Market Segmentation and Identifying the Best Approach for Your Business

by Chris Deinlein

As market researchers, so much of what we do comes down to the analyzing and understanding the choices that people (namely, consumers) make. Thinking back to some of the choices I’ve made recently, I’m inclined to wonder what drove those decisions. What was I feeling? Were my choices driven by need? Were they driven, in some way, by my demographic characteristics? Each of these considerations is unique to my personal situation and circumstances. However, I would venture to say there are a lot of other people who made similar decisions driven by a similar set of impulses, needs and characteristics.

You might say—in market research terms—that we’re all members of a segment, whether we know it or not.

As its name suggests, the discipline of “Market Segmentation” seeks to identify and understand clusters (or segments) of people who have similar characteristics, similar needs and similar feelings. Marketers will often use a segmentation study to better understand how they can engage groups of consumers in ways that are more relevant to the unique behaviors, needs and circumstances of that group. And while any businesses would obviously want a better understanding what of makes their current customers tick, the segmentation process can also be invaluable when it comes to understanding prospective customers, lapsed users or any other audience of interest.

BENEFITS OF MARKET SEGMENTATION

Segmentation helps businesses build more refined, intentional—and ultimately more effective—marketing efforts, with targeted campaigns that are optimized to reach desired groups of consumers. In fact, segmentation often forms the foundation of overall marketing strategy for many brands and larger businesses. But, looking beyond overall strategy, here are some of the specific ways in which in a market segmentation can provide ROI for businesses—including yours:

• Revenue Growth Generation – Market segmentation helps you identify the customers who offer the best opportunities for revenue. Furthermore, incorporating a prospective customer’s current, future or projected spend can help produce target segments that are more or less likely to generate more revenue for your business.
• More tailored marketing communications and strategy – The identification of unique customer segments allows you to create messaging that best fits your target segment’s needs—both in terms of prioritizing channels relevant to the segment, and by dimensionalizing their needs and attitudes to support more impactful messaging and communications.
• Stronger brand loyalty – Market segmentation helps you better understand your customers and allows your business to identify and meet their needs more accurately. In turn, this will build greater rapport and trust with your customers, when they see that you “get” them.

ELEMENTS OF A SUCCESSFUL MARKET SEGMENTATION

While market segmentation can take many paths, to be successful, any segmentation study must have five key characteristics. A good segmentation must be:

• Identifiable – Each segment should have characteristics that allow you to identify its members in your target market. Creating segments that are purely theoretical with no measurable characteristics will be impossible to identify, no matter how much market research you perform.
• Differentiated – Each segment should have some recognizable (and relevant) characteristics that make it distinct from the other segments. Identifying market segments that all look similar will not allow for effective—and targeted—messaging on the back end.
• Accessible – Your business needs to be able to reach and communicate with your segments. Identifying segments exclusively engaged in market niches where your business does not operate will not be helpful. Consider the marketing tools and resources your team has at its disposal when crafting your target segments to ensure your segments are reachable.
• Substantial – Segments should be large enough to justify your marketing efforts to reach and appeal to them. After all, the purpose of segmentation is to provide value to your organization—and if a segment is too small to justify an investment, in the end, it’s not “worth it.”
• Actionable – Similarly, you should be able to identify a strategy for marketing your business’ goods and services to your target segments Spending the time and resources in creating a market segmentation that identifies segments uninterested in your business is not money well spent.

Keeping these criteria in mind as you think through the objectives of your market segmentation (and the strategies for segmenting) will help ensure that you can transition your findings into marketing campaigns more effectively.

TYPES OF MARKET SEGMENTATION

Now that we have established the key elements of a high-quality market segmentation, we can explore the types of market segmentations that may be useful to your organization. At the end of the day, segmentation is a balance of art and science; there is no singular way to identify market segments. Just as your target customer cannot be seen as one big, homogenous group, there is not just one type of market segmentation.

All segmentation strategies fall somewhere along a spectrum, balancing both “hard” and “soft” measures. Hard measures are objective data points that can be easily verified while soft measures tend to be more subjective in nature. The balance of hard and soft measures manifests in five main types of market segmentation:

Demographic – A demographic segmentation is based on attributes such as age, education, employment, household composition, income, or other attributes specific to a given individual. A geographic segmentation that relies on geographic boundaries to define target segments is a subtype of demographic segmentation.

Firmographic – A firmographic segmentation is based on organizational attributes such as industry, location, size, market share, revenue, or other characteristics. Firmographic segmentations are similar to demographic segmentations, but they’re used in a B2B context, rather than B2C.

Psychographic – A psychographic segmentation looks to classify individuals based on their personality, values, opinions, attitudes, interests, and lifestyles.

Attitudinal – An attitudinal segmentation derives segments based on attitudes relevant to the product category, products used, or other elements that focus on values and needs related to the subject of the market segmentation.

Behavioral – A behavioral segmentation classifies individuals into groups based on how they These behaviors will be quite different depending on the industry of interest, but factors such as shopping behaviors, internet activity, hobbies, product interactions and more can be incorporated into behavioral segmentation.

Demographic and firmographic segmentations are based on hard measures, allowing for segments that are easily identifiable and differentiated on those core objective attributes (age, gender, education, income, etc.). Similarly, behavioral segmentations tend toward the “hard” measure end of the spectrum with behaviors and activities that can be verified through observation.

On the other end of the spectrum, you find psychographic and attitudinal segmentations. These rely on soft and subjective measures designed to profile and cluster respondents based on perceptions, feelings, values, needs, patterns, and other elements that tend to be less structured and/or objectively definable.

Though each of these five main segmentation types can rely exclusively on the hard or soft measures that define the segmentation strategy, often a blended or “hybrid” approach works best for creating target segments that fit your organization’s marketing strategies. In a hybrid approach, the segmentation strategy blends the hard and soft measures to create segments that are differentiated both in demographics/behaviors as well as psychographics and attitudes. Be mindful, though, that a blended approach can sacrifice some differentiation on either end of the spectrum to create this multi-faceted lens.

For example, a purely demographic segmentation will allow you to create clearly differentiated segments on the demographic variables you select as inputs. However, blending in some psychographic elements will inherently reduce the demographic differentiation, but it will provide more color around the motivations and cognitive styles of consumers. The benefit of this blended approach lies in the fact that the resulting segments are still differentiated, to some degree, by demographics, while also providing a level of psychographic nuance that can help your organization create distinctive and target-relevant marketing campaigns.

STEPS TO IMPLEMENTING MARKET SEGMENTATION

Once you’ve decided on the approach that best fits your organization’s objectives, it’s time to get the ball rolling on market research and analysis. Because a market segmentation is meant to provide a foundational understanding or your target market, the implantation process tends to be extensive. Nevertheless, we break it all down into 5 distinct steps:

Define the Target Market – Are you looking to better understand current customers? A subset of customers who use certain goods or services? Prospects? Is there a geographic bound to your organization that needs to be accounted for? Take the time to think about who you need to understand better to make this segmentation useful. If you are a Northeast regional brand that needs to understand how to build better brand loyalty among current customers, do not waste time and energy profiling prospects outside the region you serve.

Understand the Selected Market – Once you have identified the target audience, consult the available data sources to better understand the selected market. Primary market research will be key to gaining a deeper understanding of your target market. Qualitative research can help provide preliminary insights into potential segments while helping shape further quantitative research that will provide more robust profiling and segmenting of the target market.

Create Your Segments – Here’s where the blend of art and science comes roaring back. For starters, there are many segmentation methods, techniques, and algorithms that you can use to cluster and identify segments in your target audience. The algorithms, in particular, are incredibly good at identifying patterns in the data and clustering segments accordingly; thus, throwing your data at these algorithms will inevitably turn up segments. However, at this stage it is extremely important to balance the clustering output with the face validity and business relevance of that output. Clustering output that is clearly differentiated will do your organization no good if it does not meet the other essential elements of being actionable, identifiable, accessible, and substantial.

Identify Your Target Segment(s) – After you have discussed potential solutions and started to home in on the solution that best fits your organization’s needs, you need to identify which segment(s) will become your targets. Your marketing strategies may dictate that you cannot engage with the entire target audience. So, by balancing the potential value of the segments and how they resonate with your brand, you can prioritize the segments that have the most meaning—and greatest potential—for your brand. In the case of customer segments, you may be looking to identify the segments with strong brand loyalty to keep them satisfied. Or, in some cases, you may want to focus on building back some of the goodwill among segments with less-favorable perceptions.

Test Your Marketing With Your Targets – After identifying those target segments with your key stakeholders, it’s time to test your marketing strategies. Consider additional market research here to help identify whether new campaigns, concepts or optimizations will resonate with your target segments.

HOW TO ENSURE THE PROCESS GOES AS SMOOTHLY AS POSSIBLE

There is a lot for your business to consider as you work to create a market segmentation strategy. While this can open the door for challenges throughout the process, there are some pivotal steps you can take to help the team navigate the process smoothly:

• Engage Key Stakeholders Early – The outcome of any market segmentation needs to be the identification of target segments that are distinctive, accessible, and actionable. This means your team needs to be clear on what will make these target segments most useful to the business. Pull in some members of your leadership team as well as marketing, digital communications, customer experience, operations and more to participate in discussions of which bits of information will be most useful in crafting your target segments.
• Keep the conversation going – A successful market segmentation process requires frequent check-ins and updates. Everyone on the team should feel fully informed about the project status. What have we explored so far? What are we currently exploring? Where are we headed next? A market segmentation solution will be more successful and require less rework if the team remains engaged throughout the process. Blueprinting sessions, insights sessions and other key meetings should serve as the “big” strategic check-ins, but more frequent status updates are welcome additions to the process.
• Choose a Market Segmentation Provider You Trust – As noted previously, the market segmentation process is a long-term commitment and typically requires deeply engaged conversations—and collaboration—with various teams across your organization. So, selecting the right provider for a segmentation is critically important. Obviously, you want to choose a company that has the experience implementing the type of segmentation your team needs. But, beyond that, it’s important that the provider you choose is willing to act as a partner throughout the process, fully engaging with your team in all facets of strategy and implementation.

Certainly, there is a lot to think about when it comes to implementing a successful market segmentation. But that’s part of what makes these endeavors so much fun—and so valuable in the end. Market segmentations incorporate such a wonderful blend of strategy and data analytics. In this sense, segmentation is truly a gestalt—it brings diverse disciplines within market research together in effort to create something that’s more than the sum of its parts.

And, at the end of the day, it’s important to remember that every one of your customers (or prospects) is a unique individual, with unique attributes. That said, every one of those same individuals also shares important similarities with other customers. Identifying those similarities as part of a target segment is what will ultimately allow your brand to offer products, services and messages that make the greatest impact upon the greatest number of people. And that’s what brand loyalty is all about.

As a Senior Analyst, Chris Deinlein offers his clients a fresh perspective on their data. Packaged in a storytelling bundle, Chris leverages various analytical techniques to bring insights to light.

Interested in reading more? Check out Chris’ other article:

Quantiment: The Best Friend to an Open-end

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Source: Feature Image – ©babaroga – stock.adobe.com