When first starting your business, you may not have much of a marketing strategy. Your approach is probably nothing more than mass marketing, where you produce general promotions and put them in front of the general population, hoping to increase revenues. However, this type of vague marketing strategy is limiting your return on investment. Instead of applying a “one size fits all” strategy, you should instead consider customer segmentation. By dividing your target audience into smaller groups, i.e market segmentation, your marketing plan can be more effective.
What is market segmentation?
Market segmentation is the process of taking a homogeneous group of consumers and dividing it into smaller subgroups of target customers.
The subgroups tend to have similar characteristics when it comes to: needs, wants and demands.
Switching from a mass marketing approach to market segmentation can have a big payoff. Take a company like Nike, for example. Nike designs and manufactures sporting goods and apparel, ranging from golf balls to running shoes. Let’s take a look at athletic shoes, a category where Nike has more than a quarter of the market share.
Nike could run a mass marketing campaign where they mention all of their athletic shoes. However, this would not account for the fact that Nike offers athletic shoes for men and women. It also does not consider that Nike provides athletic shoes for an array of sports, including: basketball, baseball, football, soccer and golf.
Each of these categories serves as a segment. Instead of creating an ad for “athletic shoes,” which would be broad and all-encompassing, Nike could instead create unique ads for each different product, product line, or sport, and target them toward different segments. Nike may advertise a new product for golfers during The Master’s, while it would promote a new product for baseball players during the World Series.
As a small business owner, you may not have such a broad range of products. However, even if you only offer two or three products or services, you may find that segmenting potential customers will yield a higher return on your marketing investment.
Criteria to consider when segmenting
Each of the segments in your target market should consist of customers who are very closely aligned with one another, yet clearly differ from customers in other segments. The basic segmentation variables to consider include whether customers are:
Identifiable: Can you clearly measure and study your group when conducting segmentation analysis?
Accessible: Can you communicate with the segment? If one of your segments is international, do customers speak your language and live in an area where your marketing efforts will reach them?
Substantial: Is the segment large enough to warrant the investment of time and resources?
Unique: Do the customers in the segment have similar needs that differ from other segments?
Types of market segmentation
Marketers tend to recognize five different types of market segmentation.
1. Demographic segmentation
If you’re looking to start segmenting your customers, the best and easiest way to do so is through demographic segmentation. Demographic segmentation involves breaking down your homogenous market base by things like:
- Age group
- Income or social class
- Family size
- Education level
One of the most straightforward examples of this is in the automobile industry. Automobile manufacturers market vehicles to different income classes. For instance, BMW and Audi target those with higher incomes, while manufacturers like Honda are geared more toward lower-income households.
Geographic segmentation involves sorting your customer base by where they live. Geographic segmentation is one of the easiest to compile since all you need is the address of the consumer.
A perfect example of geographic segmentation is seen in the clothing industry. Imagine a clothing manufacturer that produces both heat-wicking gear for warm environments and heat-retention gear for cold climates. The company is not going to market its cold-weather equipment in Florida, much like it wouldn’t sell its warm-weather gear in northern Canada.
Geographic segmentation doesn’t necessarily need to take place on such a large scale, either. Although you can sort customers by country or state, you can also sort them by their city of residence as well. So, even small business owners may find that geographic segmentation is useful.
Psychographic segmentation refers to sorting customers based on their lifestyle. This can include things such as the hobbies or interests people have. Marketers would also consider things like:
- Personality traits
- Personal attitudes
An ideal example of psychographic segmentation is seen with streaming apps like Netflix and Hulu. These apps have algorithms that determine what type of shows you enjoy watching. The apps then make suggestions about which shows you may like. Customers may develop brand loyalty to a streaming service because it always seems as though the site makes the perfect recommendation.
Additionally, these streaming services have recently made pitches to potential customers, suggesting that they “cut cable.” These pitches are examples of psychographic segmentation, as they’re playing toward a customer’s belief that modern cable is a waste of money. Providing introductory offers geared toward cord cutters helps solidify this.
Behavioral segmentation is similar to psychographic segmentation in that it involves the psyche of the consumer. However, behavioral segmentation tends to focus more on a customer’s habits, as opposed to their interests. Behavioral segmentation consists of analyzing:
- Spending and purchasing habits
- App activity
- Session frequency
- Feature use
- Browsing history
An example of behavioral segmentation is seen in the greeting card industry. People often forget to get a card until the last minute. A company may place an in-store ad that says something along the lines of, “Forget a card this holiday? Head this way.” Then, shoppers would see shelves stocked with greeting cards cards. This is an example of behavioral segmentation because the target ad plays to the consumer’s purchasing habits.
Technographic segmentation has grown more and more popular over the past couple of years. It involves sorting customers based on the type of devices they use. You could segment customers by their chosen:
- Operating system
- Web browser
- Mobile device
A perfect example of this is Apple AirPods. AirPods are Bluetooth headphones that you could technically use with any device. However, they have quickly become synonymous with iPhones because of Apple’s marketing efforts.
Determining which segments customers fall into
Segmenting may sound like an excellent component to add to your marketing mix. However, you’re probably wondering how you can compile necessary information about your customers.
Here are a few of the things to look at:
Customer data: You’ve likely collected a lot of information about your customers, including where they live, how they prefer to pay, and what they purchase. The more information you collect going forward, the better you’ll be able to segment your market. Store this information in an easily accessible database.
Industry research: Trade groups collect consumer data on behalf of their members. If you’re a member of your industry’s trade group, it likely has demographic data available that will help you produce campaigns that target specific groups, including those that you had not thought of previously.
Giveaways: Set up a booth at a community event or advertise a promotion that entices customers to provide you with marketing data, or create an online form that allows people to download a coupon in exchange for their information. Advertise on social media and other websites to promote the coupon. Not only will you obtain customer information, you’ll begin to build a loyalty program as well.
Outsourcing: Your business may be large enough that you can afford to hire a third-party agency to conduct marketing segmentation and research for you.
Once you have identified your market segments, design campaigns specific to each segment. Remember that it’s possible for customers to fall into more than one segment.
In addition to tailoring ads to different customers, you may also want to consider changing things such as the price and product you’re advertising. Much like we mentioned with the car manufacturers — if you’re running a campaign for high-income individuals, you’ll want the price point of the product to reflect that.
Make sure you track the effectiveness of your campaigns. You could do so by monitoring key performance indicators or by setting up something like an exit survey during the checkout process.
Is market segmentation right for you?
Now that we’ve identified the primary market segments and how to sort customers into each category, you may be curious about whether you should segment and, if so, whether it’s right for you. Many factors can help you choose a market segment.
As a small business owner, your funds may be limited. Perhaps you only have the means necessary to sort customers by geographic location or basic demographics. Or maybe you don’t have the ability to offer products at a higher price point. While it’s still possible to segment if your resources are restricted, you’ll want to be much more concentrated when doing so.
Product life cycle
There’s a strong chance that you end up using more than one type of segmentation during the life cycle of the product. For instance, as your product begins to develop a reputation, you may need to alter the segmentation strategy to reach new customers. Similarly, as competitors begin to enter the field, you may need to consider choosing an alternative approach.
If you offer highly-uniform products, like paper or table salt, you likely won’t gain much by segmenting. However, as a small business owner, there’s a strong chance that your product or service is unique in some form or fashion. If you can differentiate your product in any way, marketing segmentation would be worth it.
Characteristics of the market
When conducting market research, you may realize a couple of things about your customers. If you notice that all of your customers have the same taste or that no customers in your industry are willing to pay more money for a high-quality product, then you would be better off sticking with a mass marketing plan.
However, there’s a strong chance that there’s at least one small factor that sets your customers apart from one another. Taking advantage of this niche will put you in an excellent position to succeed.
If your competitors are using market segmentation, you should do so as well. Otherwise, your mass marketing message will fall on deaf ears, and you’ll lose out to the competition.
Keep track of marketing expenses
When it comes to marketing, the more information you have, the easier the decision-making process becomes. Not only should you conduct considerable market research before crafting an ad campaign, you should also pay attention to advanced metrics throughout the life cycle of the campaign. You’ll want to consider key performance indicators such as “Cost per Click” to determine whether your marketing campaigns are worthwhile. Be sure to use reliable accounting software to track your marketing expenses.