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:
- Who are your customers?
- What do they want?
- How can you meet their needs?
- 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
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:
- Market Identification
- Market Definition
- 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 the customers they serve based on specific characteristics.
Let’s now understand how market researchers use to 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 the 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 the key insights about the target audience.
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 the TV and advertise it. 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
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, for example, 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 different 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.
How to Use Market Segmentation to Grow
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, then you need to learn how 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. This is because if you are targeting 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.
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 particular 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 specific needs and desires can help you plan for the future.
The Benefits of Market Segmentation
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 and profit and reduce costs.
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. There may be some markets that have already been sold, but other markets 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 our efforts on those 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 the different customer groups and understanding their 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 very difficult to find new markets and sell to them.
What is a Market Segmentation Report?
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:
- Demographics – What age groups are being targeted?
- Economic Status – Are there any pockets of the market that are more affluent than others?
- Psychographic – Who are the target market? Is this a group of people who are likely to be interested in your product or service?
- Behavioural – What are the critical behaviours of the customer base?
- Needs – What needs does the market have?
- Stakeholders – Who are the key influencers within the market?
- Value – What are the different values of the market, and what is the value of each?
- Customer Relationship – How can the company reach out to the market?
- 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 your strategic planning, product development, product marketing, and customer service.
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.