What is Market Segmentation? 8 Tips to Maximize Your ROI

by: Dustin Hawley | Tuesday July 2, 2019

For many, market segmentation is a pair of buzzwords thrown around by marketers that typically fly over the heads of both the general public and even members of top-tier organizations. So what exactly is market segmentation? Well at its core, market segmentation is the practice of dividing your target market into approachable groups. Market segmentation is the creation of subsets of a market based on demographics, priorities, needs, common interests, and other psychographic or behavioral criteria that is used to understand a target audience on a deeper level.

When you understand your market segments, you can leverage this hyper-targeting in your product development, sales, and marketing strategies. Market segments can fuel your product development cycles by providing insight into how you can create product offerings for different segments. For example, men vs women or high income vs low income. 

What are the Types of Market Segmentation?

Geographic segmentation

This type of market segmentation divides people on the basis of geography. Your potential customers will have different needs based on the geography in which they are located.

There are numerous ways in which a market can be geographically segmented. A market can be divided by geographical areas such as city, state, county, region, (like the East Coast), country, or even international region, (like Europe). You can also divide a market into suburban, rural, and urban market segments if desired.

Demographic segmentation

Demographic segmentation is one of the simplest and most widely used types of market segmentation. Most organizations use it to get the right population of people to use their products. Generally speaking, segmentation divides a population into different groups based on certain variables. Therefore, demographic segmentation has its own set of variables such as age, gender, family size, income, occupation, etc.

For example, luxury vehicle brands like Audi and BMW have a high price bracket, so naturally, they target high-end buyers. So in this particular instance, the segmentation taking place is doing so on the basis of earnings, which is a part of demography.

Behavioral segmentation 

This is an interesting element of segmentation. Behavioral type of market segmentation divides the population on the basis of their behavior and decision-making patterns. Behavioral segmentation in marketing is essentially the practice of marketing a product in a specific manner that targets potential consumers by offering a message that caters to some want or need of consumers, in hopes of stimulating them to purchase the product or service.

Additionally, behavioral market segmentation allows companies to create market strategies that customize their product to offer something unique to consumers that they want or desire, in turn making it a more competitive product in the market as well. Behavioral segmentation is most often used by brands that have products or services that are a niche in nature and target the specific needs and requirements of an individual with those interests.

Psychographic segmentation

Psychographic segmentation is similar in nature to behavioral but has some notable differences. It's a type of segmentation which uses the lifestyle of people, their activities, interests, in addition to their opinions, to define a specific market segment. While similar to that of behavioral segmentation, what makes them different is that psychographic segmentation also takes the psychological aspects of consumer buying behavior into account. These aspects may be a consumers lifestyle, social standing, etc.

10 Tips to Maximize Your ROI

1. Develop your products and services around your segments

As well as increasing your ability to reach segments, understanding what they want to get out of it puts you in a position to develop the best experience. Front of house ambiance, customer service, catering, learning opportunities, and merchandise can all be developed to cater for priority segment needs.

2. Target the money, not just the segment

Segments are great for targeting, but following the money should still be kept top of mind. Even if you have segmented a large customer base that aligns with your strategy if that segment does not have the buying power or a legitimate need for your product, how can you produce a positive ROI? When looking at your data sets, the ones that are producing results should still be the pillars of your marketing strategy.

Market segmentation can be a laborious and complicated task, and mistakes in the beginning stages may seem inevitable. But being aware of these common downfalls can better prepare you and your organization in order to not make these mistakes in the future. This is where a top influencer marketing strategy can really benefit your brand in terms of market segmentation. 

Additionally, learn how to perform audience testing to get relevant feedback from your targeted demographic. 

3. Don't create segments that are too small

If you are looking for how to ensure effective segments, this is a rather easy place to start. If a segment is created too small, you will lose the buying power of that group, in addition to creating a segment with non-quantifiable metrics. When it's all said and done, every single person is uniquely different. It's impossible to appeal to every aspect of every person, so don't waste your time and money trying to do so.

4. Update your strategy as your customer base changes

Sometimes, the simplest solutions can be the most overlooked. And this includes sticking with a tactic and strategy that doesn't adapt to your ever-changing customer base. People change, and sometimes they can change quickly. It is in the best interest your brand (and your bottom line) to continually adjust and refresh its strategy, taking the time to resurvey its customers and adjust accordingly.

5. Ensure Your Segmentation is Incredibly Measurable

This one cannot be emphasized enough. Measurable means that your segmentation variables are directly related to purchasing a product with traceable, accurate attribution. While it is very important for you to raise brand awareness through social media in order to be relevant in today's business landscape, market segmentation commands a much higher level of oversight into direct attribution than those of brand awareness campaigns. You should be able to calculate or accurately estimate how much your segment will spend on your product, and put together your strategy and assets around those projections. 

6. Segmentation is great for telling you where your target market is not

Segmentation in itself is, by definition, exclusionary. So when you look at your distribution of customers and begin to identify a few attractive, reasonably synonymous groups, you have all but automatically defined customers who are both different and less attractive.

It makes sense, given the limited resources of many brands, to focus on the attractive groups. You should design your products and services for them primarily, communicating with them closely and devoting your best people to addressing their challenges. That last point is especially important because it means you have clearly defined your audience, a core group which will collectively appreciate and understand your business stories, even if others may or may not.

It is a natural human desire to want to be everything to everyone, to have everyone like and buy your product, and we even can come up with a rationale for why they would. Basic segmentation helps you focus your efforts in a productive way; and if you pick up other customers along the way (and you likely will), it’s the icing on the cake.

7. Keep your segmentation current

It's best practice to periodically revisit your segmentation, at least once a year even if you make no changes. You may be able to detect shifts in the size and behaviors of your existing segments and develop theories on why these changes have occurred and how you can capitalize on these changes. You should also ensure that the value propositions and supporting communication you have in place are still relevant and update them accordingly so your messaging stays fresh and consistent. 

8. Don’t get lost in the data

Simplicity and practicality will serve you well as you learn how to get started with segmentation and eventually identify your best target segments. Once you know them, you can begin to dig deeper and add more dimensions or adjectives. The contingency element is that each new sub-segment is only worthy of pursuing if it makes economic sense: meaning it has a sufficient size, you have an unmistakable value proposition, and you also have the products or services to provide that value consistently.

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