoint analysis provides a detailed and high-level insight into the target audience.

Method 3. Personas Approach

The personas are used to segment the target audience. A persona is a fictional character which represents a group of consumers. Personas are based on key insights about the target audience.

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When creating personas, the company first identifies the key insights of the target audience. After that, the company creates a fictional character representing a group of consumers based on the key insights.

For example, suppose a company wants to sell a new TV set to the target audience. We can derive critical insights from the audience research, which shows that the target audience likes sports and cartoons, watches TV shows at different times, and has children. 

With this knowledge, the TV manufacturer can choose the best time to launch and advertise the TV. As we've seen, you can use audience research for many different purposes. And as your business grows, so will your audience's research needs.

Why Market Segmentation Works for Businesses

Why Market Segmentation Works

Market segmentation is a marketing term that describes how brands identify and categorise consumers into different groups. A brand manager may define a brand based on products and services offered, demographics or lifestyle, or use customer feedback to determine how a brand should be positioned.

Market segmentation can be done in several different ways. For example, brands can target particular customer segments using demographic or psychographic targeting. Psychographic targeting involves understanding customer psychology to understand how customers think, feel and behave. For example, marketers may use this approach to identify how consumer attitudes affect a brand's success.

Other ways of market segmentation involve lifestyle and behavioural profiling, for example, to identify who is using a particular product or service. Once a consumer has been identified as within a particular group, marketers can tailor their advertising messages and content to appeal to that group.

Understanding whom you are targeting is vital in developing and marketing a business. Understanding how consumer segments differ regarding preferences, values, and behaviours enables businesses to develop effective marketing strategies. 

In other words, market segmentation determines the type of consumers you want to reach, where they live, how they spend their money, and their interests.

How Can Market Segmentation Help Me?

The first step in market segmentation is understanding the consumers you are targeting. This means understanding how consumer segments differ regarding their preferences, values and lifestyles. Then, you can develop an effective marketing strategy and plan that suits their needs.

How Do I Find My Target Audience?

Once you know your target audience, it's time to look at your market. How are your competitors targeting their markets? Where are your competitors operating? What is your competition doing that you are not? These questions are the basis for finding your market segmentation targets.

In other words, segmenting your market will ensure that your marketing is highly relevant to those you wish to reach and will help you develop more effective marketing strategies and plans.

If you are struggling to understand how to segment your market, here are some guidelines to follow:

  • Your market segmentation will depend on the type of products and services you offer. If you sell food or drink, you might define your target audience as men, women or teenagers. For example, if you sell clothing or footwear, your market might include men or women aged 16 to 30.
  • If you operate in more than one sector, such as restaurants or hotels, you might define your target audience by whether you cater for families or single people.
  • If you sell goods, you might classify your customers by their location or by the size of their household. For example, you might define a target audience of those living in London as those aged 18 to 30 who earn a maximum of £30,000 a year.
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How Market Segmentation Boosts the Number of High-Quality Leads

1. Targeted Audience Engagement

Market segmentation helps businesses pinpoint specific groups within a larger market. By understanding these groups' unique needs and preferences, you tailor your message to engage them directly. This approach makes reaching people more likely to be interested in what you offer rather than casting a broad, generic net.

2. Enhanced Personalisation

When you segment your market, you can create more personalised marketing strategies. This personalisation resonates with individuals deeply, making them feel understood and valued. Brands like Netflix and Spotify excel at this with tailored recommendations, demonstrating the power of knowing your audience.

3. Increased Relevance

With segmentation, companies can focus on those who genuinely have a need or desire for their product or service. This precision reduces wasted resources on uninterested parties and increases relevance, attracting high-quality leads that are more likely to convert.

4. Efficient Resource Allocation

You allocate your resources more efficiently by concentrating your marketing efforts on specific segments. This efficiency increases the likelihood of connecting with potential customers who are genuinely interested and ready to engage with your brand.

5. Improved Conversion Rates

Concentrating on the right segments boosts your chances of converting leads into loyal customers. Businesses like Amazon and Google utilise segmentation to enhance their algorithms, improving user experience and driving conversion.

How to Use Market Segmentation to Grow

Segmenting For Marketing

It has been found that businesses with clear segmentation strategies perform better than those without, and many businesses fail because they are unable to segment effectively. 

The problem is that we all fall victim to ‘group think' – the tendency to believe that what is happening now is what always happens. When you think about your business or customers in a group rather than individually, you cannot take advantage of new opportunities or identify new needs.

If you are wondering how to improve your business, you need to learn to take a step back and look at the big picture rather than focusing on the day-to-day. Take time to analyse your current customer base and consider the factors that affect them. 

How can you offer them something extra to make them buy from you again? By segmenting your customers, you can find out exactly what works and what doesn't so you can build a plan to ensure that you retain these customers in the future.

Marketing is all about making people do what you want them to. When you start looking at your customers as individuals rather than as a group, you can begin to understand their unique needs and desires. 

Segmentation helps you focus your efforts so that you don't lose potential customers because they have different requirements than your other customers.

Targeting different geographic markets can lead to increased sales. If you target the right people, you can reach them when they are most interested in your products or services.

If you have multiple locations, you can choose to target them separately. Using the Internet, you can segment your customers according to their browsers. Or, if you are selling an expensive product, you could target people with high disposable income, such as students, who can purchase items at a reasonable cost.

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Segmenting your customers according to their interests and preferences can help you target the right messages to the right people at the right time. For example, selling pet food can target dog owners looking for healthy pet food. If you want to grow your business, you can look at what your competitors are doing and copy them if they are performing well.

You can change how you market to your customers to match your situation. For example, you might focus on a particular type of customer, such as young adults or those with a particular budget. You could segment them according to what product or service they are buying, or you can segment them by their gender or age.

When you are marketing, it's essential to focus on the future. There is no point in targeting your customers now if they are not likely to buy from you. You can only really segment customers when you are in the future.

Market Segmentation is a critical element of successful marketing and will help identify your target market. To segment effectively, you need to look at your customer base as a whole rather than individually. Segmenting your customers into groups based on their needs and desires can help you plan for the future.

How Does Market Segmentation Improve Brand Loyalty and Recognition?

Market segmentation is a powerful strategy that can significantly enhance brand loyalty and recognition. Businesses can tailor their marketing efforts more precisely by dividing the market into distinct groups based on various characteristics such as demographics, behaviours, or needs.

Personalised Marketing

Companies can create more personalised marketing messages when they understand different segments' specific preferences and needs. For example, Nike doesn't just sell athletic gear to everyone in the same way; they tailor ads for other sports, interests, and lifestyles, speaking directly to the unique motives of each group. This personalisation makes customers feel understood and valued, fostering deeper emotional connections with the brand.

Enhanced Customer Experience

Segmentation allows businesses to design products and services that resonate with specific consumer groups. Consider Apple's approach — they cater to creative professionals with high-end Macs while offering more affordable options for casual users. By meeting distinct consumer needs, Apple encourages repeated purchases and long-term loyalty.

Targeted Communication

By knowing what resonates with each market segment, companies can craft messages that align with the interests and values of these groups. For instance, Coca-Cola uses different campaigns worldwide that celebrate local traditions and values, enhancing its brand visibility and relevance across diverse cultures.

Competitive Advantage

When consumers perceive that a brand closely aligns with their values and needs, it stands out from competitors. This differentiation helps companies like Amazon maintain a competitive edge as they constantly adapt their offerings to align with consumer habits and preferences.

MarketMarket segmentation allows businesses to communicate more effectively with their audience, thus increasing the likelihood of converting one-time buyers into loyal advocates.

The Benefits of Market Segmentation

Marketing Segmentation Benefits

How do you segment customers? How do you segment markets? How do you segment products or services? Market segmentation is a powerful tool to increase market share, profit, and reduce costs.

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We need to understand our market and what it needs. Once we understand this, we should be able to find customers and then sell to them. This will provide us with customers who will buy what we are selling. The more we sell, the more money we make. This will enable us to grow our business.

To gain market share, there must be a market opportunity. Some markets may have already been sold, but others have not yet been developed, and we will be competing for these.

There is great competition in today's marketplace, and we cannot compete unless we understand whom we compete against and what they offer.

How are we doing with market segmentation? Are we doing it effectively? Is it working? What are the benefits of market segmentation?

There are many benefits of market segmentation, including:

  • Cost reduction – by understanding the different customer groups, we can reduce costs by reducing or eliminating discounts. We will find more profitable customers and less unprofitable customers.
  • Profit increase – focusing on customers who will buy the most.
  • Increased sales – by developing new markets, expanding existing markets and offering more of our product or service.
  • Increased market share – by finding more profitable customers and increasing our percentage of the total market.
  • Increased efficiency – by reducing wastage of time and money.
  • Better customer relations – by understanding customer groups and buying habits. This will enable us to develop a product or service to meet their needs.

Market segmentation is an effective tool in the hands of a skilled marketer. Many companies do not segment their markets, making it difficult to find and sell new markets.

What is a Market Segmentation Report?

Market Segmentation Template

A market segmentation report identifies who the market is and how to reach them. It includes a detailed analysis of the target market and will include information such as:

  1. Demographics – What age groups are being targeted?
  2. Economic Status – Are there any pockets of the market that are more affluent than others?
  3. Psychographic – Who is the target market? Is this a group of people who are likely to be interested in your product or service?
  4. Behavioural – What are the critical behaviours of the customer base?
  5. Needs – What needs does the market have?
  6. Stakeholders – Who are the key influencers within the market?
  7. Value – What are the different values of the market, and what is the value of each?
  8. Customer Relationship – How can the company reach out to the market?
  9. Key Trends – What are the changing trends in the market?

What is the Purpose of a Market Segmentation Report?

Your company will use a market segmentation report to define your target market. This allows you to identify potential clients and create a tailored marketing strategy to reach them. You will use it to help with strategic planning, product development, product marketing, and customer service.

Leveraging Market Segmentation for Brand Awareness in New Sales Channels

Expanding brand awareness often hinges on strategic moves into previously untapped sales channels. This is where market segmentation becomes a powerful tool. By dividing your target audience into distinct groups, you can tailor your marketing efforts to address specific needs and preferences, making your campaigns more effective.

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Targeted Messaging

Market segmentation allows you to craft tailored messages for different audience segments. When entering a new sales channel, such as TikTok or Instagram Shopping, connecting with the unique demographics on these platforms is crucial. Customised messaging resonates more with your audience, increasing the likelihood of brand recognition.

Efficient Resource Allocation

By understanding the potential of each segment, you can allocate resources more effectively. Suppose a segment responds better to email newsletters than to influencer collaborations—focusing your efforts on the more receptive channel can result in a better return on investment.

Expanding into Global Markets

Market segmentation can also facilitate international growth by identifying regional preferences and cultural trends. This insight allows for more effective strategy development when branching out into markets your brand previously had no foothold in, such as expanding an e-commerce platform to markets like Southeast Asia.

Improving Product Offering

Feedback from different segments allows a brand to refine and redevelop its products to meet customer needs better. Entering a new sales channel becomes more compelling when offering a product that speaks directly to that segment's desires.

In summary, by using market segmentation to understand and address the specific requirements of diverse audience groups, brands can effectively launch into new sales channels, boosting brand awareness and expanding their market presence.

Conclusion

Market segmentation is a great strategy to make sure you are reaching the right audience and you can communicate your message effectively. By targeting people based on age, gender, location, and other factors, you can focus on the most valuable audiences and effectively communicate your message. 

In this guide, we discussed market segmentation and how to use it to increase your conversion rate and reach the target audience. We also looked at different strategies you can use to segment your customers, the benefits of each segment and how you can use each strategy to drive traffic and conversion.

Learn how to use market segmentation to improve your conversions and ROI.

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Written By
Stuart Crawford
Stuart Crawford is an award-winning creative director and brand strategist with over 15 years of experience building memorable and influential brands. As Creative Director at Inkbot Design, a leading branding agency, Stuart oversees all creative projects and ensures each client receives a customised brand strategy and visual identity.

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