Companies gain a competitive edge when their brand messaging resonates with the audience. A large market share, especially across more than one customer profile, means higher revenue. But not all businesses can dominate, let alone survive after five or 10 years, because they fail to understand the customers. To solve this, they must use an effective market segmentation strategy to develop a solid value proposition and marketing plan.
What Is Market Segmentation?
Market segmentation divides a large market into smaller groups of customers who share the same characteristics. It allows companies to tailor value propositions and marketing plans to generate more leads, conversions and higher revenues.
To understand the concept of market segmentation, one has to go back to the business model, which serves as the framework of business plans. Therefore, founders and the management team must define and continuously refine the nine essential business model blocks, including customer segments.
Generally, customer segmentation starts with determining prospective buyers grouped by a common need or interest. Then, further analysis would also reveal a narrower group of prospective buyers belonging to one or more types of market segmentation:
These subsets, which may belong to one or more groups, are the target customers on whom marketers can focus their brand messaging to gain the most market segmentation benefits.
An example of a target market would be a female [gender] adult [age] executive [income] living in Dallas [geographical location] who loves shopping online [buying habit] for bags [desire or needs] from luxurious brands [attitude].
A high-end brand with this target market can focus on providing high-quality bags, combining style, elegance and status, using celebrity endorsers in their marketing campaigns online.
What Are the Benefits of Market Segmentation Strategy?
An Epsilon research study found that 90 percent of consumers find personalization appealing, with 80 percent likely to do business with brands offering a personalized experience. Furthermore, consumers who find the personalized experience appealing are likely to shop three times more frequently and 10 times more likely to become the brand’s valuable customers.
Here are the other advantages of market segmentation:
1. Clear Brand Messaging
A target market that is too broad has a diverse audience, causing the messaging to be generic. Consumers, in this case, would perceive the message as vague, and many will not identify with the brand. As a result of inefficiency, the company tends to spend more money without getting its desired results and may even lead to substantial financial losses.
By segmenting the market, marketers can tailor marketing strategies and offer a more personalized experience. The Samsung Galaxy S series, for example, are top-of-the-line smartphones. Rather than mass marketing, they targeted a few customer segments – content creators, streamers, multi-taskers and health enthusiasts. By focusing on each group, Samsung can present its solutions to specific needs and dominate each target market.
2. Better Marketing and Advertising Strategies
Market segmentation allows companies to develop specific marketing strategies and detailed sales predictions. Market researchers generally use four market targeting strategies to identify customer profiles.
Undifferentiated Market Targeting
Also called mass marketing, undifferentiated marketing disregards customer segmentation by targeting the mass market. Instead, most campaigns use mass advertising to sell a narrow product line to a broad audience. As a result, advertising costs per person are usually lower. Usually, products that most, if not all, consumers use are daily commodities and other necessities.
Differentiated Market Targeting
In differentiated or segmented marketing, companies target two or more customer segments instead of one. While it may be more costly due to different marketing mixes, it can generate more sales than mass marketing.
Colgate, for example, marketed their original oral cleaning product for teeth whitening to a broad market. But they also developed newer value propositions for fresh breath, which appealed to a narrower customer base. As a result, they kept their market dominance by combining multiple types of market segmentation.
Concentrated Market Targeting
Concentrated or niche marketing focuses resources on a particular segment. Usually, startups and small companies use this method to sell a single product line, marketing campaign and message. Meanwhile, large organizations use this strategy to increase their overall market share.
Rolex, one of the world’s most prestigious watch brands, targets customers from upper-class income groups who prefer luxury goods and live lavish lifestyles. So they feature famous and successful personalities in their marketing campaigns to convey that successful people with high status wear their watches.
Micromarketing Market Targeting
Micromarketing focuses on a single product line marketed to specific people in a niche target segment. It is accomplished by defining customers using traits such as gender, job, age or location.
The lack of economy of scale with micromarketing does not offer much room for growth and is, therefore, a concern. Nonetheless, it is an effective marketing strategy targeting Proctor and Gamble’s use. For example, they launched the Pantene Gold Series hair care line for African-American women, allowing them to capture a considerable market share of this customer segment.
There are essentially two methods of running micromarketing campaigns.
• Local Marketing: Companies adapt brands and products to the needs and desires of local customers.
• Individual Marketing: Also called one-to-one marketing, this strategy adapts products and marketing campaigns to individual needs and preferences.
3. Better Response Rates and Cheaper Acquisition Costs
Marketing campaigns fail if the audience cannot connect with brand messaging. Conversely, companies communicating effectively with target markets will likely be more successful.
A cosmetics company, for example, runs a marketing campaign on social media. LinkedIn would have been less effective as its users are primarily interested in using the platform for professional and business networking. Instead, the better platforms would be Facebook and Instagram.
Once the company runs an ad campaign targeting a broad audience, they waste money on non-buyers. So, they should use filters to define a narrower audience of women based on age, status, income level and location. As a result, the cost of acquiring new customers would be lower and their messaging would also be more personalized, which leads to higher response rates.
4. Develop New Value Propositions
Market segmentation allows companies to add more product lines and scale their business. Startups and small companies, for example, usually start with one product line. Over time, they can expand their product line to capture more customer segments.
In 2014, OnePlus launched its first product OnePlus One, dubbed by many as a flagship killer. Their unique selling proposition was mid-range phone pricing but featuring specifications that were comparable to flagship products of Apple, Samsung and other popular brands. Then, in 2020, the company launched the Nord series, an entirely new product line targeting a customer segment that prefers mid-range smartphones.
Creating value by tapping into new customer segments is one of the best ways to grow a business. As the overall market share increases, so do revenues.
Types of Market Segmentation
There is no one way of segmenting a market. Instead, companies can accomplish this process by using one or any combination of segmentation strategies. Digital marketers, for instance, combine segments to optimize websites and eCommerce stores.
1. Demographic Segmentation
Demographics refers to the socio-economic or statistical characteristics of a population. This segmentation strategy assumes that people with the same attributes will have similar purchasing habits.
Some demographic factors marketers use include:
• Family size
Demographic segmentation is beneficial in four ways:
Identify Target Markets
Companies need to define their ideal target markets for their value proposition or product line. This way, they can run their marketing campaigns with better efficiency and capture more value.
A company could develop a new product or create variations to target a particular demographic. For example, a personal care company can create two types of products for males and females.
Custom Marketing Campaigns
Marketers should create targeted marketing strategies. A luxury brand, for instance, may focus on people with high incomes, not wasting resources on poorer demographics who cannot afford their prices.
Advertising in the Right Channels
Demographic factors influence media consumption. For example, the largest social media consumers are aged 20 to 29. So companies targeting this age group should run marketing campaigns on those channels.
Using more than one demographic factor is also a common practice as it expands product lines and markets and helps add more income streams to generate higher revenues.
2. Geographic Segmentation
Geographic segmentation targets consumers based on where they live, work and travel. Identifying these segments is essential because purchasing habits in different locations may vary.
Usually, the factors used in geographic segmentation are:
• Zip code
• City, municipality, or town
• State, province, or region
Besides location, other factors affecting buyer decision-making are:
• Geographical features
• Climate (seasonal segmentation)
• Population density
• Community type (urban, suburban, or rural)
• Culture and tradition
Geographic market segmentation examples:
• A company selling winter clothes would target markets with four seasons. During winter, consumers would need ample clothing to keep them warm. But in tropical countries, the market size may be too small as only people who travel to countries during the winter season would have a need for winter clothing.
• In the early 80s, MacDonald’s introduced McSpaghetti in the United States. Unfortunately, it failed to gain traction. So, the only place where it continues to be available is in Orlando, Florida. But in the Philippines, it proved to be a big hit.
Geographic segmentation helps companies understand the nuances of different markets. This way, they can provide desired or needed products to a target market and create campaigns that effectively boost sales.
3. Behavioral Segmentation
The term “behavioral” used to describe this segmentation process is somewhat misleading. Rather than personality, it refers to how consumers engage and interact with brands.
The measurable actions used in behavioral segmentation, among different forms of engagements, include:
• Browsing habits
• Purchasing habits
• Spending habits
• Loyalty to brands
Behavioral segmentation allows companies to learn how consumers react to engagements and interactions. Furthermore, they can gain more insight into customer decision-making and buying.
Some examples of behaviors used in segmenting are:
• Reason: What do consumers need, or what problems are they trying to solve? How do they choose the products? What criteria do they use – price, safety, reliability, brand recognition, rating or others?
• Benefits: What do customers want to get from buying a product? Do they want to be one of the first to own a product? Are they attracted to technology or some other attribute?
• Occasion: Are the consumers buying because of an anniversary, holiday or event? For business-to-business (B2B) buyers, are they using up their budget before the end of the fiscal year?
• Engagement: Are buyers enthusiastic fans of a particular brand or product line and want the latest offerings?
• Buyer journey: Will customers buy now, or are they seeking information for future buying consideration? Are they trying a brand for the first time?
Once marketers identify appropriate behaviors, they can create personalized marketing plans that are bound to generate better results. It is also possible to harness more value by developing new value propositions and adding more target markets.
Brand loyalty is one of the best ways to illustrate behavioral market segmentation benefits. Loyal customers are a steady source of income because they have a bias and high degree of trust for their preferred brands. For this reason, many companies offer loyalty programs and rewards to forge a stronger brand-consumer relationship and higher customer retention rates.
Behavioral segmentation is also widely used in digital marketing. For instance, search engine optimization (SEO) experts not only optimize a site for better rankings in search results. They also analyze many metrics, such as:
• Session numbers
• Which page and number of times visited
• Time spent on the site
• Referral source
• Exit intent
Based on the metrics gathered, the SEO specialists, digital marketers and content creators can create custom pages to capture more leads, increase conversion rates and drive higher revenue.
4. Psychographic Segmentation
Psychographic segmentation relies on people’s psychological or intrinsic traits to segment the market. It may, for some, be the most challenging set to identify.
Generally, psychographic segmentation focuses on the personalities and interests of consumers. So, marketers may use interviews, surveys, case studies, focus groups and audience testing to understand the target market. They may use one or more of these factors:
• Personality traits
• Life goals
• Conscious and subconscious motivators
Psychographic segmentation is also often used to complement demographic segmentation because it aids in understanding the motivations behind customer decision-making.
For example, they can determine what customers want or need and what they think of a product or service. They can also resolve the pain points or gaps in the buyer’s journey. Lastly, it helps them communicate with customers better or create new engagement opportunities.
Psychographic market segmentation examples:
• A fitness company can target customers who value healthy living and physical exercise. They can also categorize consumers by gender and age group demographics.
• A cafe can target several customer segments. They can, for instance, serve a variety of exotic beans for sophisticated coffee lovers. But not everyone in the circle of a coffee lover would have the same taste. So, they can also offer other drinks like frappuccinos and teas or cater to families by providing children’s favorites.
How To Create Great Market Segmentations
With a better understanding of the importance and benefits of market segmentation, here are the things marketers can do to identify target segments.
1. Identify Goals and Set Objectives
Accomplishing desired results is difficult or impossible without well-developed plans. So, one of the first things marketers need to do is to set goals. Then, break it down into objectives that, when achieved individually, bring them closer to achieving their goals.
One way to better understand the concept of goals and objectives is through these questions:
• Goal: What does the company want to achieve? A company can, for example, aim for a 20 percent increase in revenue in the next fiscal year.
• Objective: What does the company need to do to achieve the goal? They can, for instance, develop a marketing plan designed to increase customer engagements on social media and increase lead generation on their website.
Goals and Objectives should be SMART:
• Specific: Set clear and precise goals and objectives. Generalities and vagueness, unfortunately, can only lead to confusion and missed targets.
• Measurable: Goals and objectives need to be quantifiable and qualifiable. Marketers need to track and analyze the metrics to see if they are on schedule.
• Achievable: Set goals and objectives that are attainable with the given time, resources and circumstances.
• Realistic: Be sure that the goals and objectives are realistic. Otherwise, expecting team members and employees to achieve the improbable can be demoralizing.
• Time-bound: The absence of a deadline is the reason for procrastination and lack of a sense of urgency. So each goal and objective needs to have a deadline.
By following SMART goals and objectives, companies can operate and achieve milestones that eventually lead to accomplishing their long-term goals.
2. Develop Solid Market Segmentation Strategies
In market segmentation, research and data are the two critical components. Once the demographic segmentation, geographic segmentation, psychographic segmentation and behavioral segmentation have been defined, a customer profile is generated. This profile will vary depending on marketing intent, such as creating new markets or increasing market shares.
One of the first things entrepreneurs should do before starting a business is to identify the following:
• Vision: What does the company want to achieve?
• Mission: How will the company achieve its vision?
• Core values: How will the company behave during the process?
These three statements serve as the guiding principles for the market research phase and determining the ideal types of market segments and customer profiles.
Generally, marketers ask these questions while doing market research:
• What are the characteristics of the ideal customer segment?
• Do they need the company’s product or service?
• Do they want the company’s product or service?
• Can the company capture value from the customer segment?
• Who are the competitors?
• Can the company compete?
These are only some of the questions asked to get started. As for the actual process, marketers use different data collection and segment analysis methodologies to accomplish their tasks.
Analyzing data comes after market research. Here, the goal is to determine how receptive a segment will be to a brand and its value proposition.
Regardless of the segmentation method, it must pass the MASDA model:
• Measurable: Each customer segment must be quantifiable and qualifiable. Is it possible to estimate how much the customer segment can afford and be willing to spend?
• Accessible: People buy products to solve a problem. Can the brand persuade consumers to want, desire, or accept their value proposition?
• Substantial: A customer segment must generate enough sales. Is the customer segment profitable and worthwhile? Is it for the short term or the long term?
• Differentiable: Accurate differentiation of customer segments reduces overlapping into irrelevant markets. This way, marketers can work with a clear structure.
• Actionable: Segmentation means that each segment reacts differently to market offerings. Can the brand tailor marketing strategies that best resonate with the consumers?
After extensive data analysis, brands can now separate customer segments they can target from those that would not patronize their products and services.
How To Best Use Customer Segmentation Strategy
Go-to-Market (GTM) is one of the most widely used strategies to introduce products into a market. Essentially, it serves as the blueprint detailing how a company plans to use its resources to gain a competitive edge in delivering its value proposition to the consumers. In addition, it is a roadmap that includes measuring product viability and predicting product performance in the market.
The usual processes comprising a GTM strategy include:
Identify Target Markets
Marketers research markets they can reach and study the playing field. They check the level of competition and find gaps that may exist.
Define Customer Segments
Market researchers narrow down prospective markets into distinct customer segments. They then analyze and see which ones can benefit the most from their value propositions. At the same time, they also make financial projections.
Determine Brand Positioning
A strong brand position is crucial to success. Here, companies decide how they want consumers to perceive their brand and products.
Choose the Right Communications Channels
The most critical aspect of GTM is selecting the proper channels to communicate with consumers. Besides the number of people using a particular medium, marketers ensure each channel aligns with their brand image and can gain a competitive advantage.
Marketing strategies used by companies share common goals – to understand customers, meet their expectations, generate revenue and keep increasing customer engagements and retention. GTM is one strategy companies can adapt to realize the advantages of market segmentation.
Gaining a Competitive Edge in Digital Market Segmentation Strategy
The pandemic has changed the way consumers find information and buy products. In some estimates, it has accelerated the eCommerce industry by five years. As a result, digital marketing became a necessity, not a choice, for many companies to survive and thrive.
Market segmentation lets you break down a prospective market into smaller target markets classified by distinct characteristics. Then, you can develop strategies for each segment after identifying the target customer profiles. One of the best ways to do that is through your website, online store, social media platforms and other digital marketing strategies.
If you want to gain a competitive edge and boost your sales, call 843-353-6383 or contact us for a free consultation on how we can help you grow your business.