Market Segmentation Simplified: The 5 Types You Must Know

Breaking down market segmentation

Companies need stronger, faster, and cheaper insights. But how can an insight or marketing team divide their customer base into more precise customer segments to accomplish this task? Cue, the different types of market segmentation research.

Segmented personas will present your insights team with the strongest data. Behavior-based segmentation, especially, is increasingly popular among researchers.

Let’s dive into these 5 types of market segmentation strategies your team can use to unlock employee and consumer insights. In this market segmentation guide, you’ll learn:

1. What is Market Segmentation?
2. How to Conduct Segmentation Research
3. 5 Types of Market Segmentation & Segmentation Examples

• Behavioral Segmentation
• Psychographic Segmentation
• Demographic Segmentation
• Geographic Segmentation
• Firmographic Segmentation

4. Common Mistakes to Avoid
5. Types of Market Segmentation Strategies

Market segmentation definition

Market segmentation is a marketing technique that involves segmenting a target market into smaller, more defined market segments, enabling a business to conduct strong market research into customers. By participating in the right types of market segmentation, researchers can reveal consumer experience insights, product development innovation approaches, suggestions for boosting customer loyalty, and more.

What is customer segmentation?

Customer segmentation is similar to market segmentation in that it involves dividing a larger group into smaller groups with similar characteristics. However, in customer segmentation, the larger group consists of current customers, not the entire market. This allows for more targeted and effective marketing efforts aimed at the existing clientele. Such data is valuable for boosting loyalty and customer lifetime value.

The importance of the market segmentation process

We know that market segmentation allows us to gain an in-depth understanding of our customer base, but what can we do with these insights? Market segmentation offers a wide range of actionable recommendations with projected business outcomes. These outcomes include:

Unlocking new competitive advantages

Market segmentation can allow us to unlock competitive advantages by introducing new markets for organizations to explore. Using the insights gained from this method, we can identify untapped and growing markets that have low competition. High-growth and low-competition markets allow the organization to expand its clientele and eventually drive product discovery.

Improving the product development process

Through the use of market segmentation, organizations can power their product development process. Uncovering new segments and discovering their needs allows product teams to create products that satisfy the needs of specific market segments. In turn, specialized products or services may have little competition – and if niche enough, they may have no competition at all. Creating product guides and recommendations is one way to address competition issues within the niche.

Optimizing campaign performance

Market segmentation insights can help marketing teams develop a more effective marketing strategy with tailored messaging, resulting in personalized marketing approaches. Most importantly, market segmentation insights allow teams to make more calculated decisions, reducing media spend, and improving the campaign’s cost-effectiveness.

How to conduct segmentation research

You can split market segmentation into four distinct stages within a more prominent market research method separate from the segmentation divides themselves.

Read: The State of AI on Market Research (Report)

1. Set an objective

What is the purpose of this market segmentation process? Identify customer segmentation models and variables (and those that apply to your specific market), then develop a hypothesis based on those findings.

2. Identify customer segments

Establish a research design. Then use different market segmentation tools to collect and analyze the data, and develop your segments. You should also conduct a thorough market segment analysis to validate or disprove your hypothesis and gain deeper insights into each segment. This step will help confirm or disprove your initial assumptions.

3. Evaluate the target segment

There are several potential target markets you can choose from, so you must choose your most viable option and move your product forward from there.

Think of this step as a service to your future clientele. Identify the most specific use case, and your company will be able to offer a more personalized product or service. Think of your company as a resource, not a selling point.

You can perform this step in market segmentation in a variety of manners. An online focus group is a fast and efficient way to discover new segments. You can use platforms like Remesh to dig into pre-existing customer segments.

4. Develop market segmentation strategy

Select your target segment and identify the implications of this segment or persona. Make moves based on a target segment, project goals, market viability, and product status. Use powerpoint templates to capture and present your marketing segmentation strategy effectively.

5. Identify launch plan

Identify key stakeholders, ideate and communicate the launch plan internally, then execute the project using your target segments.

What are the five types of market segmentation?

Each of these represents a different customer segmentation model. The five types of market segmentation include:

• Behavioral Segmentation
• Psychographic Segmentation
• Demographic Segmentation
• Geographic Segmentation
• Firmographic Segmentation
  

Watch: How to Use Behavioral & Narrative Economics (Webinar)

Behavioral segmentation: A customer’s choices

Behavioral segmentation digs deeper into customers' purchasing habits than demographic segmentation. It's also one of the most popular customer profile types to be integrated into marketing campaigns. Behavioral segmentation involves analyzing behavior patterns, like customer loyalty or engagement level, specific to customer interactions with a brand or company. This allows marketers to create detailed customer personas that reflect real purchasing habits and preferences. It also allows them to track consumer behavior trends.

Behavioral segmentation examples

• Benefit(s) sought from product or service
• Readiness to buy or purchase
• Usage-based segmentation
• Common characteristics

You can use behavioral segmentation to gain insights into customer experience, allowing for improvements in customer success. Some questions to consider:

• How engaged are shoppers throughout the customer journey?
• What specific trends in timing or occasion do your customers tend to prefer your products?
• How much time are your customers spending in the buyer's process?
• How does your business define a "good customer?"

Behavioral segmentation is also used for marketers to determine future customer leads and prospects in the market who are more likely to purchase your product.

Similar to psychographics, behavioral segments are primarily collected based on a consumer's digital footprint. New improvements in technology compile metadata from customers to better understand their preferences. Unused data can be sent to customer support or used for marketing messages.

Psychographic segmentation: Defining customer profiles

Psychographics is a type of customer segmentation that focuses on inner or qualitative traits. Psychographic attributes are the ones that aren't obvious just by looking at your customer, like demographic segmentation. Instead, psychographics requires deeper analysis.

Psychographic segmentation Examples

• Habits
• Hobbies, activities, or interests
• Values or opinions
• Personality or attitude
• Lifestyle
• Social status

Psychographic data can be particularly valuable for niche market segmentation, allowing businesses to identify and target highly specific customer groups. By defining a customer persona this way, you'll be more equipped to tailor your marketing strategies. And, you'll appeal to customer tastes.

Defining brand personality traits through psychographic segmentation

You can use psychographic segmentation to develop a “brand personality” or brand personification. In other words, the personality traits that your brand exemplifies.

For example, let's say your insights team discovers your customer base purchases a new type of running shoe every year. Your market research team also knows that people interested in new running shoes value high energy and independence.

Then, you can use that finding as a feature in your brand style, which could help sell other products related to fitness under those same traits. For example, your commercials might be fast-paced and emphasize the strength of the individual.

There are a few ways to collect demographics, including:

1. Interviewing existing clients

Depending on your relationship with a customer, you can more or less ask them directly about their consumer habits. Some quantitative feedback questions may include:

• How likely are you to purchase Company X's sneaker again?
• If you like Sneaker X, would you try Hoodie Y from the same company?

If you're running out of ideas, you might start looking into some unusual places to collect customer feedback. Or, you might begin by investigating potential groups of customers you're not currently interviewing or more broadly into consumer trends.

When you ask qualitative questions, you can discover meaningful insights about your customers. These questions may include:

• What do you enjoy about running?
• Can you walk me through your running routine?

Asking questions like this can lead to further insights into a customer's lifestyle. These questions, especially when asked to larger groups of people, are typically requested by creating a survey. However, online focus groups are becoming increasingly popular customer feedback tools, as well.

Read: Online Focus Groups vs Traditional Focus Groups

2. Observing customer data

This type of psychographic probe is more low-key and becoming increasingly efficient with A.I. advancement. For companies studying consumers, A.I. systems have allowed for a deeper understanding of consumer insights.

Some questions to consider:

• Where are your consumers on the internet?
• How can you use their Instagram or Pinterest clicks to better market your products?
• What niche marketing strategies can you tap into?

Analyzing your customer's social media and digital habits will enable you to optimize your product marketing efforts – and probably contribute to your market segmentation strategy, as well. An increasingly popular example of this play method is coming with the rise of voice technology.

Voice search is an essential asset in psychographic segmentation. Customers use devices like Google Home or Amazon's Alexa to discuss personal preferences, interests, and other potentially sensitive data. Now, consumer data is available for companies to sculpt customer profiles.

With this access to detailed customer information comes some concerns over data privacy and ethical corporate use. Some risks can include:

• Data exploitation
• Identity tracking
• Voice and facial recognition

Without consent and transparency, this data could easily make consumers less inclined to share their information with brands, which in turn, makes it harder to generate brand loyalty. If used responsibly, these technologies can create a fully tailored consumer marketplace, speed up efficiency, and increase time to market.

Demographic segmentation: A customer's profile

Demographics are the breakdown of your customer personas in the market for cursory traits like age or gender. These traits offer basic information on your customers and are often considered one of the more broad segmentation types. Examples of demographic segmentation include age, income, family size, education, or gender.

Dive into these segments to cut down on time and resources to understand your target audience. Or tap into potential consumers that you have yet to reach. Demographic data is generally less invasive to collect than other segmentation types.

Demographic segmentation examples

• Occupation
• Marital status
• Political party status
• Race
• Religion
• Living status (if your subject is a homeowner or renter)

Geographic segmentation: A customer's home

Geographics are the study of your customer based on their physical location, which can affect more physical interactions in the market. Consumers grouped in similar areas may share similar preferences. That's why this type of market segmentation is excellent to pair alongside more abstract types, like behavioral.

Geographic segmentation examples

• City
• State
• Country
• Population density
• Economic status
• Zip Code
• Regional climate

However, geographic segmentation can also include geographic regions that aren't technically defined, such as neighborhoods.

For example, consider a company that is advertising a lawn care service that utilizes a subscription model. The company would likely be more successful in targeting a suburban area where residents need extra yard care. The campaign would be less successful in an urban area, where consumers might be more interested in a food delivery service. Studying customer geography can also help target search results in your prospect's region.

Read: How to Write Discussion Guides (eBook)

Firmographic segmentation: The customer's company

You can use firmographics to describe the attributes of firms or businesses. Firmographics are to firms and investors as demographics are to people. Firmographic segmentation is particularly useful for B2B market segmentation, allowing businesses to target other companies based on relevant characteristics. Companies can also use this type of segmentation to determine whether or not a smaller firm is apt for an investment.

With millions of firms worldwide, businesses can use firmographics to identify prospects based on size, scale, and funding. You can also breakdown firms into sections of:

• Non-profits
• Businesses
• Governmental entities
• Agencies
• Small-retail shops
• Independent contractors

Investing in a smaller firm or company always comes with a risk. Therefore, investors have to be precise in segmenting venture opportunities to minimize that risk.

Segmentation variables for firms typically include things related to a smaller company's potential. For example, before investing in a new application, venture capital firms look for company strengths. These can include things like the vision of the executive team or the product's target market.

Firmographic segmentation examples

• Performance and annual revenue
• Average sales cycle
• Size and employee population
• Ownership (public, private, government, etc.)
• Organizational trends

Read: The Ultimate Guide to Conducting Online Qualitative Research

Common segmentation mistakes to avoid

Effective audience segmentation requires keeping an eye out for common mistakes that marketers and researchers make.

Making your segments too small or specialized

‍Segments that are too small will be more challenging to organize or inaccurate, and they can distract from your objective. Like sample size, an over-segmented group can yield data that is not statistically or directionally significant.

Not allowing your segments to change

‍Stay focused on ROI. If your strategy isn't working efficiently for your business, it may be time to switch things around.

Ignoring new potential personas  

Customer profiles change. Try not to get too attached to your segments, as they will evolve with the market.

Types of marketing segmentation strategies

Various target marketing techniques can be used based on your segmentation results. These strategies help in effectively reaching and engaging each identified segment.

Segmentation targeting and positioning

Segmentation targeting and positioning is a crucial process that follows market segmentation. This strategic approach helps businesses focus their efforts on the most promising segments. To evaluate the potential commercial value of a segment, use these strategies to assess the following criteria:

• Market Size. The market share for that segment must be large enough to justify spend.
• Segment Differences. What's different about each segment, and what is the value of those differences? Is one segment distinct from the others?
• Profit vs. Spend. The segment must provide returns on investment from the initial budget allocated for a campaign or project.
• Accessibility of Segment: Is the segment available to your team? If not, how can your brand overcome the barriers to that segment?

After settling on a target segment, move on to product positioning, which presents the benefits of your product to the chosen target segment. A simple way to evaluate your best positioning opportunities is to map them out.

Follow these steps to create a simple product positioning map:

1. Define “hot buttons” or customer feedback trends about your product through surveys or focus groups
2. Ask your customers to rate competitor products based on that given feedback criteria
3. Place your product and competitor products on a scatter plot and evaluate the gaps

Summing up market segmentation

Whether it's conducting an interview or writing a survey, the next phase of your research can sometimes be unclear.

When collecting massive amounts of market segmentation data, keep the more extraordinary brand or marketing in mind. Rather than relying on one or two sole strategies to characterize your customer segments, combine the efforts of multiple strategies. For researchers, this allows for a complete perspective on target customers.

Marketing segmentation allows companies to define and optimize future products and advertise their product to consumers in the future.

Don't leave your market segmentation up to a manual process. Optimize your customer insights with AI, using our free guide below.