Market segmentation

Market segmentation

Quick definition

Market segmentation is the practice of grouping customers together based on certain characteristics that they may share.

Key takeaways

Demographic segmentation, psychographic segmentation (which looks at attitudes, beliefs, traits, or lifestyles), behavioral segmentation, and geographic segmentation are some of the most common ways companies choose to group their customers.

Segmentation allows companies to more fully identify and understand their customers, particularly their high-value customers, and provide better experiences.

Market segmentation can also provide information about growth opportunities, product improvements, and efficiency on a company-wide level.

More integration of AI with segmentation technologies will make the process of targeting customers easier, faster, and more precise.

Heidi Besik is currently a group product marketing manager for Adobe Analytics, where she leads go-to-market strategy and sales enablement for emerging channels, including mobile, voice assistant, and connected car analytics. Prior to joining Adobe, she was director of B2B marketing at Klout and did product marketing at Yammer, both startups with successful exits.

Why do businesses choose to segment?

Why is market segmentation important?

What is a market segmentation strategy?

How does market segmentation tie into other aspects of business strategy?

How do companies analyze market segments?

What is a segmentation model?

What mistakes do companies make with market segmentation?

Can companies revise their segments?

How has market segmentation changed over time?

Q: Why do businesses choose to segment?

A: There are many ways to segment customers, but some types of segmentation are more common or useful than others. The types of segments a particular business is going to go after will depend on their business strategy, and who they're looking to target.

Common types of market segmentation include groupings based on demographic information, geographic location, or behavioral information. For example, a company might want to target all customers located in the eastern United States who purchased a certain product during a specific timeframe. To do so, they would create an audience segment matching those parameters.

Q: Why is market segmentation important?

A: Market segmentation should be a key aspect of any company’s go-to-market strategy. Without some level of segmentation, it is difficult to identify and understand your target audience.

Market segmentation also helps companies identify who their most high-value customers will be, and the similarities and differences between different groups of customers. That can help you to meet your customers’ needs more effectively, increase profitability, and make sure that you're allocating budgets to the right areas and to the right people, especially for your marketing efforts. Segmentation helps you create more targeted and personalized communications or more targeted marketing efforts. It can help with improving customer retention, because in doing some analysis, you might realize that you've been approaching a particular group of customers all wrong, or you've missed something really key about their behavior.

Paying attention to segmentation can also allow an organization to better identify growth opportunities. There might be different segments where you didn't realize there was an opportunity for growth until you started to dig into them a little bit more. Segmenting is a way to help you take a targeted approach to growing your business. It can also be a way to gain new market share. If you want to enter into a new market, segmentation can help you drill down and better understand how to effectively move into that new market.

Q: What is a market segmentation strategy?

A: A company’s market segmentation strategy will depend on their business goals. There are different models an organization can follow, but essentially, once a company creates market segments, they will use those segments to target specific customers with personalized experiences.

Q: How does market segmentation tie into other aspects of business strategy?

A: Segmentation most directly benefits marketing campaigns, but it provides benefits for other departments as well. Segmentation can help the product team understand how to improve a product, or identify which products to invest more in. At an organization-wide level, it helps a company understand whether your customers are more engaged on mobile or your website, or if they make more purchases in-store or online. Do you tend to see certain behaviors happen geographically in a particular area more than others? Does your customer base tend to be stronger on the East Coast versus the West Coast, or in the Northwest versus the South? From a broader business standpoint, all those factors can help you really understand where to put budget in terms of teams, development of products, and marketing and advertising efforts.

Q: How do companies analyze market segments?

A: To analyze market segments, a company will group them into different segmentation models, and then use an analytics solution like Adobe Analytics. The analytics solution will often give you different toolsets to allow you to analyze different aspects of the segments you're trying to understand. In some cases, that analysis may be more manual, and in others, like with Adobe Analytics, you have access to some AI capabilities. For example, the segment IQ feature lets you take the guesswork out of understanding key differences between segments, so you can do comparison and then see statistically significant differences or overlap between those two segments.

Q: What is a segmentation model?

A: Segmentation models are tools used to help organizations manage and understand their market segments.

In addition to the different types of segmentation, organizations have access to different types of segmentation models. For instance, most companies use demographic models to create and deliver content based on gender, but depending on the industry and the business goals, different companies will choose to segment their audience based on different traits or identifying factors.

There's also a model that incorporates information about recency, frequency, and monetary value (RFM) of interactions. An RFM model looks at the recency of the last purchase, the total number of purchases a customer may have made, or the amount spent. That helps companies start to identify their high-value customers, which are usually ultimately who they're trying to identify. Then, based on that RFM segmentation, you can identify where those high-value customers come from and the characteristics they share, which will enable you to find and target potential customers with similar traits.

Another model a company might look at is a customer status model. A customer status model would look at customer activity to see if a customer has lapsed or become inactive in some way. Different companies will define customer status differently and will be able to break that information down depending on their strategy and their business. But typically, a customer status model will help a company identify the last time a customer engaged with them. Often, understanding past behavior can help you make predictions about what your customers might do in the future, particularly when it comes to things like purchasing behavior. Some of that information could be tied to big events, like Black Friday or back to school season, to show how the customer behaviors for your target market change, peak, or drop for those particular times. So behavioral segmentation models like the customer status model can be really helpful in identifying any fluctuations around purchasing or customer actions.

Psychographic models are more targeted toward attitudes or beliefs. A brand may use them to identify commonalities with particular segments based on how that group views different statements or get a sense for how a group of customers perceives different colors or other aspects of the brand identity.

Another segmentation model growing more common today looks at device use. With the ever-increasing number of channels available, it can be helpful to identify how customers are accessing and interacting with your brand.

Q: What mistakes do companies make with market segmentation?

A: Companies need to make sure they identify and effectively measure customers in each of the segments they want to include, whether that be characteristics, or other factors like usage behavior. Having a segment in mind doesn’t automatically make it more accessible. Companies also need to make sure they’re able to reach their segments through different efforts, whether that’s marketing, communications, or any other channel. For example, if a business wants to do something with a mobile segment, but they have no mobile presence at all, then it will be nearly impossible to reach that audience.

You also want to make sure that the segments you’re targeting are large enough to make the effort cost-effective. If an organization targets too many small segments, they won’t see a significant return from any segment. They would be better off narrowing the options by identifying the most lucrative segments to go after. This type of strategy can help the organization avoid getting too scattered.

Companies should also be careful to ensure that as they’re considering segments, those segments will not evolve frequently or be too dynamic. The segment should be stable for long enough to give the organization time to analyze the data and take action against the results. Lifestyle, for example, is a segment that could be enticing to go after, but it tends to be very dynamic and evolving, making it a difficult segment to work with.

Q: Can companies revise their segments?

A: It depends on the company size and the tools they’re using. With a solution like Adobe Analytics, it can be fairly straightforward to update your buckets of segments, but you need to evaluate how long it will take to pull useful data from those segments. It takes effort to build segments, so you will not want to redo the work every week or so. You want to make sure that there's some time for you to be able to gather enough data to really see a trend in behaviors or identify any anomalies in them and then change course and ensure that whatever actions you're taking against them have been effective.

Q: How has market segmentation changed over time?

A: While the practice of market segmentation has remained essentially the same since its inception, an increase in channels and devices has led to companies expanding the ways they segment their audiences. The specific information a company might want to get out of a segment has changed as well, as marketers drill down into different behaviors to get a greater sense of the customer.

The other aspect of segmentation that has evolved over time is the analysis that organizations are able to do. With the introduction of artificial intelligence (AI), segment analysis has improved to the point where some of the involved guesswork has been removed. As we move forward, and AI becomes more and more integrated into analytics solutions, it will allow organizations to quickly and easily identify new segments they should be considering or identify key differences within those segments without requiring as much thought as before.

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