Segmentation Analysis Explained

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Among the many challenges affecting businesses today, one that’s becoming more prevalent is the need to understand and reach target markets more effectively. Forget the one size fits all approach; businesses are realizing that to remain relevant, they must focus on delivering tailored solutions to meet the specific needs of their target market. That’s segmentation analysis in a nutshell.

But that’s not all there is to it. Efforts to reach customers with laser precision are not new, but the methods and techniques for doing so continue to change even as the basic goals remain the same. We’ve seen the success of companies like Amazon and Netflix, who leverage customer data to create personalized experiences that keep people coming back for more. In fact, it’s become something of a best practice in the business world.

A 2015 Direct Marketing Association (DMA) study reveals that 77% of ROI comes from targeted and triggered campaigns. And yet, despite the clear advantages of segmentation analysis, many businesses still struggle to get it right. This article will help you understand what segmentation analysis is, the different types of market segmentation, and how to perform a segmentation analysis for your business.

Bottom Line Up Front 

Segmentation analysis is the process of dividing a market into distinct groups with similar needs or characteristics. Businesses use segmentation analysis to identify customer segments, understand their needs, and develop marketing strategies accordingly. You can segment markets as you see fit, but the most common bases are; geographic, demographic, psychographic, and behavioral.

What is Segmentation Analysis?

Segmentation analysis is the process of dividing a market into smaller groups or segments based on shared characteristics. At its core, segmentation is about understanding the needs of your target market and tailoring your products, services, and marketing messages to meet those needs. By creating subsets of your target market, you can more effectively target your campaigns and maximize your results.

Albeit more sophisticated, the goal of segmentation analysis is not unlike that of traditional marketing efforts. The difference lies in the level of customization and personalization you can achieve with segmentation. With segmentation, you’re no longer shooting in the dark, hoping your message will resonate with someone. You know exactly who your target audience is and what they need to hear from you.

Types of Market Segmentation

The four primary types of market segmentation are geographic, demographic, psychographic, and behavioral.

1. Demographic Segmentation

Demographic segmentation divides the market based on observable characteristics like age, gender, income, education, occupation, ethnicity, and family size. Most businesses use demographic segmentation to some extent because it’s the easiest and most obvious way to group people. The determining factors affect everyone in the market and are relatively easy to identify.

Age is the most common basis for demographic segmentation. As people grow older, their needs and wants change, so it’s important to tailor your marketing message accordingly. For example, a company that sells baby clothes would use a very different marketing strategy than one selling retirement planning services. Even entertainment companies segment their audiences by age, releasing children’s movies, teen dramas, and adult comedies.

Combining all the demographic factors mentioned above can give you a detailed picture of your target market. You can further segment your audience by targeting specific groups like working mothers, empty nesters, or millennials. It’s not enough to just know that your target market is female or that they’re in a certain age group. The more specific you can be, the better.

2. Psychographic Segmentation

Psychographic segmentation is a bit more complicated than demographic segmentation. It’s the process of dividing a market based on psychological factors like values, attitudes, personalities, and lifestyles. Unlike demographic characteristics, these factors are harder to measure. They’re also much more likely to change over time, making segmenting your market challenging.

The intrinsic factors that drive customer behavior are often more important than the observable demographic factors. That’s because people of the same age, gender, or income bracket can have very different lifestyles, values, and personalities. Psychographic segmentation allows you to target your marketing messages to specific groups of people based on those shared characteristics.

For example, a company that sells organic food would use different marketing strategies to appeal to health-conscious individuals than one selling conventional food products. And a luxury car company would use a different approach to reach status-conscious buyers than a company selling economy cars.

You can use several strategies to gather psychographic information. Marketers often use surveys, focus groups, and customer interviews to better understand their target market’s psychological makeup. Case studies and customer profiles are also helpful in this regard.

3. Geographic Segmentation

Geographic segmentation is the process of dividing a market based on geographic factors like region, city, climate, or neighborhood. Businesses often use this type of segmentation when their products or services are only available in certain areas. For example, a company that sells snowboards would only target markets in regions with snow.

Businesses can also use geographic segmentation to tailor marketing messages to specific groups of people. For example, a company selling sunscreen would use different marketing strategies in Florida than in Alaska. And a company selling winter coats would use different strategies in the northern states than in the southern states.

It’s not really about the products or services you offer, but more about the needs of the people in specific geographic areas. That’s why businesses need to be careful when using this type of segmentation. You don’t want to alienate potential customers by using marketing messages that don’t apply to them.

For instance, McDonald’s uses different marketing strategies in different countries. The company focuses on its “All-American” image in the United States while stressing its global reach in other countries. Living in Hong Kong, you’ll see MacDonalds serving rice dishes and other local favorites like Ramen noodles.

4. Behavioral Segmentation

Behavioral segmentation is almost precisely what it sounds like: dividing a market based on consumer behavior. It has similar measurements to psychographic segmentation but with observable behavior being the main focus. This type of segmentation focuses on customers’ reactions toward a brand, product, or service.

A customer’s attitude toward a product is often more important than their demographics or psychological profile. That’s because attitudes are directly related to behavior. And it’s customer behavior that interests businesses. Behavioral segmentation in marketing starts with having a high-quality product or service. Something that when a customer tries it, they’ll be so satisfied that they’ll keep coming back for more even without reading reviews or getting a recommendation.

There are four main types of behavioral segmentation:

  • Occasion: Special occasions or seasonal changes trigger different consumer behavior. For example, people buy more gifts during the holiday season than at any other time. By segmenting your marketing efforts based on occasions, you can ensure you’re reaching the right people at the right time.
  • Benefit: Customers are looking for different benefits from the products they buy. For example, some people purchase shampoo because it makes their hair soft and shiny. Others might buy shampoo because it’s gentle on their scalp. Essentially, customers are looking for different things from the same product. 
  • User Status: This type of segmentation is all about whether or not someone is a first-time buyer, a repeat customer, or a potential customer. For example, a business might offer a discount to first-time buyers to get them to try their product. In contrast, a company might offer a loyalty program to repeat customers to keep them returning.
  • Loyalty: Loyalty segmentation is similar to user status. But instead of focusing on whether someone is a first-time buyer or a repeat customer, it focuses on their level of loyalty. For example, a business might offer a loyalty program to customers who frequently purchase their products. In contrast, a company might offer a discount to customers who haven’t bought anything in a while.

Other Types of Market Segmentation 

We’ve seen how businesses can segment their markets based on demographics, psychographics, behavior, and geographies, but there are other types of segmentation that companies can use as well. Here are some of the most common:

1. Volume segmentation

Marketers classify consumers as light, medium, and heavy users of their products. For instance, a company may sell 80% of its products to 20% of its customers (the heavy users). Or it may sell 60% of its products to 30% of its customers (the medium users). The remaining 40% and 10% are light users. 

The application of volume segmentation is most common in business-to-business (B2B) markets. Marketers tend to be more concerned with the medium and heavy users because they contribute the most to sales. In contrast, light users have little impact on sales.

2. Product space segmentation

Businesses use this type of segmentation to understand how different products relate to each other. It’s also known as Perceptual or Competitive Mapping. Product space segmentation aims to identify opportunities and threats in the market. In product space segmentation, businesses plot their products on a graph. They then map out their competitors’ products.

This process allows companies to see how their products compare to their competitors. Competitive mapping is a common tool used by businesses in the tech industry. That’s because the tech industry is constantly evolving, and companies must adapt quickly to market changes. 

For instance, an iPhone is not just a phone; it’s a camera, a maps app, and a music player. By understanding how their product fits into the market, companies can identify opportunities to improve their product or develop new products.

How to Perform a Segmentation Analysis 

There’s no universally accepted method for performing a segmentation analysis. However, you need a systematic flow to cover all the necessary steps. 

Here’s a brief overview of how to perform a segmentation analysis:

1. Define Your Objectives

The first step is to define your objectives. What do you want to achieve with your segmentation analysis? Do you want to increase sales, market share, or customer loyalty? The further you can narrow down your objectives, the easier it will be to select the correct type of segmentation.

2. Identify Different Customer Segments

Once you know your objectives, you can start identifying different customer segments. Start by checking who your competitors are targeting. Some publicly available information such as company filings, earnings calls, and analyst reports can give insights into your competitors’ target markets. You can also check out data from the U.S. Census Bureau and other government agencies.

3. Analyze Potential Segments 

Narrow down your list of customer segments by analyzing their potential. To do this, consider market size, growth rates, profitability, and risk factors. For each segment, ask yourself: “Is this a viable target for my business?” Why should your business target this particular segment? What is the ideal customer profile for this segment?

4. Select the Final Segments

With the help of market research, select the final segments you want to target. Ensure your segments are measurable, accessible, differentiable, and actionable. A segment that doesn’t meet these criteria is probably not worth targeting.

5. Develop Marketing Strategies

Proceed to develop marketing strategies for each of your segments. Keep in mind that each segment will require a different marketing approach. The goal is to create a unique value proposition for each segment that resonates with their needs and wants. You also need to establish how to measure the success of your marketing campaigns. 

6. Launch Your Marketing Campaigns

After developing your marketing strategies, it’s time to launch your campaigns. Keep track of your campaigns’ progress and make changes where necessary. Remember to re-evaluate your segments periodically to ensure they are still relevant. Take note of critical stakeholders’ feedback and use it to improve your segmentation analysis. 

Importance of Segmentation Analysis 

There are many benefits of segmentation analysis, but some of the most important ones are:

  1. Increased sales and market share: Segmentation analysis aims to identify high-value customers and target them with marketing campaigns. By doing this, businesses can improve sales and market share.
  2. Improved customer loyalty: Segmentation analysis can also improve customer loyalty. Creating value for specific segments through marketing campaigns can make customers feel appreciated and more loyal to your brand. 
  3. Resource efficiency: Unlike throwing darts in the dark, segmentation analysis allows businesses to focus their resources on most likely convert segments. Doing so leads to improved resource efficiency and lower marketing costs. 
  4. More substantial market differentiation: When done correctly, segmentation analysis can help businesses stand out from their competitors. Creating unique value propositions for each segment allows firms to differentiate themselves in the marketplace.
  5. Greater customer insights: Segmentation analysis gives businesses more significant insights into their customers. Companies can learn about customer needs, wants, and pain points. 

Limitations of Market Segmentation 

While market segmentation can be incredibly beneficial, it does have its limitations. The main ones are:

  • Customer heterogeneity: Segments are created to group customers that have similar characteristics. However, even within segments, there will always be some degree of heterogeneity. 
  • Customer switching costs: Customers might be reluctant to switch to your company, even if you offer a more significant value proposition. The switching costs might be too high for some customers, such as the time and effort required to switch providers. 
  • Customer perceptions: Customers might not perceive your company as you want them to. Creating a unique value proposition is essential, but it’s not enough. You must ensure that your target segments perceive your company the way you want them to. 
  • Greater risk of misassumptions: When performing market segmentation, there’s always a risk of making inaccurate assumptions. It can lead to firms targeting the wrong segments and wasting valuable resources.
  • High upfront expenses: Market segmentation can be expensive, especially if you need to purchase data or hire experts. 

Segmentation Analysis Explained (FAQs)

Question: How do you identify market segments and targets?

Answer: The most common way to identify market segments is using demographic criteria such as age, gender, income, and location. However, you can also use other criteria such as behavior (e.g., spending habits) or psychographics (e.g., lifestyle). The important thing is to choose criteria that are relevant to your business, allowing you to target segments effectively. 

Question: How many segments should a company target?

Answer: The ideal number of segments to target depends on your business and resources. Some companies might only be able to focus on one or two segments, while others might be able to target multiple segments simultaneously. However, most companies should start with a small number of segments and then expand over time.

Question: What is an example of market segmentation?

Answer: A common market segmentation example is targeting different age groups with different marketing messages. For example, a company might target millennials with ads focusing on social responsibility and baby boomers with ads focusing on experience and reliability. The Coca-Cola Company is an excellent example of effective market segmentation. They have over 200 different brands that they target to other segments. 

Conclusion

In this article, I’ve covered all you need to know about segmentation analysis. I’ve discussed what it is, its importance, how to perform it, and some of its limitations. I’ve also answered some common questions about market segmentation. By now, you should have a good understanding of this topic and be able to apply it to your business. 

The best way to learn about market segmentation is to try it out yourself. Start by identifying a few potential segments and then creating unique value propositions for each one. Once you’ve done that, you can start testing your marketing messages on each segment to see what works best. 

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