Customer or market segmentation, simply put, is how marketers break down the market - the potential customers for their product or service - into smaller, more manageable groups. The aim of a market segmentation is to develop and implement differentiated marketing strategies that are tailored for smaller groups of people, and to help you identify which customer segments to prioritise.
Why create a customer segmentation?
Customer segmentation has a role to play in every aspect of marketing, sales and customer experience. The benefits of market segmentation include the following:
- Improved communications: market segmentation can help you to develop clear and detailed customer personas and differentiated messaging for specific groups of customers.
- Innovation: insights from market segmentation can contribute to product development and innovation by highlighting different use cases and need states within specific groups.
- Better customer satisfaction: different segments have different customer service needs and market segmentation can help you understand how to prioritise your resources and ensure maximum satisfaction for each customer group
- Increased customer loyalty: you will be able to offer more personalised treatment through conducting market segmentation which will drive loyalty and advocacy
- More effective marketing campaigns: all campaigns should start with a clear idea of which segments are being targeted and what the benefits are for those segments
- Less waste: through market segmentation you will be able to prioritise the customers that will be of most value. This means you won't waste time and budget on trying to appeal to customers who are not engaged with your products or your brand, or who don't have the needs and interests that you can serve.
In addition, an effective market segmentation can help the company as a whole become more customer-centric. It is good practice to give your segments evocative names that bring the customer's needs and motivations to life.
For example, a segmentation for a cereal manufacturer based on when people choose to eat cereals might include segments such as 'Night-time snackers' 'Healthy breakfast lovers' or 'All day grazers'. This type of naming makes it easy for people throughout the company to understand the customers and to fine tune their work to fit that understanding.
Types of customer segmentation
There are a number of different ways of segmenting the market. The most widely used methods of segmentation include demographic segmentation, psychographic segmentation and behavioural segmentation.
Demographic segmentation involves using demographic or firmographic data as segmentation variables. This is one of the simplest and most effective ways of segmenting the market, and it can be inexpensive too as it often uses existing in-house data such as that held within the customer relationship management system.
Some companies target customers by age or life stage, with differentiated offers and messaging - for example, the mobile phone networks target young people with cheap data and SIM only deals, families with value bundles and parental controls, and older people with low-usage packages and easy-to-use handsets.
Others companies use geographic segmentation which takes regional preferences into account - for example global fast-food restaurants often have different menu items in different parts of the world to account for cultural traditions and tastes.
Companies that sell to other businesses typically segment their customers based on firmographics such as company size, customer geography or employee job title. If you are selling IT products, for example, your messaging for people in finance roles will probably explain the cost model and emphasise value for money, whereas your messaging for people in IT roles will emphasise features and functionality.
Behavioural segmentation builds on demographic segmentation by creating customer segments built not just on who people are, but on what they do. This can also be cost effective as you can use existing internal data about your customer base such as how many times they visited your website, how long they stay, their customer journey, the marketing channels they respond to, or their purchasing habits.
As with demographic segmentation, this enables you to address specific customer segments with tailored offers and to target them to receive marketing communications that have been designed to appeal specifically to them.
For example, you might want to offer frequent customers a reward for their loyalty, such as a free gift of another of your products or services - hoping that they become the ideal customer that loyally buys both products.
In contrast, if you have an infrequent buyer, you would be more likely to try to entice them to become a regular buyer with marketing messaging that offers, for example, a discount in return for a commitment to buy more products.
Psychographic segmentation is the practice of segmenting based on psychological characteristics such as attitudes, beliefs, motivations, preferences, lifestyle choices, opinions and interests.
This can be a more meaningful way of segmenting people than simply by their demographic profiles. For example, John Humphrys and Ozzy Osbourne are both white men in their seventies but you would probably not expect them to have the same tastes and preferences or to buy the same products.
Psychographic segmentation requires you to gain an in-depth understanding of your target customers. This means going beyond the standard demographic data that you probably already hold and conducting market research. This will enable you to get underneath the basic characteristics and behaviour of your target audience and give you insights into their thinking and emotions. This in turn will help you to develop more effective marketing strategy and marketing campaigns to reach all of the segments within the target market.
How to conduct market segmentation research
When conducting market segmentation analysis, you should aim to maximise the similarities within each group, while also maximising the difference between each group. As such, segmentation can be seen as much of an art as it is a science.
Market segmentation research methods
The research process is most effective if you first decide on your target market for the research. For example, are you looking to segment your current customers only, to focus on those who show the greatest brand loyalty or do you want to include people from the wider market? Are you only interested in existing users of your category or are you interested in the people who don't purchase the types of product and service that you offer? Are you trying to identify ideal customers or to broaden your appeal beyond the existing customer base?
Once you are clear on your audience for the research, the best place to start when developing your market segmentation strategy is with qualitative market research. Qualitative research enables you to understand your customer base in detail, to explore the feelings and beliefs that lie behind their decisions and behaviour, and to identify the factors that are most likely to differentiate the different customer groups that you would like to target.
Qualitative research methods include using online focus groups and qualitative research communities, both of which are effective ways of gathering rich consumer data and uncovering insights about your target market. You can use groups or communities to explore the type of language that consumers use around your product category, the feelings that they have and the issues that are important to them.
Qualitative research is also effective when you operate in niche markets or your product or service is highly specialised and your potential customers are harder to find.
Qualitative research alone can be sufficient to conduct a segmentation exercise and create descriptive customer segments. Bearing in mind the goal stated above, that people are similar within the group and different between groups, the data analysis you need to conduct will involve looking for the factors that differentiate your research participants around the key issues you have explored.
However, you may want to take your market segmentation further and conduct quantitative research that will enable you to estimate the size of the resulting segments in the market and within your customer base, and to understand how to reach the target audience of people within specific segments.
If this is the case, the insight you have gained in the qualitative phase will feed into any quantitative research you are planning. For example, if you discover that the geographic regions where people are located differ hugely in how they relate to your products then you can probably conduct a geographic segmentation based on existing customer data.
However if you find a number of different factors that relate more to emotions, interests, behaviour and motivations, you may want to conduct a survey to quantify those factors and derive your segments using statistical analysis.
Once you have a good sense of the types of issue that are likely to drive your market segmentation, you can conduct a large-scale survey to create your segments. The qualitative research that you have done is invaluable in writing the questionnaire for your survey.
Once you get your survey data, you can then go through a statistical process of factor analysis to discover the variables that will be most useful in your segmentation - this enables you to discard variables that are highly correlated. For example, you may find that agreement with two statements such as 'I love to browse online for new brands' and 'I am adventurous in choosing new brands online' are highly correlated, in which case you wouldn't choose to include both in your segmentation.
The next stage of the analysis is to conduct a statistical cluster analysis. This involves grouping customers into segments, with the goal of maximising the similarities withing the segments, as discussed above. Often you will find that there are several different possible customer segmentation models - and this is where market segmentation becomes an art as well as a science.
You will need to explore the different solutions that arise and balance the size of the segments against how homogeneous they are and whether they will be addressable - it is no use having beautifully descriptive segments if you can't identify people who might belong to those segments.
It is important to be able to identify people within defined segments so that you can target them for marketing campaigns and future market research.
Choosing a research partner
Market segmentation can be complex and difficult to get right. It makes sense to work with a research partner for your customer segmentation project who can guide you through all of the stages of the process, which are as follows:
- Identifying the goals of your segmentation
- Choosing the right type of segmentation to meet those goals
- Selecting the appropriate audience for the research
- Designing the research process
- Conducting the fieldwork
- Conducting the segmentation analysis
- Developing a method of identifying people within market segments
Rather than searching for specific market segmentation companies to work with, you need to look for a partner with a research team that has expertise in understanding consumers, developing actionable segments and applying customer segmentation research.
The goal is not to have beautifully named segments if they don't actually fit with your business model or enable you to improve your marketing efforts.
Market segmentation may be both an art and a science but, ultimately, it needs to help you achieve your organisation's goals.
We work with our clients to identify and understand the segments that unlock growth potential (and those that don’t) so they can be more targeted with their proposition and communications. To learn more about how we can help head over to our Expertise page.