Market segmentation is a marketing strategy that uses well-defined criteria to divide a brand's total addressable market share into smaller groups. Each group, or segment, shares common characteristics that enable the brand to create focused and targeted products, offers and experiences.
A brand's total addressable market can have a variety of needs, challenges, preferences and buying criteria. Market segmentation carves out focused portions of a target market in order to create messaging, products and services that are customized to those segments.
Market segmentation can be a competitive differentiator. Customers served by market segmentation campaigns may perceive that a brand's messaging and products were specifically tailored to them.
Importance of market segmentation
Market segmentation results in more effective and efficient marketing, advertising and sales. Rather than targeting a broad audience with generic messaging and offers, market segmentation enables brands to provide offers specifically tailored to each segment's needs.
Consider an advertising campaign organized around a particular market segment. A brand can select relevant targeting criteria to reach users who fit the criteria of that market segment.
This can result in a campaign that is both effective and efficient: Audience segmenting and customized messaging drives higher success rates, while advertising dollars are only spent to reach the defined audience. The same nonsegmented campaign would suffer from lower response rates, with a portion of the advertising budget wasted on the wrong audience.
The four types of market segmentation
There are four primary types of market segmentation:
Geographic. Geographic segmentation works by grouping potential customers by the areas in which they live or reside. Example geographic market segments could include the following:
- North America
- EMEA (Europe, Middle East, Africa)
- Midwest United States
- Northeast United States
- New York, New Jersey and Connecticut
- Northern California and Southern California
- Cuyahoga County (Ohio)
For geographic market segments, a brand may choose to offer products and services tailored to local or regional preferences, such as seasonal offerings (e.g., beach season vs. ski season), regional tastes (e.g., barbecue in the South or Midwest of the United States) or local laws and regulations.
Geographic segmentation is relatively simple to manage, assuming the brand has the location and address information of potential customers.
Demographic. Demographic segmentation works by grouping potential customers by their individual attributes, such as age, ethnicity, education, job title, industry, marital status and income. A brand may define a demographic market segment based on a single attribute or a combination of several. Examples of demographic market segments include the following:
- single men;
- married couples with two or more children;
- women with an annual income above $65,000;
- women with a Master's degree or related graduate degree; and
- men with senior job titles in the automobile industry.
Demographic segmentation is relatively simple to manage, assuming the brand has the necessary demographic information of potential customers.
Behavioral. Behavioral segmentation works by grouping potential customers based on observed actions or behaviors. Actions can include past purchases, lifestyle choices, travel destinations and daily routines. Behavioral data can be observed or queried via online interactions, such as social media posts, forum posts and published reviews. Examples of behavioral market segments include the following:
- people who purchased a new home in the past 12 months;
- people who take more than 10 flights per year;
- people who drive their kids to sports practices multiple times per week; and
- people who had more than $1,000 in online purchases in the past year.
Behavioral segmentation is more complex to manage, because it requires brands to have access to behavioral data. It also requires the necessary tools to manage that data and create market segments based on it.
Psychographic. Psychographic segmentation works by grouping potential customers based on their beliefs, values, lifestyle, opinions and interests. Brands use surveys, interviews and focus groups to determine psychographic attributes of potential customers. Examples of psychographic market segments include the following:
- people interested in healthy eating and physical fitness;
- people who voted for a particular candidate for office;
- people who practice a particular religion; and
- people who believe in sustainability.
Psychographic segmentation is more complex to manage, because it requires that brands acquire the necessary psychographic data from potential customers. In addition, tools are needed to manage that data and create market segments based on it.
Combining market segmentations
Brands may choose to combine two or more of the four outlined market segmentations. Generational marketing is one example. Brands that target the millennial generation use two segments:
- Demographic: people born between 1981 and 1996; and
- Psychographic: people with a shared set of expectations about the workplace, political views, aspirations, etc.
Although a person born between 1981 and 1996 is defined as a millennial, brands might refine their segment by combining age with psychographic attributes. After all, 100% of millennials do not share the same views or values. The right segment might be people in the millennial age range that share a common set of psychographic attributes.
Characteristics of market segmentation
For market segmentation to be used effectively, it must have the following characteristics:
Viable. The people in a brand's market segment must be able to purchase the product or service. For example, if a business sells homeowner's insurance at high premiums, and their behavioral market segment is "people who purchased a new home in the past 12 months," homeowners in low-income communities may not be able to afford the offered policies.
To make the segment more viable, the business could combine the behavioral market segment with demographics, selecting residents of communities with median family incomes above a certain level.
Quantifiable. A brand is able to measure the amount of revenue generated by the market segment. Without the ability to quantify the success of selling into a market segment, it's hard to make decisions about future investments in that segment.
Accessible. A brand is able to reach members of the market segment in adequate quantities. For example, the brand won't be able to reach its segment with digital marketing if its target customers live in communities without internet access or mobile data coverage.
Benefits of market segmentation
Market segmentation is helpful because it enables learning, decision-making and action to take place at the subgrouping level. Instead of spreading resource allocation across an entire market, an organization can test segments against each other based on hypotheses, or prioritize some segments over others based on variables that are already understood.
Several other benefits to market segmentation include the following:
Services and messaging that's more in tune with customers. By definition, market segmentation creates smaller, more focused groups of potential customers. Instead of relying on generic and nonspecific messaging, brands can tailor their marketing to the unique needs of each market segment.
Competitive differentiation. Brands can separate themselves from the competition by using market segmentation. A company that takes a one-size-fits-all approach to its marketing and sales will struggle to win against a brand that provides offerings that are tailor-made for particular customers.
Higher customer retention. By providing products and services tailored to specific market segments, a brand provides more value to customers. Satisfied customers, in turn, will become repeat customers and stay with a brand over the long term.
Explore new market niches. As a brand finds success with particular market segments, it may discover new niches, based on combinations or variations of existing segments. These market niches help brands uncover new and unmet customer needs in the market. By creating new customer segments, they can take advantage of these market niche opportunities to grow revenue.
Examples of market segmentation
Mercedes-Benz used market segmentation to reach a new demographic: younger drivers.
Mercedes-Benz traditionally catered to an older, more wealthy demographic. Its customers liked driving the luxury sedans for which Mercedes-Benz became known. In 2012, the company introduced a new A-Class hatchback. The new model was designed with a modern, sporty look, moving away from the boxy and minivan-like designs of previous models.
According to representatives of Mercedes-Benz, the company targeted buyers in their late 30s and early 40s for the new model. They projected that over half of the customers for the new model would be new to the brand. Both the product design and the marketing strategy used by Mercedes-Benz were highly tailored to this younger demographic.
Another example of market segmentation comes from CVS Pharmacy, a subsidiary of CVS Health. CVS used a demographic-based market segmentation strategy to tailor the mix of in-store product offerings based on urban vs. suburban locales.
In urban stores, customers shop like they were in a general store, so CVS made it easy to find and select grocery items, snack foods and household items, such as toilet paper and batteries.
Suburban stores were located near general-purpose stores, such as Walmart, so shoppers were not there to buy general household items. CVS designed the suburban stores to conveniently place health and beauty products close to the pharmacy, where customers went to pick up their prescriptions.
CVS wisely tailored the shopping experience based on these two distinct demographic segments.
Market segmentation vs. customer segmentation
While customer segmentation uses similar criteria to create subgroupings, it is different from market segmentation. Customer segmentation focuses on existing customers, while market segmentation focuses on target markets, including prospective customers. Typically, market segmentation divides an entire market, including both unpreferred and preferred targets, to highlight the preferred business areas. Customer segmentation usually includes only customers -- not prospects -- and seeks to create useful groupings within the group of people or companies who have historically already purchased from the seller company.
Take the example of Mercedes-Benz, referenced earlier. Its customers were middle-aged -- or older -- and wealthy. Younger drivers were not a part of their customer base. However, seeking to attract younger customers, the company created a market segment of drivers in their late 30s and early 40s, then delivered products and messaging to reach that segment.
Market segmentation can be equivalent to customer segmentation when a brand's target market matches an existing customer segment. However, as with the Mercedes-Benz example, market segmentation is different when targeting new customer segments.