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5 types of market segmentation and how to use them

What is market segmentation?

“Any customer can have a car painted any color that he wants - so long as it is black.” Henry Ford

In the early days of marketing, companies offered products that were easy to manufacture without much concern for a customer’s need. In 1909, black paint dried the fastest, so that was the color of the car that all buyers purchased.

Today, marketers realize that customers have diverse needs. To identify what customers want, marketers have learned to divide people into market segments based on their demographics, behaviors, location, purchasing habits, and other factors that influence their buying patterns.

Market segmentation is the process of dividing a broad population into subgroups according to certain shared factors. These groups may have common demographics (age, gender, etc.), geographic location, attitudes, behaviors, or a combination of similar characteristics.

A consumer may belong to multiple market segments. For instance, a female may be a Millennial (gender and age demographic), living in a rural area (geographic location), who likes to buy her food locally (purchasing habit) from companies with a solid humanitarian ethic (attitude). 

Businesses perform market research to create market segments that include multiple variables. Their challenge is to find potential customers, known as their target market, that combine shared factors, making them the group that is most likely to buy their products and services.

Marketers use different segmentation strategies depending on their goals. The goal of market segmentation is to identify a target market or group of people.  Market segmentation will have greater emphasis on the geographic market segments (e.g. metro areas, DMAs, states, regions, countries).  Consumer segmentation is used to find out the behaviors and attitudes of those groups. Customer segmentation divides the existing customer base into separate groups. While the methods for study design, data collection, and analysis are similar, they focus on different aspects of segmentation.

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Why use market segmentation?

The goal of market segmentation is to develop detailed profiles of each market segment. Once these segments are clearly defined, marketers choose the segments with the highest potential of buying their products and services.

To achieve that goal, marketers go through a three-step process that clarifies who people are and why they buy products.

  • Segment. Marketers divide the market into categories based on shared traits.
  • Target. They choose the market or target, who are most likely to buy their products.
  • Position. Marketers research what product, price, promotion, and place combinations will attract customers to buy their products.

Sound easy? Large companies spend millions of dollars researching markets to find the right target market that will increase a successful product's chances. Each market will likely have other companies who sell similar products, so research on competitors and their products is essential.

Once marketers isolate their target audience, they must define what is different about their product? Is it better, faster, cheaper, or more advanced than competitive products? To answer that question, marketers should understand their target audience's problems and how they can creatively solve those problems. Companies create a competitive advantage for themselves through product differentiation, helping their products and services stand out as solutions for buyers’ issues.

Graph of key drivers

Why should companies use the market segmentation process and focus on how to solve customer problems? According to research, over 30,000 new products are launched each year, and 95% of them fail. By identifying a target market, isolating their problems, and creating a product that solves those problems, marketers have a higher probability of success over their competitors.

Market segmentation examples

Companies use different approaches to segment their markets. Here are three examples:

No segmentation.  Companies use mass marketing to sell their products to everyone, using an undifferentiated strategy. For example, commodities like salt or generic items with many substitutes may not spend much effort segmenting their market.

Few segments. Firms may use one or more narrowly defined target markets to create a highly focused niche market for specialized products. Example: exclusive high fashion apparel, handmade art, or customized machinery parts.

Thousands of segments. Known as hyper-segmentation, marketers can customize a one-to-one marketing approach for each customer to develop a long-term relationship. For example, personalized services like hair salons and online retailers like Amazon offer personalized recommendations based on purchase history.

Market segmentation is the first step for successful product marketing. Whether companies are marketing to consumers or businesses, market segments help companies better understand their customers’ problems and solve them.

5 types of market segmentation

There are many ways to segment markets to find the right target audience. Five ways to segment markets include demographic, psychographic, behavioral, geographic, and firmographic segmentation.

How to use demographic segmentation

Demographic segmentation assumes that people with common characteristics will have similar lifestyle patterns, tastes, and interests that will influence their purchasing habits. Demographics are often combined with other segmentation approaches to develop target markets with the greatest likelihood of buying their products.

Demographics include factors like age, gender, occupation, income, and education. Surveys are one way to collect demographic information and may consist of these questions:

  1. What is your age? 
  2. What is your household income? 
  3. What is your highest level of education?
  4. How many members are in your household?
  5. What gender do you identify as?
  6. Do you own or rent your home?
  7. In what zip code is your primary residence?
  8. Are you married/divorced/single?
  9. What is your nationality/race?
  10. How many children do you have?

The advantage of demographic segmentation is that it is easy to collect. Government sources, including the Bureau of Labor Standards, provide household, income, education, and health data for marketing strategy and business goals. Companies have also developed apps that track more granular demographic data for contact tracing and travel patterns. Surveys also reveal the specific demographics of a target market instead of available research data sources and uncover actionable insights.

After using demographics for market segmentation, marketers can use this same information for customer segmentation. Using demographics and behaviors, they can identify:

  • How big the market opportunity is for their product.
  • How their brand compares to the competition.
  • Which demographics are most likely to buy our product or service.
  • Which advertising campaigns will resonate best with their target market.

When combined with behavior traits and other variables, demographic segmentation provides valuable insights to understand which specific customers within their target market will buy products and better understand how to reach them with the right marketing messages.

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How to use psychographic segmentation 

Psychographic segmentation divides people into groups based on their personality, lifestyle, social status, activities, interests, opinions, and attitudes. Psychographics is an excellent complement to demographics because they identify the motivations behind why people make particular choices.

Companies use psychographics for market segmentation to understand:

  • How consumers perceive their products and services
  • What consumers really want—and why
  • Gaps or pain points with their current products or services
  • Opportunities for future engagement 
  • How to better communicate with their target audience

Marketers collect psychographic information using three types of survey questions.

Open-ended questions that use a qualitative approach include a question like, “What is your biggest challenge with…” will provide a deeper understanding of the respondent's problems.

Likert scale questions show how much the respondent agrees or disagrees with a statement, like “strongly agree” to “strongly disagree,” letting marketers know how important the topic is to them.

Semantic differential scale questions ask people to rate a product, brand, company, or other attributes, helping marketers understand their attitude.

How to use behavioral segmentation

Behavioral market segmentation describes specific steps in their ideal customer’s buying process, including what their ideal customers want, why they want it, the benefits sought, and how they go about getting their needs met.

Behavioral segmentation is used to study B2C and B2B market segments. When companies understand why people buy, they can better target their marketing messaging. Behaviors can include:

Purchasing reason. Are buyers searching for the best price, excellent ratings, safety considerations, or other criteria? What problem are they trying to solve?

Occasion or event.  Are consumers buying for a holiday or anniversary? Are B2B buyers trying to use up their budget before year-end? 

Product benefits. Is the buyer looking to purchase the latest technology, safest product, or be the first to buy the newest product?

Buyer’s journey stage. Does the buyer want information for a future purchase? Or are they looking to try out the brand for the first time? 

Engagement level. Is the buyer a die-hard fan looking for the latest product?

These are a few of the behaviors that buyers exhibit when they are purchasing products. When marketers know why consumers or businesses are buying their products, they can make it part of their marketing strategy to address those behaviors.

How to use geographic segmentation

Geographic segmentation allows marketers to group people based on where they live, work, or travel. The location has a significant influence on buying habits that marketers can use to develop their marketing messages.

Marketers use various geographic segmentation variables that include the country, region, state, province, town, climate zone, or zip code. Culture and population density (urban or rural) are also crucial variables to include in their market research. These location variables will influence what problems people have in that region and how marketers can solve it.

Global consumer panels

An example of geographic segmentation is marketing plants based on the climate zone. Geraniums will be best for hot and sunny locations and blue spruce for places with a harsh winter. Knowing the geographic area's details helps marketers identify which plants, soil, and gardening accessories will sell best in each climate. Here’s a similar example for a coffee company: knowing average temperatures can help marketers know when to market hot drinks vs. iced drinks at the local level.

Where a person lives can influence everything from their food choices to the car they drive. Cultural norms of the area influence their beliefs, causing them to choose one product over another. For instance, working in an office in a big city versus working from home will affect what they wear and what technology they use. Travel destinations also use geographic marketing to promote hotels, activities, and restaurants in the area.

The benefit of geographic segmentation is that the data is relatively easy to collect through online data sources. Marketers can also hone their messaging to the target audience of a specific location or combine it with other segmentation variables, like demographics, to build a complete profile of their target market.

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How to use firmographic segmentation

Firmographic segmentation is to B2B marketers what demographics is for B2C marketers. Firmographics explain their business target market characteristics and include their industry, number of employees, legal status, company size, financial standing, and other business-related variables.

A B2C market may have thousands of customers, but a B2B target market may have only a few large commercial companies in their target market. Firmographics provide information for marketers who want to understand companies' strengths and viability within their target market. They focus on their financial performance and growth trends to see if the market segment is growing or experiencing a decline.

Firmographic data is available through online sources like federal and state government websites, trade journals, and other industry sources. Marketers also use surveys to collect specific data about their B2B target market. 

Firmographic data examples include:

Industry classification - North American Industry Classification System (NAICS) code.

Ownership and Legal Status - Ownership status, including sole proprietorships, limited liability corporations (LLCs), limited liability partnerships, private corporations, and public shareholder-owned corporations. 

Years in Business - Years in business can be an indicator of financial strength and industry experience.

Number of Employees - The number of employees shows how large the company is. 

Location - Locations may include offices, manufacturing plants, or stores. 

Customers and Products - What products the company makes or sells and who their target audience is.

Market Size - How large is their market, and who are their competitors.

Benefits of market segmentation

Market segmentation is the basis for successful product concepts, launches, marketing messages, advertising, and other critical marketing activities. Companies invest crucial resources into understanding their ideal customer’s problems to solve those challenges with valuable products and services.

After investing time and effort into market segmentation, what is the benefit for companies?

Better advertising campaigns

In 2019, Proctor and Gamble, maker of consumer goods like Tide and Gain, spent $10.7 billion on advertising, making them the #2 advertiser in the US. Who claimed the top spot? Amazon, which spent $11 billion.

Companies spend billions of dollars on marketing and advertising when they know exactly who their audience is and what they want. Marketers now collect vast amounts of data on their target audience to ensure their marketing messages appeal to the right customer, at the right time, for the right products.

Surveys are a great way to test marketing messages to see if they resonate with the target audience. They start by creating a hypothesis about how they think their survey respondents will react. The survey results help them build better messages and more successful campaigns.

Develop on-target products

Companies have great ideas for new products, but they must determine if those ideas solve a problem for their target audience. Without market segmentation, companies will waste time and effort on a product that sounds good but doesn’t sell.

Surveys help take the pulse of a target market. Within a few hours, companies can quickly find out if:

  • They are solving a problem for their target market.
  • One or more of their ideas is a clear winner.
  • Their product concept has the right features, packaging, and logo.
  • If buyers will purchase the product and what price they will pay.

Getting the correct answers from a well-defined target market helps companies focus on successful products that their audience will buy.

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Identify new trends and opportunities

Trends change quickly. Social media can provide insights into new customer behaviors, but marketers don't know if they are viable opportunities unless those behaviors are measured. 

Understanding the behavior of a target market is the core of market segmentation. As new trends take hold, it is up to marketers to find out which ones are new opportunities and which ones will disappear overnight.

Marketers are responsible for identifying emerging customer problems, defining new marketing messages, and testing new product concepts. To identify new opportunities, marketers need to frequently test their target audiences for new insights and verify if customers still enjoy existing products.

For instance, Millennials represent 25% of purchases, making them a critical group to watch for many marketers. They like technology, are the biggest spenders and are much more willing to switch brands than previous generations. If Millennials are part of a target audience, staying engaged while keeping them loyal customers is a significant challenge.

Provide input to business operations

Market segmentation contains a robust data set that includes customer data that other departments can use to help the company succeed. In B2B companies, the Marketing and Sales departments are often closely linked, with Sales depending on Marketing to generate qualified leads that drive greater revenue. The department in charge of pricing products also needs market and competitive data to correctly price products, helping them maintain a competitive edge. And no manufacturing division suddenly wants to work overtime because of a sudden need for 100,000 widgets to meet increased demand, so sharing buyer trends demand keeps production on track.

Market segmentation data is not meant just for the Marketing department. It should be shared so the entire company can serve its customers.

Establish brand trust

Companies want to do more than just sell products to their target audience. They want to establish a relationship with their customers, so they keep buying from products. When customers know, love, and continually buy a company’s products, they have created a brand trust.

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Market segmentation identifies which audience is most likely to buy not just once but also to make future purchases. By creating a brand identity that customers appreciate, firms start to raise brand awareness and build a trusted relationship with their target market. They stay focused on that trust, creating marketing messaging, new products, valuable content, and current information, creating a customer experience that keeps consumers and B2B clients returning for future purchases.

Apple iPhone users, Harley Davidson bike owners, and Starbucks coffee drinkers are just a few examples of brand trust. These companies invested in their products and services to create die-hard fans of their products.

Target market segmentation helps marketers understand their ideal customers' problems and behaviors, creating solutions that build a long-term brand trust that benefits both parties.

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