What is Market Segmentation? Types, Example, & Benefits

Ever wonder how an ad for your favourite product pops up on Facebook or Google the moment you log in? It's almost like brands seem to know exactly what you want - and often when you want it! This is all thanks to the power of Market Segmentation, which divides a broad market into smaller, well-defined groups based on shared characteristics. 

By categorising consumers based on factors such as age, interests, or buying habits, segmentation transforms generic marketing into a tailored, customer-specific experience. In this blog, we’ll break down the art of Market Segmentation, exploring its types, real-world examples, game-changing benefits and more. Read on to discover how this strategy can revolutionise your brand's impact. 

Table of Contents

1) What is Market Segmentation? 

2) Different Types of Market Segmentation 

3) How to Identify Your Market Segment? 

4) Benefits of Market Segmentation 

5) Challenges of Market Segmentation 

6) Market Segmentation Examples 

7) Difference Between Market Segmentation and Customer Segmentation 

8) Conclusion 

What is Market Segmentation? 

Market Segmentation is a marketing strategy that employs well-defined criteria to divide a brand's total addressable market share into smaller segments. Each segment shares common characteristics that allow the brand to develop targeted products, offers, and experiences. 

Market Segmentation can serve as a competitive differentiator. Customers served by such campaigns might perceive that a brand's products and messaging were tailored to them.
 

Different Types of Market Segmentation 

With segmentation and targeting, you can understand how the market will respond in a given situation, such as what causes people to purchase your products. You can employ the following types of Market Segmentation strategies: 

Demographic Segmentation 

Demographic segmentation sorts a market based on the following parameters: 

a) Age 

b) Education 

c) Household income 

d) Marital status 

e) Family size 

f) Race 

g) Gender 

h) Occupation 

i) Nationality  

This is the most commonly used type of Market Segmentation since the products and services being bought and the amount spent on them are primarily based on demographic factors. 

Geographic Segmentation 

Even though geographic segmentation can be considered a subset of demographic segmentation, it can also be a unique segmentation category in its own right. It involves creating different target customer groups based on geographical boundaries. Since potential customers have preferences and interests that vary according to geography, understanding the climates and locations of customer groups can help determine where to sell and advertise.
 

Behavioral Segmentation 

This type of Segmentation divides markets based on behaviours and decision-making patterns such as consumption, lifestyle, purchase, and usage. For example, younger buyers may purchase bottled body wash, while older consumer groups may prefer soap bars. Segmenting markets based on purchase behaviours allows marketers to create a more targeted approach. 

Firmographic Segmentation 

This is similar to demographic segmentation, with the exception that while demographics focus on individuals, firmographics prioritises organisations. This type of segmentation considers factors like company size and number of employees, illustrating how addressing a small business can differ from addressing an enterprise corporation. 

Psychographic Segmentation 

This kind of segmentation considers the psychological aspects of consumer behaviour by segmenting markets according to consumer personality traits, opinions, lifestyles, values, and interests. Big markets such as the fitness market employ psychographic segmentation when they categorise their customers into people who care about healthy living and exercise. 

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How to Identify Your Market Segment? 

There's no one universally accepted way to accomplish Market Segmentation. To determine the segments, it's common for organisations to ask themselves the following questions based on their Market Segmentation journey. 

Phase 1: Define Expectations and Objectives 

Set objectives and expectations by posing the following questions: 

a) What is the purpose of performing Market Segmentation? 

b) What does the company wish to find out by performing market segmentation? 

c) Does the company have any expectations on which market segments may exist? 

Phase 2: Recognise Customer Segments 

Consider the following: 

a) Which segments are the organisation's competitors selling to? 

b) What publicly available information is relevant and available to our market? 

c) What data needs to be collected, and how can they be collected? 

d) How should they segment customers? 

Phase 3: Analyse and Assess Potential Segments 

Considering these questions are essential: 

a)  What risks exist if the data doesn't represent the true market segments? 

b) Why should a company cater to one type of customer over another? 

c) What are the long-term repercussions of selecting one market segment over another? 

d) What is the company's ideal customer profile, and what segments best overlap with this "perfect customer" idea? 

Phase 4: Create a Segment Strategy 

Consider the following: 

a) How can the company examine its assumptions on a sample test market? 

b) What defines a successful marketing segment strategy? 

c) How can the organisation assess whether the strategy is working? 

Phase 5: Implement and Monitor 

These are the considerations of the final phase: 

a) Who are the key stakeholders that can offer feedback once the Market Segmentation strategy has been unveiled? 

b) What barriers to execution exist, and how can these be overcome? 

c) How must the launch of the marketing campaign be internally communicated? 

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Benefits of Market Segmentation 

Companies who properly segment their market enjoy significant advantages, including: 

1) Stronger Marketing Messages: You can directly speak to a specific group of people in ways that resonate with them since you understand their wants and preferences. 

2) Targeted Digital Advertising: Market Segmentation helps you define your audience’s characteristics to direct your online marketing efforts to specific locations, buying habits, ages, interests, etc. 

3) Better Response Rates and Lower Acquisition Costs: Such segmentation will result from creating marketing communications in ad messaging as well as advanced targeting on digital platforms such as Facebook and Google. 

4) Increasing Brand Loyalty: Customers who feel understood and well-served are likelier to stick with your brand. 

5) Identifying Niche Markets: Segmentation can uncover new ways of serving existing markets. 

6) Staying on Message: Since segmentation is so linear, it’s easy to keep on track with marketing strategies and not get distracted into less impactful areas. 

7) Improved Profits: Different customers have different disposable incomes, and prices can be set according to their willingness to spend. Understanding this can ensure you don’t oversell or undersell yourself. 

8) Product Development: You’ll be able to design fresh products and services with your customers' needs at the forefront of your mind. 

Challenges of Market Segmentation 

Market Segmentation also comes with potential downsides and challenges. Here are some points to consider when implementing Market Segmentation strategies: 

1) Higher Upfront Marketing Expenses: Market Segmentation aims to be efficient. However, organisations must often spend resources upfront to gain insight into the broad market data and research their customer base to capture this efficiency. 

2) Increased Product Line Complexity: Breaking a vast market into more specific, manageable pieces has the risk of creating an overly complex product line. Instead of a cohesive product line, a company's marketing mix may become confusing and inconsistently communicate its overall brand. 

3) Greater Risk of Wrong Assumptions: Market Segmentation is founded on the assumption that similar demographics will share common needs. This may not always be the case. Through it, a company may risk misidentifying individuals' motivations or needs within a given population. 

4) Higher Reliance on Data: Market Segmentation is only as robust as the underlying data supporting the claims. This means being mindful of which sources are used to pull in data and being conscious of changing market trends. 

Market Segmentation Examples 

Here are two prominent examples of Market Segmentation: 

1) Mercedes-Benz, which traditionally catered to an older, wealthier demographic, utilised Market Segmentation to reach a new demographic of younger drivers. In 2012, the automobile giant introduced a new A-Class hatchback designed with a modern, sporty look, moving away from previous models' boxy designs.

2) CVS Pharmacy, a subsidiary of CVS Health, used a demographic-based Market Segmentation strategy to align a mix of in-store products based on urban vs suburban locales. In urban stores, CVS made finding grocery items and snack foods easier. At the same time, CVS designed the suburban stores to conveniently place beauty and health products close to the pharmacy, where customers go to pick up their prescriptions. 

Difference Between Market Segmentation and Customer Segmentation 

This table summarises the difference between Market Segmentation and customer segmentation: 

Conclusion 

Market Segmentation is a proven strategy that helps businesses connect with their audience on a deeper level. By identifying distinct groups within a market, companies can offer personalised experiences, optimise their marketing efforts, and drive better results. This approach is key to building stronger customer relationships, as explained in this blog, whether through behavioural, demographic, or geographic segmentation. 

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