Market segmentation: definition, example, types, benefits (2023)

What is market segmentation?

Market segmentation is a marketing term that refers to the aggregation of potential buyers into groups or segments with common needs that respond similarly to a marketing action. Market segmentation allows companies to target different categories of consumers who perceive itoverall braverydistinguish between certain products and services.

Understand market segmentation

Businesses can generally use three criteria to identify different market segments:

1. homogeneityor shared needs within a segment
2. Distinction,or be unique from other groups
3. Reaction,or a similar reaction to the market

For example, an athletic shoe manufacturer might have market segments for basketball players and distance runners. As different groups, basketball players and distance runners respond to very different advertisements. Understanding these different market segments allows the athletic shoe manufacturer to market their brand appropriately.

Market segmentation is an extension of market research aimed at identifying specific consumer groups in order to tailor and customize productsMarkein a way that is attractive to the group. The goal of market segmentation is to minimize risk by determining which products have the best chance of winning a share of atarget marketand determine the best way to bring products to market. This allows the company to increase its overall efficiency by focusing limited resources on efforts that bring out the best.Capital leases(return).

Types of market segmentation

There are four main types of market segmentation. However, a type can be broadly divided into an individual segment and an organization segment. Therefore, five common ways of market segmentation are listed below.

demographic breakdown

Demographic segmentation is one of the simple and common market segmentation methods. The market is divided into customer demographics such as age, income, gender, race, education or occupation. This market segmentation strategy assumes that people with similar demographics have similar needs.

Example:The market segmentation strategy for a new video game console can show that the majority of users are young men with disposable income.

Firmographic segmentation

Firmographic segmentation is the same concept as demographic segmentation. However, instead of looking at people, this strategy looks at organizations and looks at the number of employees, the number of customers, the number of branches, or a company's annual output.revenue.

Example:An enterprise software provider may cater to a multinational with a more diverse and customizable suite, while catering to smaller companies with a flat fee and a simpler product.

Geographic Segmentation

Geographic targeting is technically a subset of demographic targeting. This approach groups customers by physical location, assuming that people in a given geographic area may have similar needs. This strategy is most useful for larger companies looking to expand into different branches, offices, or locations.

Example:A clothing retailer may display more waterproof clothing in its Pacific Northwest locations than in its Southwest locations.

behavioral segmentation

Behavioral segmentation relies heavily on market data, consumer actions, and customer decision patterns. This approach groups consumers based on how they have previously interacted with markets and products. However, this approach assumes that consumers' past buying habits are an indicator of what they will buy in the futureSpending habits may changeover time or in response to global events.

Example:Millennials traditionally buy more craft beer, while older generations traditionally tend to buy more national brands.

Psychographic Segmentation

Often the most difficult market segmentation approach, psychographic segmentation attempts to classify consumers based on their lifestyle, personality, opinions and interests. This can be more difficult to achieve because these characteristics (1) can change easily and (2) may not readily have objective data. However, this approach can lead to stronger market segment results because it groups people based on intrinsic motivators rather than external data points.

Beispiel:A sportswear company may target or view individuals based on their interest in a variety of sports.

How to determine your market segment

There is no single, universally accepted way to perform market segmentation. In order to determine their market segments, it is common for companies to ask themselves the following questions during their market segmentation process.

Phase I: Set expectations/goals

• What is the purpose or goal of market segmentation?
• What does the company hope to discover by performing marketing segmentation?
• Does the company have any expectations as to what market segments might exist?

Phase 2: Identify customer segments

• What segments does the company's competitors sell to?
• What publicly available information (eg.US Census Bureaudata) are relevant and available for our market?
• What data do we want to collect and how can we collect it?
• Which of the five types of market segments do we want to segment by?

Phase 3: Assess potential segments

• What are the risks that our data is not representative of the true market segments?
• Why should we choose to favor one type of customer over another?
• What are the long-term implications of choosing one market segment over another?
• What is the company's ideal customer profile and which segments best overlap with this "perfect customer"?

Phase 4: Development of the segment strategy

• How can the company test its assumptions in a sample test market?
• What makes a successful segment marketing strategy?
• How can the company measure whether the strategy is working?

Phase 5: Implementation and monitoring

• who are keysaffected partiesWho can provide feedback after the market segmentation strategy has been announced?
• What are the barriers to implementation and how can they be overcome?
• How should the start of the marketing campaign be communicated internally?

Advantages of market segmentation

Marketing segmentation requires effort and resources to implement. However, successful marketing segmentation campaigns can increase a company's profitability and health in the long run. The various advantages of market segmentation include:

• More resource efficiency.Marketing segmentation allows management to focus on specific demographics or customers. Rather than trying to promote products across the market, marketing segmentation allows for a precise, focused approach that often costs less compared to a broad-based approach.
• Stronger brand image.Segment marketing forces management to consider how it would like to be perceived by a specific group of people. Once the market segment is identified, management needs to consider what message to write. Since this message is aimed at a specific audience, a company's branding and message is more likely to be highly intentional. This can also have a spillover effect and lead to better customer experiences with the company.
• Greater potential for brand loyalty.Marketing segmentation increases the opportunity for consumers to form long-term relationships with a company. More direct personal marketing approaches can resonate with customers and foster a sense of inclusion, community and belonging. Additionally, market segmentation increases the likelihood that you'll land the right customer that fits your product line and demographics.
• Stronger differentiation in the market.Market segmentation gives a company the ability to identify the exact message it wants to convey to the market and competitors. This can also help when creatingproduct differentiationto communicate in a targeted manner how a company differs from its competitors. Instead of a broad marketing approach, management creates a specific image that is more memorable and specific.
• Better targeted digital advertising.Marketing segmentation allows a company to run more targeted advertising strategies. This includes marketing plans that target specific age groups, locations, or habits via social media.
  

Limitations of Market Segmentation

The above advantages cannot be achieved with some potential disadvantages. Here are some cons to consider when implementing market segmentation strategies.

• Higher initial marketing spend.Marketing segmentation has the long-term goal of being efficient. However, to harness these efficiencies, companies often need to dedicate upfront resources to gaining insight, data, and research about their customer base and their markets in general.
• Increased product line complexity.Marketing segmentation takes a large market and tries to break it down into more specific and manageable chunks. This carries the negative risk of creating an overly complex and fragmented product line that is overly focused on serving specific market segments. Instead of a company with a cohesive line of products, theMarketing-MixIt can get too confusing and inconsistently communicate your entire brand.
• Increased risk of wrong assumptions.Market segmentation is based on the assumption that similar demographic groups have common needs. This may not always be the case. By grouping a group on the assumption that they share common characteristics, a company risks misidentifying the needs, values, or motivations of individuals in a particular group.
• Greater confidence in reliable data.Market segmentation is only as strong as the underlying data supporting the claims made. This means that consideration must be given to the sources from which data is extracted. It also means being aware of changing trends and market segments compared to previous studies.

Examples of market segmentation

Market segmentation is evident in the products, marketing, and advertising that people use on a daily basis. Automakers benefit from their ability to correctly identify market segments and develop products and advertising campaigns that appeal to those segments.

Grain producers are actively marketing three to four market segments at a time, pushing traditional brands that appeal to older consumers and healthy brands for health-conscious consumers as they buildbrand loyaltyamong younger consumers, for example by linking their products to popular themes from children's films.

An athletic shoe manufacturer can define multiple market segments including elite athletes, gym goers, fashion conscious women and middle aged men who want quality and comfort in their shoes. In all cases, the manufacturer's marketing intelligence across each segment allows it to develop and promote highly attractive products more efficiently than trying to appeal to the masses.

The final result

Market segmentation is a process that companies use to segment their potential customers into different areas. This allows the company to allocate the right resource to each individual segment, allowing for more precise targeting across a variety of marketing campaigns.