Why Market Segmentation is Crucial for your Business

customer segmentation segment business concept marketing market

For many years, marketing specialists have segmented their target customers to understand who might buy a service or product. It does sound pretty easy. Yet, sometimes companies have fallen (and continue to fall) into a few pitfalls when thinking about segmentation. One, is that they simply don’t segment. Two, they confuse segmentation with demographics. And three, many companies forget to ask themselves why they want to segment and what decisions will be made based on the information they receive.

In other instances, firms focus on traditional segmentation while failing to consider major shifts in customer behavior caused by the advance of Information Technology. So, for instance, what demographic or geographic segmentation never did was identify what a person may have wanted other than a specific product (say juice).

One step at a time, we will explain what market segmentation is, the process of market segmentation and why it is important for your business.

What is market segmentation?

Segmenting a market, simply put, is separating a group of customers belonging to the mass market into smaller groups of customers with similar needs and behaviors. In doing so, a company establishes a target for their marketing efforts (i.e., target market) and can therefore better customize its services and products to meet the target’s preferences.

Consider this example: the beverage market consists of people that are willing to purchase a liquid beverage to satisfy their thirst needs. While it would be simplistic to consider everyone in the world to have a thirst need, in reality there is not a single commercial product that would satisfy everyone’s desire. Individual needs, tastes, price sensitivity and many other factors lead to differences in the ways people choose what to drink. Such differences and similarities are the key elements that for-profits or non-for-profits, industrial or consumer businesses should consider when orientating their marketing strategies and segmenting the market.

The purpose of segmentation is to learn as much as possible about the consumers and with this information begin to craft highly targeted marketing campaigns. Targeting a particular market does not mean excluding people who do not pertain to the criteria. Rather, learning as much as possible on specific people allows you to craft highly targeted marketing campaigns. This is a much more affordable, effective and efficient way to reach potential clients and generate revenues.

Now that we’ve covered what Market segmentation is, let us dive into the three-stage process of segmenting our market: Segment, Target, Position.

The Three Steps to Market Segmentation

Step One – Identifying Segments

The very first step in segmentation consists of identifying variables through demographics (i.e., statistics that describe a population), geographics (i.e., location issues) and financial information. While a few years ago a marketer may have stopped at this stage, nowadays, the straight line that once linked a person’s demography or geography to their buying patterns may look like a crack in the windshield: an indirect path leading to various types of dead ends. How so? Because every experienced marketer knows that different customers buy for different reasons and different customers engage with a product or service in different ways.

Marketers should in fact use market research techniques that are tailored to finding out more about their target, for ex., the purchase situation, what circumstances within customer’s environment could affect purchases and understanding local conditions that could impact purchase decisions.

Accordingly, segmentation consists of identifying variables through behaviors (i.e., knowledge of, attitude towards, and readiness to use a product.), psychographics (i.e., real people’s lifestyles, attitudes, self-image and aspirations), and culture. Most of these variables necessitate the marketer to analyze the customers in the market through primary research methods, like surveys, customer service, or hiring consultants to undertake research projects. Simply put: you will need data.

The advantage of deeper segmentation is likely to be competitive gains over rivaling companies whose segmentation efforts were more superficial. To get access to such information marketers must be aware that they will spend a surprising amount of resources and time in order to collect data which customers are sometimes not so keen to share.

Quick tip: Qualitative research is preferable because it showcases real stories that are the key to convincing stakeholders.

Whichever approach you take to gain relevant data and segment your market, segments should be fashioned according to the following 6 characteristics: Identifiable, substantial, accessible, stable, differentiable and actionable.

1) Identifiable means you should be able to identify and measure customers’ characteristics, like demographics or usage behavior.
2) Substantial entails a large enough segment to be potentially profitable.
3) Accessible means it should be reached via communication and distribution channels.
4) A stable segment is one which can be strategically marketed over a long period of time. For example, psychographics may not be wise to use globally because people’s lifestyles are dynamic and constantly evolving.
5) Differentiable. The targets in a segment should have similar needs that are clearly different from the needs of people in other segments.
6) Actionable means you have to be able to provide products or services to your segments.

To wrap it up: when segmenting your market, you want to be sure you are asking yourself if you have targeted all those potential customers that fit into the segment; whether you understand your target fully; whether your target will benefit from your products and services and if they can afford them; and if your idea, product, service is easily accessible.

Now all your business needs is a marketing plan.

Step Two – Target Marketing strategy

Given the current state of the economy, devoting time and resources to identify more targeted markets can help you maximize your marketing strategy. This process – knowing when and to whom to market your product or service – can result in much higher rates of return. No one can afford to target everyone. Small businesses can effectively compete with large companies by targeting a niche market. With a clearly defined target audience, it is much easier to determine where and how to market your company.

Here are some tips to identifying a good marketing strategy.
The first tip is that there isn’t a single strategy to suit all consumer groups, so coming up with tailored strategies for your target markets is crucial. The second tip is to perform a cost-benefit analysis between all available strategies before selecting a particular targeting approach, so you know which best suits your firm.

There are four general strategies for selecting your target market/s:
(Market Analysis)

Undifferentiated or Mass Targeting:

With this strategy, the marketing team views the market as one group using a single marketing strategy. As we mentioned earlier, however, while this approach might have been appealing in the early days of marketing when Ford introduced his Model-T, a limited number of businesses now view it as a feasible strategy.

Concentrated or Niche Targeting:

This approach combines mass and segmentation marketing by focusing on a particular market niche on which marketing efforts are targeted. It is primarily used by small firms which have identified a narrower sub-target of a larger segment that is not served by larger firms. This strategy often allows the former to benefit, as focusing on one segment enables them to compete effectively against larger firms.

Differentiated or Multi-Segment Targeting:

This strategy is used by marketers to target multiple markets using a unique marketing strategy for each. Multi segment targeting mainly offers benefits to large consumer product firms that offer multiple products (e.g., soccer shoes and baseball shoes) within a wider product category (e.g., footwear).

Customized or Micro-Marketing

This newest target marketing approach, catalyzed by the Internet, is generally used to attract targeted customers with individualized marketing programs. For micro-marketing segmentation to be effective the marketer must, to some degree, allow customers to “build-their-own” products. As more companies learn to utilize the internet micro-marketing is expected to flourish.

Step Three – Positioning

No matter which marketing strategy is selected, the overall marketing strategy should involve the process of positioning the firm’s outputs in ways that will appeal to targeted customers. Positioning is the process by which you market a brand, product or service and communicate the benefits to potential customers with the goal of convincing them to believe such outputs are better than those of the competitors.

For instance, if a customer has discovered they have a need for an affordable laptop computer, a company such as Dell may come to mind since their marketing efforts position their products as offering good value at a reasonable cost. When you start coming up with the factors that will communicate your position, they must all tie-in to the positioning approach in order to maximize its effectiveness. Otherwise your marketing campaign won’t own the idea in the mind of the targeted customer, and your positioning won’t have the desired effects.

To position successfully, you must have thorough knowledge of the key benefits sought after by the market and thus know what your customer is truly wanting to buy from you, how your product stands out among those of your competitors, and the reasons your product or service is unique. Once you have a clear view of these strategic aspects, you can begin to develop a positioning strategy for your business plan that will include a description of the target market, how it will be reached, the product that is being bought, who the competitors are, and what your unique selling proposition is. And when you have done your homework in terms of segmentation, you will know the benefits wanted by the market and therefore the overall market strategy can be evaluated for each target market more smoothly.

Why is it important?

We’ve come a long way to describing what market segmentation is and the process of getting it done. But one last question remains unanswered: why is it important?

As we mentioned at the beginning of the article, big data and technology have changed how companies approach segmentation. Technology revolves around universally cheap communication. The boundaries of availability for an infinite variety of products and services have expanded, and many products have been converted to a digital format. Technology has also created a ‘two-way flow’ of information between customers and suppliers, enabling an entirely new set of customer behaviors and expectations around how, when and where they can buy and use products, and in what form. This isn’t necessarily bad news, rather over time, customer behaviors will be easier to cater thanks to the use of advanced analytics.

So, as the pool of customers’ personalities, needs, behaviors, etc. change over time, it is crucial that companies keep up the pace and constantly correct and revise their segments with new data on real behaviors. You will want information about which benefits and features matter to customers, and data on emerging social, economic and technological trends that may alter purchasing and usage patterns.

Effective segmentations need to be dynamic in two ways, and need to be redrawn as soon as they lose their relevance. The first way is, they should concentrate on the needs and behaviors which are rapidly evolving, rather than personality traits, which normally persist through a person’s life. The second way is, that segments are being rapidly reshaped by technology, fluctuating economics, and new consumer niches.

If a company, business or firm ignores market segmentation and ignores their target customer, there is nothing to sell and nobody to sell to. A good market strategy and thus a good segmentation, can increase your competitiveness, brand recall, customer retention, communications and expand your market. In summary – Target the proper segment and you will walk away with a better company and higher profitability.

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