Market Segmentation — Because One Size Does Not Fit All (Part 1)

Market segmentation can be a straightforward and inexpensive process. Or, given the vast amount of data companies now have, it can become complicated and expensive. Thanks to technology, we can create “markets of one.” But making the leap to one-to-one marketing may not be right for every company or brand — now or ever. So if your focus is on market growth, you may want to rethink your market segmentation strategy first.

WHY SEGMENT YOUR MARKET?

Smart marketers know every product needs a target market. They know that a product or service can’t be everything to everyone. Market segmentation divides the market into groups that share similar characteristics and needs. Because of these similarities, group members are likely to have similar buying behaviors.

Market segmentation is a proven growth strategy for both consumer and business-to-business markets. A good segmentation model can guide every stage of the product commercialization process. Segmentation also increases a company’s profitability when it’s used to:

• develop products and services that meet the needs of various segments
• focus marketing resources on segments with the most potential
• craft marketing messages that resonate with target audiences
• set prices that optimize the balance between profitability and demand.

Companies that appropriately segment their market and understand their customers enjoy significant advantages. That includes increased profits. A Bain & Company survey found businesses whose segmentation strategies helped them tailor products to the appropriate customer segments enjoyed up to 10 percent higher profits over a five-year period than companies whose segmentation wasn’t as effective. While 81 percent of surveyed executives said customer segmentation is critical for increasing profits, only 25 percent believed their companies used it effectively.

KEEPING A FACE ON BIG DATA

Every click, like, follow, search and sale has turned people into units to be targeted, acquired, tracked and retained. In this era of big data, information may end up stripped of the real people who give it meaning. That makes it easy to lose sight of the real people behind the information. And even to forget that your goal as a marketer is to reach real people.

Yet the tenet of marketing is “know your customer.” Great market segmentation helps you understand your customers. That includes your customers’ similarities and differences, which is a fundamental step in quantifying their relationship with your product and company.

CHOOSING SEGMENT VARIABLES IS A KEY STRATEGIC DECISION

There isn’t one perfect approach to segmenting a given market. But the goal is to create distinct, relevant, identifiable and quantifiable groups.

You’re not alone if you struggle with choosing a robust segmentation strategy. Should you go with a mix of demographic variables? What about differences related to geographic factors? Should you — can you — layer psychographic factors on top? In reality, a combination of characteristics is often needed to create relevant segments.

The choice of variables is often determined by the type of product or service. But the final decision is still a strategic one. While different businesses will use different segmentation strategies, some basic attributes should include:

• who
• where
• what — including what they’ve done, what they do, what they think and what they are likely to do
• when

Geographic, demographic, behavioral and psychographic traits are used to create market segments for most products and services. Here is a brief overview of these common segmentation strategies.

Demographic segmentation

Demographic segmentation is one of the simplest, most-used approaches to market segmentation. It’s a good place for any marketing initiative to start. Demographic segmentation uses readily identifiable, objective and quantifiable traits. These characteristics may include age/generation, gender, income, family size, marital status, ethnicity and nationality, education level, occupation and religion. Demographics tell us who is buying our products and services. But they can’t explain why consumers choose one product or service over another.

Geographic segmentation

Where people live influences their needs, interests and preferences. It also guides how they interact with your company’s products and services. Geography is one of the simplest and easiest segmentation strategies for certain businesses. Geographic variables can include country, region, state, county, community, neighborhood, zip code, population density (urban, suburban or rural) and climate. You should consider geographic segmentation when a product has broad appeal and customers are concentrated in a defined location.

Psychographic segmentation

Psychographic segmentation takes into account the psychology of consumer behavior. Market-segment members share common attitudes, interests, activities, values or lifestyles. These qualities aren’t easily measured like demographic or geographic factors. But they can provide deep, rich insights that complement demographics and/or geographics. Exploring psychographics can tell us why customers buy our products and services.

The internet has made psychographic differences more important, plain and relevant, according to Alexandra Samuel, writing in the Harvard Business Review. Getting psychographic insights is easier than ever before. They’re also actionable in ways that were almost impossible before social media. Combined with today’s research, analytics and ad targeting, it’s possible to turn psychographics into the foundation of a robust product development and marketing strategy.

Behavioral segmentation

Behavioral segmentation groups consumers by how they use a product or service. In this case, your market segments share familiarity and experience with your products. Common characteristics are benefit preferences, level or frequency of use, brand loyalty, and prospect or customer status.

A combination of approaches may be most useful

Combining demographic and psychographic variables can provide a quantitative and qualitative picture of your target market. And when you combine demographics, psychographics and behaviors, you create a powerful marketing triad that can drive your company’s product development, services, channel strategy, pricing philosophy and brand messaging.

HOW MANY MARKET SEGMENTS ARE ENOUGH?

There’s no right or wrong answer to the question “How many market segments are enough?” Experience management and technology company Qualtrics recommends aiming for four or fewer segments. At the same time, research and consulting company Gartner advises clients to use as many as they need. However, Gartner is quick to note that it’s about how many segments can be used that truly matters.

To be useful, market segments must meet several criteria:

Measurable

Measurable means that your segmentation variables are quantifiable characteristics that relate directly to buying a product or service and to key performance indicators.

Identifiable

Can each segment’s needs, wants, desires or preferences be easily identified? Every customer or prospective customer must be associated with only one segment. Also, it should be possible to create a distinct persona for each segment that’s identified.

Reachable or accessible

Understanding your customers and being able to reach them are two different things. Your segments’ characteristics and behaviors should help you identify the best way to contact members and contact them efficiently.

Actionable

Actionable means that each segment is different, unique and responds distinctly to a marketing offer.

Substantial and relevant

A market segment must be large enough or wealthy enough to justify targeting it based on practical considerations such as stability, growth or durability. An identified segment should be more than interested in your products and services. Members should be potential buyers.

SEGMENTATION VERSUS TARGETING

Segmentation is the first step in a two-step process. Once you know which groups exist, you can proceed with selecting those you want to target. You may have identified a market segment, but that doesn’t mean you have to dedicate resources to it.

Market segmentation helps your team to understand who your customers are and why they buy your company’s products and services. Segmentation helps identify unmet needs and allows your company to create products and services to meet those needs. Segmentation also allows your communication team to craft messages that resonate with current customers and attract new ones.

In a future post, we’ll take a closer look at segmenting U.S. pet owners, including the addition of psychographic variables where appropriate.