Quick definition: Market segmentation is the practice of grouping customers together based on certain characteristics they may share.
- 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 identify and understand their customers, particularly their high-value customers, and provide better experiences more fully.
- Market segmentation can also provide information about growth opportunities, product improvements, and efficiency on a company-wide level.
- More integration of artificial intelligence (AI) with segmentation technologies will make the process of targeting customers easier, faster, and more precise.
What is market segmentation?
Market segmentation is a strategy for dividing a target audience into specific groups to create tailored and personalized outreach campaigns. But why does this matter?
In marketing and advertising campaigns, many companies target a large audience. Naturally, different kinds of people share the same interest in a product or service.
This means that companies need to segment their target audience to communicate with specific groups in different ways. Otherwise, they’ll send the same message to their entire audience, which will resonate more with certain groups than others.
What is a market segmentation strategy?
A market segmentation strategy is a plan that involves breaking up a target audience into specific groups. This helps companies market to different segments of their audience in more approachable ways. A company’s market segmentation strategy will depend on its business goals. There are different models an organization can follow.
What is a segmentation model?
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.
RFM segmentation models
There's also a model that incorporates information about recency, frequency, and monetary (RFM) value 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.
Customer status models
Another model a company might look at is a customer status model, which analyzes customer activity to see if a customer has lapsed or become inactive in some way. This helps a company identify the last time a customer engaged with them.
This 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 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 of how a group of customers perceives different colors or other aspects of the brand identity.
With the ever-increasing number of marketing channels available, it’s helpful to identify how customers are accessing and interacting with your brand.
What are the benefits of market segmentation?
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. This is why market segmentation plays a key role in successful campaigns.
Market segmentation’s benefits include:
- It helps companies identify high-value customers and the similarities and differences between different groups of customers.
- It helps create more personalized communications and more targeted marketing efforts.
- It helps companies create better products that meet specific market expectations.
- It cuts down on wasted marketing dollars. The better you target, the more impactful your campaigns.
- It leads to ultimate customer satisfaction.
- It makes it easier for companies to learn about their audiences and create more cost-effective campaigns in the future.
Why do businesses choose to segment?
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 goes after will depend on its business strategy and who it is 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.
What mistakes do companies make with market segmentation?
Companies need to 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.
How does market segmentation tie into other aspects of business strategy?
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 understand which channels and touchpoints drive the most engagement and ultimately revenue.
From a broader business standpoint, segments like geography, gender, and age can help you really understand where to put budget in terms of teams, development of products, and marketing and advertising efforts.
How do companies analyze market segments?
To analyze market data, a company will group them into different segments, and use an analytics solution like Adobe Analytics to better understand user behavior within various segments.
How has market segmentation changed over time?
While the practice of market segmentation has remained essentially the same since its inception, an increase in channels and devices has led to additional complexity with audience segmentation.
The other aspect of segmentation that has improved over time is the level of automation available to companies. With the introduction of 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.