Market segmentation is a crucial factor in determining the success of a business. If a product is marketed to everyone without any specific target audience, it becomes more challenging to analyze and map the competition. However, by implementing clear and appropriate market segmentation, companies can dominate specific segments and effectively tailor their products to cater to the preferences of the customers within those predetermined market segments. So, what exactly is market segmentation, what are its types, and how is it determined? Read on to find out more.
What is Market Segmentation?
Market segmentation is a strategy that enables businesses to identify and categorize target customers into distinct groups. This process allows companies to gather data based on various characteristics, behaviors, and customer needs. By effectively mapping these customer groups, companies gain a better understanding of which customers are most suitable for their business. This ultimately leads to several benefits for the company. Furthermore, proper market segmentation allows companies to tailor their marketing strategies to be more targeted and effective in reaching the identified customer segments.
Also read: The Definition of Market Share and How to Calculate It
The Purposes of Market Segmentation for Business
market segmentation
After understanding the concept of market segmentation, let’s explore its purposes and benefits. The primary purpose of market segmentation is to divide or categorize the broad target market into distinct groups based on predetermined criteria or homogeneous markets. Here are several purposes of market segmentation for businesses:
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Differentiating the market
Market segmentation helps differentiate the target market by dividing it based on specific characteristics such as geography and demographics. This enables companies to better understand customer needs and interests and facilitates product innovation tailored to meet those needs.
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Identifying competitors
Market segmentation assists companies in identifying their business competitors. By mapping competitors who offer similar products to the same or similar target customers, companies can improve their product quality, innovate, and enhance their competitiveness.
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Evaluation and business planning
Market segmentation can serve as an indicator for evaluating and refining the company’s business plan. By considering market segmentation data, entrepreneurs can develop more thorough and efficient business plans.
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Improving marketing strategy
Market segmentation ultimately leads to an improved marketing strategy. With a more focused target customer base, companies can align their marketing strategies to better match the actual market conditions.
Also read: Understanding Business Model Canvas (BMC) and Its 9 Elements
Benefits of Market Segmentation
Here are several benefits of market segmentation for businesses:
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Customer mapping
Market segmentation helps companies organize customers based on specific characteristics, allowing for a better understanding and targeting of different customer groups.
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Product/service determination
Market segmentation facilitates the process of determining which products or services to offer to different customer segments, resulting in more tailored offerings.
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Increased market focus
Market segmentation enhances a company’s focus on its target market, enabling it to allocate resources more effectively and efficiently.
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Enhanced competitiveness
By understanding the market segments and competitors, companies can identify areas for improvement, innovate, and increase their competitive advantage.
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Targeted marketing strategy
Market segmentation enables companies to create more targeted marketing strategies, reaching the right customers with the right messages and channels.
Overall, market segmentation brings numerous advantages to businesses, ranging from an improved understanding of customers to more effective marketing strategies and increased competitiveness in the market.
Also read: What is Return On Investment (ROI), and How to Calculate It
Types of Market Segmentation
market segmentation
There are four main types of market segmentation: behavioral, demographic, psychographic, and geographic. Let’s explore the differences between each type:
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Behavioral segmentation
This type of segmentation categorizes customers based on their behavior toward a product or service. It focuses on understanding how customers interact with the offering, their purchasing habits, product usage, brand loyalty, and other relevant behavioral factors. Examples include analyzing website visit patterns, shopping frequency, the level of product knowledge, and purchase decision-making processes.
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Demographic segmentation
Demographic segmentation involves dividing the market based on demographic characteristics such as age, gender, occupation, education, income, marital status, and more. It helps identify specific groups of customers with similar demographic profiles. For instance, products specifically designed for men may be differentiated from those targeting women based on their demographic attributes.
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Psychographic segmentation
Psychographic segmentation involves grouping customers based on psychological aspects such as lifestyle, values, personality traits, interests, opinions, and attitudes. This type of segmentation aims to understand customers on a deeper level by examining their motivations, aspirations, and preferences. Psychographic segmentation can be more challenging due to the complexities of human behavior and individuality. It often relies on techniques like customer surveys or questionnaires to gather data and uncover insights into customer preferences.
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Geographic segmentation
Geographic segmentation categorizes customers based on their geographic location or place of residence. It considers factors such as regions, countries, cities, rural or urban areas, population density, climate, and local characteristics. Geographic segmentation recognizes that customer needs, preferences, and behaviors can vary based on their geographical context. For example, a company may tailor its marketing efforts differently for customers living in hot climates compared to those in colder regions.
Each type of market segmentation provides valuable insights into different aspects of the target market, allowing businesses to better understand and connect with their customers. By leveraging these segmentation approaches, companies can create more targeted marketing strategies and offerings that resonate with specific customer groups.
Also read: What is Profit: The Types and the Elements
Characteristics of an Effective Market Segmentation Strategy
Market segmentation indeed requires careful consideration and clear benchmarks to ensure its effectiveness and yield positive outcomes for the company. Here are several characteristics of an effective market segmentation strategy:
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Measurable
A successful market segmentation strategy should have measurable indicators. It should be based on thorough analysis and valid data to accurately assess its performance and impact.
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Affordable
An effective market segmentation strategy aims to dissolve barriers between products and customers. It should ensure that the product or service is easily accessible to the target customers, considering factors like affordability and distribution channels.
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Influential
Market segmentation should have a positive influence on the business. This influence may manifest in various ways, such as increased profits, improved customer satisfaction, or continuous product innovation over time.
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Distinguishable
Effective market segmentation should be capable of differentiating and distinguishing each element within the target market. This distinction enables the company to develop more targeted strategies tailored to the specific needs and preferences of different customer segments.
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Realistic
Market segmentation strategies should be realistic and achievable within the resources and capabilities of the company. Realistic segmentation ensures that the strategy can be effectively measured, implemented, and realized.
By incorporating these characteristics into the market segmentation strategy, businesses can enhance their understanding of the target market, develop focused marketing approaches, and ultimately achieve better outcomes.
Also read: Gross Merchandise Value (GMV): Definition and How to Calculate It
How to Determine Market Segmentation Strategy
After understanding the meaning of market segmentation and its types, it is now time to comprehend how to determine a market segmentation strategy that can be applied to the business at hand. Please find below the steps to determine a market segmentation strategy:
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Collecting data
Start by collecting data through various methods such as surveys, discussions, questionnaires, market research, and customer feedback. The data collection process aims to gather information on variables related to each type of market segmentation being considered.
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Analysis
Once you have gathered valid data, it’s important to analyze it thoroughly. Use appropriate analytical techniques and tools to gain insights from the data and identify patterns, trends, and correlations. This analysis will help you understand customer behaviors, preferences, needs, and characteristics within different market segments.
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Organizing
Based on the analysis results, organize and categorize the data to identify which products or services are suitable for each market segment. Determine the unique characteristics, behaviors, and preferences of each segment and how they align with your business offerings.
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Strategy development
Develop a marketing strategy for each identified market segment. Tailor your messaging, positioning, pricing, distribution channels, and promotional activities to effectively target and reach each segment. Consider the specific needs, motivations, and preferences of each segment to create compelling value propositions and differentiate your offerings in the market.
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Implementation and evaluation
Once your market segmentation strategy is developed, implement it in your marketing efforts. Monitor and evaluate the performance and effectiveness of the strategy over time. Collect feedback, track key metrics, and make adjustments as necessary to optimize your market segmentation strategy and ensure it aligns with the evolving needs and dynamics of the market.
By following these steps, you can determine a market segmentation strategy that is grounded in data, insights, and a thorough understanding of your target customers. This will enable you to create targeted marketing approaches and effectively cater to the needs and preferences of different market segments, leading to improved business outcomes.
Example of Market Segmentation
A culinary company offers dessert boxes and sweet snacks that typically consist of cakes, creams, and various toppings like chocolate, cream cheese, and fruits. Initially, the company targeted mothers and young couples from the middle to upper economic classes. However, the company now aims to expand its market reach. To achieve this, they can conduct demographic segmentation, such as reviewing the age category, to target student markets located in urban areas. Psychographic segmentation can also be employed by examining the consumption patterns of students. For example, distinguishing between in-state and out-of-state students to identify who consumes more snacks outside of their regular three meals a day. By gathering and analyzing this data, the company can enhance their marketing strategy and make informed decisions regarding expanding their product range. In essence, market segmentation is crucial for every company to avoid unnecessary costs associated with less targeted marketing efforts.
