Market segmentation is one of the most effective tools for marketers to define a group of customers. It makes it easier to personalize marketing communications as well as develop products and services that meet the needs of the customer segment.
Market segmentation is now new and has been used by marketers since the late 1900s. Although some may think of it as outdated, it is still a cornerstone part of marketing strategy and planning.
What is market segmentation
Market Segmentation is a decision-making process that involves dividing a market of potential customers into different groups.
Groups are labelled as and segments on the basis of certain characteristics.
To create a group there needs to be a common set of characteristics that the people share e.g. age range, location where they live, lifestyle, interests…
Market segmentation is beneficial marketers can create a custom marketing mix for each segment and then plan how they will acquire, retain and grow a customer base.
Typically, this involves the full marketing planning process from strategy to marketing campaigns and communications.
The concept of market segmentation was coined by Wendell R. Smith who in his article “Product Differentiation and Market Segmentation as Alternative Marketing Strategies” observed “many examples of segmentation” in 1956.
Today market segmentation is more sophisticated and the tools you can use enable you to segment a market-based in more nuanced ways e.g. lifestyle choices, behavioural segmentation and occasions.
Market Segmentation Methods
For an ideal market segment, you need to divide up a market into smaller groups of people to make your marketing more relevant and contextual.
As an example, it’s no good sending out emails to people who don’t play football as a hobby if you’re selling personalized football kits for local teams.
However, it doesn’t always make sense to create segments unless you have available data about those segments. Otherwise, when it comes to targeting them through communications you will find it difficult or costly.
How Segmentation is changing
As more data has become available ( through dig data – sensors, devices, social media, search data…e.g. Google or the social knowledge graph Facebook) new segmentation approaches have become possible.
These platforms provide insights into customers, how they interact with websites and content, including data on when people are active, their location and much more.
Some important considerations for choosing a segment:
- trends vs segments – is it a trend or a viable over a long-term?
- value of spend – how much does this segment have to spend? e.g. budget-conscious, luxury, affluent…
- can you reach the audience through communication channels?
- do they have an identifiable need you can address that they will pay for?
Those are the requirements for market segmentation. Let’s see them more in detail.
Requirements for Market Segmentation
Measurable and identifiable
Can we measure those segments so that they can be identified?
Can we reach those segments through communication and distribution?
Do those segments respond differently to different marketing mixes? In short, do they have unique needs?
Is this segment large enough to be profitable, thus justify the marketing effort required?
Are those identified segments stable enough to allow proper marketing campaigns?
Types of Market Segmentation
What is demographic segmentation?
Demographic segmentation divides markets using demographic variables like age, gender, marital status, family size, income, religion, race, occupation, nationality, etc.
This is one of the easiest ways to segment because of the availability of this type of data. Demographic segmentation is used as a start point in almost all industries. e.g. automobiles, beauty products, mobile phones, apparels, etc
What is geographic segmentation?
Geographic segmentation divides the market on the basis of geography. Often people in different regions have different requirements and may source and buy differently. Another simple reason is distribution. In other words, people often want to buy products locally or source them locally.
The dating industry, for instance, uses location as key way to segment and match people. The Uber business model is built on matching local drivers with people who need a ride.
People belonging to different regions may have different reasons to use the same product as well. Geographic segmentation helps marketer create relevant marketing campaigns for everyone.
What is behavioral segmentation?
This form of market segmentation is based on how customers behave, e.g. usage, preference, choices and decision making. Typically, you have segments like early adopters (based on technology adoption model – TAM), knowledge of the product and usage of the product.
- Those who know about the product.
- Those who don’t know about the product.
- Potential users.
- Current Users.
- First time users, etc.
What is psychographic segmentation?
Psychographic segmentation divides the market on the basis of their personality, lifestyle and attitude. This segmentation process works when buying behaviour affects the decisions about the purchase of a product.
As an example, people who buy a holiday can be targeted on lifestyle choices, personality and attitude.
- Personality is a combination of characteristics that form an individual’s distinctive character and includes habits, traits, attitude, temperament, etc.
- Lifestyle is how a person lives his life.
The luxury market and targeting high-net-worth individuals is a good example. A person who has a high-net-worth will often live a luxury lifestyle and may consider buying only luxury cars e.g. Ferrari, Lamborghini…
B2B market segmentation
Segmentation equally applies to business to business environments. Often, the process of buying in B2B is more complex and involved understanding:
- how different stakeholders are involved in the buying process.
- their roles and responsibilities and level of purchasing authority.
- buying cycles e..g. how long they sign contracts for and alternatively, therefore, it is important to know when they end.
- if a business is buying locally for an office vs for the group.
- if the business is international vs regional vs local.
- the length of time from the start of the buying process to the end – decisions can take months for complex products. and services.
For these reasons, a B2B marketing strategy has to be able to understand the buyers and buying process first.
The four-level of market segmentation
As Philip Kotler suggests in “from mass marketing to mass customization” the four steps of market segmentation are: probing, partitioning, prioritizing and positioning. This is an ongoing feedback loop.
He also divides the market segmentation into four levels:
- mass market
- segmented markets
- micro-markets (distinct from segmented markets)
- and individual markets
What is Mass Marketing?
As Philip Kotler noticed market researchers going to one household as a sample for a product launch.
Philip Kotler noted, “how can you generalize from the sample of one?” and as the story goes, the Japanese market researches replied “We Japanese are homogeneous. We’re all alike. If this family likes the product, everyone will like the product.“
This kind of “market segmentation” can be referred to as a shotgun approach.
In short, just like a shotgun is used to aim at moving targets in the air, so the shotgun approach aims to reach a wider audience, with no specific focus.
What are segmented Markets
A segmented market is divided using one or multiple types of segmentation approaches e.g. demographics, geographic, behavioral or psychographic.
This becomes a narrower and more focused approach compared to mass marketing.
What is Niche Marketing?
To give you a representation of niche marketing, think of it as being a big fish in a small pond.
Niche marketing is about becoming an authority for a small community of people of which you know their main characteristics.
As Peter Thiel, co-founder of PayPal, pointed out successful companies seek to monopolize markets instead of going where there is lots of established competitors.
In his book Zero to One, there are four steps to take to dominate a market:
- Start small to monopolize
- Stop with the BS of disruption
- Be like a chess player, think about the endgame
What is one-to-one marketing
One-to-one marketing is the approach of personalizing interactions with customers. As digital technologies for CRM systems have become more sophisticated there are increasingly higher levels of personalization methods available.
Companies now like Nike and Levi’s even have radically transformed the supply change and production methods to be more modular. This has led to products being personalized by customers.
In an article dated 1999, HBR asked “Is Your Company Ready for One-to-One Marketing?” defined as “being willing and able to change your behavior toward an individual customer based on what the customer tells you and what else you know about that customer.“
The main aim of one-to-one marketing is to establish a “learning relationship” with your potential customers and customers.
In short, for any interaction, there will be a learning experience, a better understanding of that customer’s needs.
Segmentation, Targeting, And Positioning Framework
The core questions that relate to STP:
Where am I?
The first stage of the process involves assessing the market. In other words, where you intend to launch your product or service. Understanding the market is critical to understand how and what business model you will need to design. organization. How and what type of organizational design you need. How long it will take to acquire each customer. How much it will cost to acquire them…
Who is my key customer?
Understanding who’s is the potential buyer for your product and service is critical to your overall business success. You need to do market research to understand potential customer (defining your customer is an iterative process). Depending on the kind of business model you need to understand how your value proposition fits with your customer’s needs. When you do align your value offer with their unmet needs your business is ready to take off.
Why my product matters to my key customer? Defining the problem, building a valuable product that your key customer might want, need and desire is another critical element. At this stage it’s not just about what customers or potential customers want, it’s also about how to offer an experience which is 10x better than existing alternatives.
What Channels Your Customer Uses and What Content Engages Them?
It is easy these days to find out what channels your customer uses, but the harder part is to spend time understanding what type of content they engage with and how that fits with the buying process.
How to reach your key customer?
After understanding the communication channels you prioritize on which will be the primary channel(s) that you can use to reach them. Considerations include whether they use a channel for entertainment vs enquiry and the cost of advertising on the channel and subsequent conversion rates.
Market Types: The Four Types of Markets
This is a simple but effective framework used by Steve Blank to highlight four main types of markets:
These are well-defined with existing customers and well-known competitors. This is straightforward, and in this kind of market, there isn’t necessarily a dominant player or monopoly.
When a market is dominated by only a few companies (monopoly or duopoly), re-segmentation is the best approach. This involves addressing a need that other dominating businesses can’t tackle. Clayton Christensen famously wrote about this in his work on disruption.
This involves an approach that involves copying existing business models and using them in other markets (think of how Baidu built its fortune in China due to the impossibility for Google to take off). Think of the “uberization” of several industries.
What are the 4 types of market segmentation?
The four main types of market segmentation are demographic segmentation, geographic segmentation, behavioral segmentation, and psychographic segmentation.
They form the basis for most businesses to divide customers into identifiable groups that they can then reach through marketing channels.