Market Segmentation: Definition, Benefits, Types, and Practical Examples

Marketing is a deliberate, planned, and well-researched practice that many companies invest in to understand their target audience better, increase their brand awareness, promote their products or services, and significantly increase sales.

To increase your chances of success, there are several steps and processes that you would need to take and complete before promoting your marketing campaigns – one of which is market segmentation. Market segmentation is a strategy widely used by expert marketers and marketing teams to understand their customers better to enable them to tailor their products, services, and marketing to the target market’s specific needs.

When you do this correctly, it can help you save time by targeting the right audience with the right content, fulfilling more needs of your customers, and, importantly, increasing your team’s productivity. Through market segmentation, you ensure your money is spent on the right people.

Market segmentation is the bedrock of every successful marketing strategy. You can’t afford to miss or do wrongly, hence, the reason for this blog. By reading this article, you will learn more about what market segmentation entails, why you need to do it, its benefits, various types, and real-time examples to get you started.

Keep reading!

Table of Contents

• What is Market Segmentation?
• Why Do You Need Market Segmentation?
• 10 Benefits of Market Segmentation
• Types of Market Segmentation
• How to Get Started with Segmentation?
• Market Segmentation Strategies
• Market Segmentation Use Case Examples
• Limitations of Market Segmentation
• Common Segmentation Errors To Avoid

What is Market Segmentation?

Market segmentation is a marketing strategy or practice that involves defining prospective buyers or target audiences into groups or segments of people with everyday needs or features who respond similarly to a marketing action.

Simply put, it is the process whereby target customers are divided into groups of consumers with similar characteristics, needs, and interests to tailor and present the products, services, or marketing in a way that appeals to those groups. Market segmentation enables companies to target different segments of customers who share similar values of your products or services.

This process creates market segments based on demographics, needs, shared interests, priorities, and psychographics (behavioral traits) to understand the target audience better. In essence, marketing professionals use psychology to sell their products or services to their target customers in a way they can’t refuse.

Creating different market segments can improve your product development cycles to better inform you how to create and present your product or service offerings for different segments, such as young vs. old, men vs. women, low-income vs. high-income, countryside vs. city, etc.

Three Criteria for Identifying Market Segments

Companies and marketers generally use these three criteria to identify market segments:

1. Homogeneity refers to the similarity or uniformity in needs, interests, and common goals shared by some groups in the target market.
2. Distinction refers to the credit or uniqueness shared by some groups that differ from others.
3. Reaction: This refers to the similarity in the response given by some groups differently from others.

Why Do You Need Market Segmentation?

According to a study by HubSpot, 30% of marketers who use market segmentation techniques to improve email engagement experienced 14.31% higher open rates and 101% more clicks from segmented campaigns than non-segmented campaigns.

Another study revealed that email marketers who segmented their audience before campaigning experienced an increase in revenue generation by up to 760%. In contrast, the targeted and segmented emails generated 58% of all revenue.

Segmentation strategies are proven drivers of company revenues because they help you define your target market and tailor your market campaigns, products, or services to people who need or are interested in them. Furthermore, a study by Bain and Company revealed that tailoring campaigns to customer segments generate yearly profit growth of 15% vs. 5% of businesses that don’t do that.

Above all these statistics and results, market segmentation also helps you channel your marketing strategy and campaign to the right target audience interested in the product or service and more likely to buy it. This way, you stand a higher chance of getting better campaign results and increasing your market share.

Market segmentation also helps you gain new market share, build products that solve needs, increase your marketing campaign success rate, improve customer satisfaction, and increase customer retention.

10 Benefits of Market Segmentation

Market segmentation is an effective marketing strategy that can drive immense business growth but takes effort and resources. When you do it correctly, a marketing segmentation strategy can increase your company’s long-term profitability and overall success. The benefits of market segmentation include the following:

1. It will help you attract the right customers

Market segmentation can help you identify trends or similarities in your target customers to create targeted, clear and direct messaging that appeals to the needs and interests of these people who are more likely to buy from you. This way, you attract the right people to your brand.

2. It helps you identify market gaps

Segmentation helps you identify gaps in the market and audience. For example, conduct well-researched market research. You can identify trends and problems synonymous with certain groups of people and tailor your campaigns to solve those needs.

3. Increase resource efficiency

A well-developed market segmentation strategy enables business executives and marketers to focus their products or services and campaigns on specific market segments or demographics instead of tailoring the products to a general audience with no need or interest for your products.

This way, you channel your resources to the right people and increase your team’s productivity.

4. It increases brand loyalty

Market segmentation increases your opportunity to understand better your target audience – their needs, goals, pain points, and interests.

When you understand your target audience’s problems and needs, you can tailor your products or services to meet these needs, helping you fulfill their needs. This way, you can build long-term relationships with the clients and allow you to be more loyal customers.

5. Improve your response rate and lower acquisition costs

When you use the correct information and data to create effective marketing communications in your ad messaging and advanced targeting on social media platforms and other digital media like Google, you increase your chances of getting better responses from your prospects and help you engage your existing customer base – thereby reducing your customer acquisition costs.

6. Increase profits

Creating market segments lets you group your target customers into similar groups based on gender, age, income levels, career prospects, interests, and pain points.

When you understand your prospective clients’ different incomes and job levels, you decide on the price and specifications of the products or services you will tailor to these clients. This way, you ensure you don undersell or oversell your products to your clients.

7. You develop personalized marketing messages

This is pretty easy. When you understand your client’s needs, goals, interests, pain points, and desires, you can tailor your marketing messages to meet the needs of these people in a way they can understand.

8. Product development

When you understand what’s lacking in the market or your customer’s pain points, you can develop new products and services that meet the needs of your customers as well as create multiple products that cater to the needs of each market segment with similar characteristics.

9. Stronger brand image

Creating marketing segments can provide businesses with many options to better understand their customers and market needs; this way, you can determine the best ways to cater to these needs with your products or service and how you want to be perceived by a specific group of people. You can craft your messages and company branding positively, impacting how your target audience sees and relates to your brand.

10. Stronger market differentiation

Market segmentation enables companies to understand the messages and business solutions they must offer their clients and determine the best way to convey them to the market and competitors. As a result, you can create product differentiation on how your company differs from its competitors. With this, you can position your brand better in the market, making it more desirable, memorable, and specific.

Types of Market Segmentation

Salespeople and marketers divide the comprehensive list of their target market into smaller customer segments to better tailor their marketing strategies to fit the needs of these groups. Here are some of the common types of market segmentation:

1. Demographic Segmentation

This is one of the most simple and commonly used yet effective types of market segmentation. Marketers use this kind of segmentation strategy to group their client bases and create customer personas based on the following objective information:

• Age
• Gender
• Income
• Level of education
• Religion
• Profession/Job role

Many marketers and salespeople use this method because these factors influence the kind of products or services that we buy, how we use those products, and how much we spend on these products or services. Demographic segmentation is also used to predict future customer behavior since target audiences with similar characteristics tend to behave similarly.

The advantages of demographic segmentation include the following:

• It’s easy to collect information
• It’s simple to measure & analyze
• It’s cost-effective

How to conduct demographic segmentation

Demographic segmentation is the more accessible and most straightforward due to the easy accessibility of information. You can perform this by sending surveys to customers to get their current demographic data or use readily available third-party data such as government census to gather further information.

2. Psychographic segmentation

Unlike demographic methods, psychographic segmentation groups customers into smaller segments based on similar psychological traits, personal values, political opinions, and aspirations. More specifically, marketers group their clients based on the following information:

• Values and beliefs
• Social status
• Personality 
• Hobbies
• Opinions 
• Life goals
• Lifestyle

Companies with large market sizes use psychographic segmentation methods to sort their customers into categories of people who care about healthy living and exercise. Although this method is the most valuable, every customer’s subjective characteristics make it much harder to segment clients.

How to conduct demographic segmentation

Psychographic segmentation gives you a deeper insight into your customer’s values and psychological traits. It allows you to understand their needs, likes, dislikes and loves to create marketing campaigns that resonate with those needs.

You can get psychographic data through audience analytic tools and social media channels. Beyond this, you can also use surveys, interviews, and focus groups to strengthen your customer understanding of the segments.

3. Geographic segmentation

Geographic segmentation is pretty straightforward. It involves grouping the customers based on their geographic locations – where they live and share their shop. As a subset of demographic segmentation, geographic segmentation looks for similarities in needs, mindsets, and cultural preferences in people living in the same city, state, or zip code.

The advantage of this type of segmentation is that it provides insights into what the customer locations say about some geo-specific variables such as:

• Culture
• Climate
• Language
• Population density

Like other market segmentation methods, marketers must also analyze these data to understand how each factor influences customer shopping behavior. For example, if you run a clothing brand, using geographic data of your target audience in hotter climates are less likely to buy winter clothing and home heating appliances compared to people in colder climates. Instead, people in hotter climates would need home cooling appliances and lighter clothing.

How to conduct Geographic segmentation

Geographic segmentation data can be obtained from customers through surveys and other available third-party market research data. These data can also be sourced from operational data such as IP addresses for website visitors.

4. Behavioral segmentation

Behavioral segmentation divides customers into standard market segments based on their expected behaviors when interacting with your brand. For example, young buyers are likelier to buy bottled body wash and scented candles than older customers, who will most likely purchase soap bars and regular candles.

Essentially, marketers use behavioral segmentation to group their audiences based on the following factors:

• Purchasing habits
• Browsing habits
• Spending habits
• Interactions with your brand
• Loyalty to your brand
• Product feedback

Behavioral segmentation enables marketers to gain deeper insights into the customer’s purchase behaviors to develop a more tailored marketing strategy. This allows them to focus on some specific buying traits of customers to increase their success chances.

How to conduct Behavioral segmentation

Behavioral segmentation, unlike other types, is best started with the information you have on an existing customer base. You can gather this information through your website analytics or third-party market research data to identify the patterns r trends in your customer’s behavior that will enable you to predict how they will interact with your brand.

5. Firmographic segmentation

Firmographic segmentation is closely related to demographic segmentation, except that demographic focuses on individual information while firmographic focuses on firms/organizations. Firmographic segmentation analyzes and classifies B2B customers based on common company characteristics. B2B marketers consider the following factors and company information to create firmographic customer segments:

• Company size
• Status
• Number of employees
• Industry
• Location
• Performance
• Executive title
• Sales cycle stage

B2B marketers use firmographic data to understand their clients better and create more impactful marketing campaigns.

How to conduct firmographic segmentation

Most firmographic segmentation data can be found in public listings for companies and other company information the company makes public, as well as trade publications, case studies, etc. A more straightforward way to do this is by sending surveys to your editing and potential customers to build this data.

Other Less Common Types of Market Segmentation

6. Technographic segmentation

Technographic segmentation groups customers into different market segments based on the technology they use and how they interact with it. Mainly used by B2B companies, marketers target companies based on the types of technology that they are using – be it a CRM, a website content marketing system, or specific niche tool/software.

D2C marketers use technographic segmentation to segment early adopters vs. late tech adopters and target them respectively when they launch a new product or update an existing one. Overall, technographic segmentation enhances sales and marketing efforts.

7. Price segmentation

Price segmentation is changing the price of similar products and services to different consumer groups. This can identify customers willing to pay more for a product or service they perceive to be more valuable.

This segmentation method also allows you to create your market segmentation strategy based on your customer’s previous purchase interactions with the brand, such as:

• The date of the most recent order
• Total number of transactions
• Source of brand discovery
• Average order value.

When you do price segmentation correctly, you can determine the maximum amount of revenue for each transaction.

8. Generational segmentation

Generational segmentation is an extension of demographic segmentation. It segments customers into groups based on their generation – baby boomers, millennials, and Gen Z.

Although it is pretty similar to the “age” variable in demographic segmentation, generational market segmentation extends to age as it considers the difference in preferences, habits, lifestyles, and attitudes of a particular generation. Using this segmentation method, you can also group your customers based on marital status, home ownership, and number of children

A survey by Buzzstream and Fractl found that

• Baby boomers counter the most content, consuming a larger portion in the morning.
• Millennials are more likely to share memes than other generations.
• Baby boomers are more likely to share videos than other generations.
• More than 25% of millennials use their mobile phones as their primary content viewing device than other generations.
• Gen Xers are more likely to share content on Twitter than others.

9. Life stage Segmentation

Life stage segmentation is the process of segmenting the market based on the life stage of your target audience. For example, Insurance ads are more likely to appeal to someone who just started a family than college kids.

Additionally, a person who just entered the workforce will likely be more interested in a new apartment than someone who is retired.

10. Seasonal Segmentation

Seasonal segmentation is pretty similar to geographic segmentation. However, instead of segmenting the target audience based on geographical location, seasonal segmentation groups target audiences based on their purchasing habits during specific year periods.

Remember that seasons don’t necessarily mean actual seasons like spring, summer, fall, and winter; they also mean events such as Coachella and Super Bowl and holidays such as Christmas, Mother’s Day, Father’s day, etc.

How to Get Started with Segmentation?

Here are five primary ways to create your market segmentation process.

1. Define your target market:

This is the first stage, where you determine if there’s a need for your products and services; who are you, competitors? What do buyers love about them/their products? What is the target audience’s pain point, and how can you fit into the market as a possible solution?

2. Segment your market

Based on the information you have gathered about your target audience and the market, decide on which of the five types of market segmentation – demographic, psychographic, geographic, firmographic, or behavioral segmentation best fits your type of clients.

Remember that you don’t just need to choose one type of segmentation. You can combine two or more segments to tailor your marketing efforts.

3. Understand your market

Now that you have segmented your target audience into market segments, the next and crucial step is to conduct a preliminary research survey, focus group, and polls to ask your target audience questions that relate to the segment that you have chosen. You can combine quantitative and qualitative methods to get the right answers.

4. Create your customer segments

After you have all the answers to your questions, the next step is to analyze all the responses from your research to start creating your customer segments based on the information and the type of segment you have chosen.

5. Create and test your marketing strategy

Once you have analyzed your responses and created your segments, the final step is to create a target marketing strategy and advertising campaigns for your customer segments. Once you begin running the marketing campaigns, use conversion tracking to see how effective it is, and continuously test it to track and monitor its effectiveness.

If you monitor the result and it’s not as expected, consider recreating the customer segment and repeat the process.

Market Segmentation Strategies

Once you have successfully created your market segmentation, the next vital step is to create an ineffective marketing strategy to increase your success chances. Below are two effective marketing strategies that you can use.

1. Concentration market strategy

A concentration strategy is a company focusing its marketing efforts on a single market segment. Usually, this is best suited for small, growing businesses or startups that need a specific target market.

As the name implies, concentrating on a single segment allows you to devote more time, energy, and resources to a specific target market, reducing advertising costs and team burnout.

Pros

• It has less marketing cost.
• It has high conversion rates.
• The marketing practices are repeatable.

Cons

• It has low growth potential.

2. Multi-segment market strategy

Multi-segment market strategy is the direct opposite of a concentrated market strategy. It is one where a company channels its marketing efforts on more than one market segment. It requires a much larger tax on a company’s marketing spend and is relatively safer than a concentrated strategy.

Pros

• It is safer
• It allows for more diverse marketing
• It appeals to more consumers
• It has a high growth potential.

Cons

• It has a higher marketing spend
• It has lower conversion percentages

Market Segmentation Use Case Examples

Below are some of the ways businesses can use market segmentation:

1. For product development

The ultimate goal of creating a new product or service is to solve a problem or serve a need. If your product or service doesn’t do this, you have failed. This is where market segmentation can help you understand the needs and goals of each of your market segments. This way, you can develop effective products that solve the needs of your target audience.

2. Marketing campaigns optimization

When you understand your different customer segments better, you can personalize your marketing campaigns and strategies at scale to make your campaign more effective. After running this campaign and discovering it is not giving you the desired results, you can return to the drawing board to restrategize and rerun your campaigns for better performance.

3. Customer needs research

Before developing a product or starting a business, you need to understand your target audience’s needs and goals to help you know what you need to produce or what your product needs to solve. All the information you gather during the market segmentation process provides you with all the necessary information about your potential clients and existing ones

4. For Assessing Markets and opportunities

Market segmentation helps when entering a new market or looking for new growth potentials. By gaining deeper insights into your target audience’s needs, pain points, goals, and gaps in the market, you can create better products that solve people’s problems and fills market gaps. This way, you increase your

Limitations of Market Segmentation

Below are some of the limitations of the market segmentation:

1. It relies heavily on data: Market segmentation is only effective when you have the correct data; without these, the whole process will fail, and this can have a drastic effect on your

2. There is a high chance of misassumptions: Market segmentation is deeply rooted in the assumption that people with similar demographics need the same things. This can be wrong, mainly when other factors affect the person’s circumstances. When you fail to understand the target audience’s needs, it becomes more difficult to create functional products that solve a need.

3. It has higher upfront marketing expenses: It can be a bit more expensive to create your own market segmentation strategy considering the number of people you would have to segment into groups. Especially when you need more data accuracy to gain better insights into your target market and audience.

4. Increased product line complexity: Market segmentation requires a large market to study the people and break them into smaller, manageable pieces. The downside is that you could focus too much time, money, and resources on a particular segment while leaving out the other

Common Segmentation Errors To Avoid

Here are the things market segmentation companies shouldn’t do when creating market segments:

1. Avoid focusing too much on creating different market segments; instead, look out for the ones with more purchase potential/power.
2. Avoid making your segments too small or specialized to increase your data accuracy.
3. Don’t be rigid; customers and circumstances change, so don’t be too invested in a specific segment you have, be prepared to evolve and change your marketing approach in due time.

Conclusion

Market segmentation is a marketing strategy where a large group of consumers is divided into smaller and specified groups with more similarities and needs. This allows companies to present specific products that meet the needs of these particular groups and appeal to their interests.

Although it can be complicated to achieve your desired results, we advise that you take your time when doing this and choose market segmentation software that can help you streamline your marketing strategy as your business grows.