Understanding Market Segmentation

All consumers are not created equal, and businesses that can discover or create optimal ways of segmenting their customers, based on interests, ages, location, values or purchase patterns, are most likely to create a competitive advantage for themselves over time. This is the kind of thinking that has made market segmentation, where a market is divided into subsets based on common attributes, a universal marketing activity. It is a common practice and becoming even more prevalent in an era when products and services need to be differentiated to stand out in an increasingly cluttered environment.

Market segmentation typically has two key objectives. First, it reduces risk in deciding where, when, how and to whom products and services will be marketed. Further, it helps enhance marketing efficiency by steering resources toward specifically designated segments in ways that are aligned with each segment’s characteristics.  

Consider separate examples of market segmentation put into practice.

Manufacturers like Nike, a top brand in sporting goods and apparel that has a huge customer base and a huge product are essentially forced to segment their consumers. Messaging about the numerous product and services they offer sent out to the mass of current and prospective customers would be hugely ineffective considering the challenges of communicating all of the features and value in a single ad. So it segments its customers and campaigns around products and in media that are relevant to their interests.

An online women’s retailer used market segmentation to adjust the offers it was making via e-mail marketing. Analyzing purchase patterns, open rates and click rates led to three segments: VIPs with high income levels who shopped for trends; sales shoppers who frequently snatched up discounts; and brand shoppers, motivated by price, but other factors as well. Offers were adjusted accordingly, with the VIPs receiving non-monetary benefits, like invitations to exclusive fashion events, while other segments were targeted with different levels of discounts.

As these examples illustrate, there are different ways to segment markets. One approach is to segment by product or service benefits that customers want, whether quality, price or convenience, and create or refine products and services accordingly.

Another approach is to segment according to customer use of products or services, creating segments consisting of former customers, first time contacts or regular users, or by usage rate – light, medium or heavy. This breakout is important because heavy users, for example, may account for only a small portion of the market but a majority of sales volume.

A third segmentation approach divides customers according to their stage of readiness for a product or service. Some are unaware, others aware, some segments may be more informed and interested than others, and some may already intend on purchasing. Other factors are helpful to consider in determining potential segments, like geography (urban versus rural population densities), demographics (age, ethnicity, income, occupation, etc.) and psychographics (attitudes, values, lifestyles).  

What is essential when determining market segments, however, is to ensure that segments cover customers who are aligned with each other, but are clearly distinct from those in other segments. Each segment should be identifiable and have the ability to be measured and studied. It should be accessible, large enough to warrant the marketing investment and have unique needs.

Done right, market segmentation can succeed at helping a business do the job of reaching the right customer with the right offer at the right time. And that’s what can lead to success over the long term.