What is Market Segmentation and How to Do It

Business can be simple, but it's also complex at the same time. Because of the world’s need of data to perform tasks efficiently, it has become a requirement for all businesses to have information on their customers’ desires and needs. Market segmentation is one of those things. Here is everything you need to know about market segmentation and a how-to tutorial on how to do it.

What is market segmentation?

Market segmentation is defined as the process of dividing a market of potential customers into groups or “segments” of people that follow a certain characteristic. In other words, market segmentation is a technique that classifies certain people into various categories depending on chosen characteristics and helps you to focus your marketing efforts.

Here are some advantages of using market segmentation that you should know about:

Better matching to customer needs

As a customer, you will be getting better services catered to you. This is because companies will be able to figure out how many of their customers want a certain service a certain way, or what other sort of offerings can be provided by the company.

Not only does the customer benefit from catered products and services, but businesses do, as well. They will enjoy better sales and better customer feedback.

Gain a better hold of the market share

The market is an unforgiving place for any company, business or organization. Through the use of careful market segmentation, a company can figure out where their customers are located and what kind of services they want. This helps businesses to position their offerings to achieve competitiveness in the market and build market share.

Know where to take the company

As entrepreneurs, it can sometimes be difficult to decide how to steer the company. It can take many years before a business finally figures out what customers really want. By segmenting the market into groups of customers that share common traits, businesses can target their efforts to reach customers that have a shared interest, need, or location. This reduces the time and resources necessary to build a customer base, because the company can focus their resources toward connecting with a particular subset of the population, rather than marketing their products to the entire world.

Improved communication and profits

One of the biggest advantages of using market segmentation is that companies will be able to enjoy improved profits. We discussed earlier that through the use of market segmentation, companies will be better matched to customer’s needs. Not only will this increase the quality of service that will be provided to a customer, but will also improve the profits that a company will be making because the company is not wasting money marketing to a segment that has no interest in the products or services.

Cheaper for advertisements

One advantage that we really wanted to share with market segmentation is that it makes advertisements cheaper and more effective. By knowing the type of customer you are trying to relay your message to, you can make a more eye-catching theme that they will want to apply for.

Harvard Business found out that 85% of product launches in the United States fail to generate enough revenue because they have a lack of poor market segmentation and are unable to find customers that might be willing to buy that product. Similarly, they also noticed that marketers and brands that would effectively use market segmentation were able to see a 760% increase in their email revenue through the use of market segmentation. Sounds like something every entrepreneur should do, right?

Here are some of the types of market segmentation that you should know before we get to implementing it:

Demographic segmentation – Segmentation based on demographics: factors such as age, education, income, family size, race, gender, occupation and nationality.

Behavioral segmentation – Segmentation that is done based on the customer’s behavior: what they might buy, how much they consume, and aspects of their lifestyle.

Psychographic segmentation – Segmenting a customer based on their lifestyle and psychological choices such as their values, opinions, and interests.

Geographic segmentation – Usually used by multinational companies or companies that operate in bigger regions, it is segmentation based on the needs, preferences and interests based on location.

Companies usually follow at least one of these types of segmentation. There is no hard and fast rule on what type of segmentation to follow. Each type is useful in certain markets – depending on the business.

How to use market segmentation

Step 1: Figuring out type of market segmentation

The step that you should take before you begin your market segmentation is to figure out what kind of market segmentation technique will work better for your business. Some companies benefit better from behavioral segmentation, while others like to use demographic segmentation. Entrepreneurs and marketers should consider the nature of their business to decide which type(s) of segmentation are best for their organization.

Step 2: Information gathering

The next step to market segmentation is to gather information on the market that a company is doing business in. Through the use of various information gathering techniques like in-person research, studying the geography and people patterns, using online mediums to gather information, or using surveys, a business should figure out all kinds of information about their market.

Step 3: Sorting data into segments

After gathering enough information on your market and potential customers, you have to sort this data into different categories depending on what type of market segmentation you chose. You’re essentially dividing your potential customers into different groups with each member of the group having similar characteristics to the other group members. Within groups, you may find it useful to divide even further into subcategories to make even smaller market segments. For instance, you can divide sugary drinks into performance drinks, carbonated beverages, teas, etc. You can take carbonated beverages and divide into even more categories, like traditional and diet drinks, or you can divide by flavor category. From there, you can identify the subsets of the population that consume the particular products that you are trying to market.

Step 4: Targeting a segment

Not everyone is going to want to buy your product or service. Marketing segmentation should help you identify which groups of potential customers are likely to be receptive to your offerings, so that you can devote your resources toward targeting people that might actually buy from you.

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