What Is Market Segmentation, and Why Does It Matter?

As a sales professional, you’re always looking for ways to better understand your customers and improve your marketing efforts. One essential tool in your arsenal is market segmentation. By dividing your target market into smaller, more specific groups, you can tailor your marketing strategies, outreach, and campaigns to target better prospects, drive results, and hit your sales goals.

In this guide, we will answer the question “What is market segmentation?” explore different types, explain how to develop a market segmentation strategy, and more.

Key Takeaways

  • Market segmentation is a powerful tool for sales professionals, allowing for a better understanding of your target market and more effective marketing campaigns.
  • Developing a successful segmentation strategy involves conducting market research, identifying specific market segments, targeting those segments, and monitoring and adjusting marketing efforts.
  • B2B and B2C market segmentation strategies can vary considerably from one another. Tailor your market segmentation strategy to your business.
  • The future of market segmentation looks promising, with advancements in technology and data collection methods leading to more precise and effective marketing strategies.
what is market segmentation

Market Segmentation Definition

What is market segmentation? Market segmentation is the process of dividing a broad target audience (or target markets) into smaller, more specific groups based on shared characteristics. As you’ll see, these characteristics play a major role in determining which type of market segmentation is best for your needs.

Market segmentation allows you to better understand these smaller groups’ needs and preferences and enables you to create more targeted and effective marketing campaigns. Instead of leaning on a one-size-fits-all marketing strategy, you’ll be able to tailor your sales outreach and campaigns to the specific needs of these smaller groups of prospects.

These campaigns will be more cost-effective and efficient to produce, and you’ll be better prepared to identify new market opportunities and customize your product offerings to meet customer needs. Customers who are marketed and sold to in this manner often have increased satisfaction and are more loyal to your brand. In a SaaS or other subscription model, market segmentation can help make it easier to retain existing customers..

The 4 Types of Market Segmentation

There are four main types of market segmentation: demographic, geographic, psychographic, and behavioral. These sound more complex than they really are; each type refers to the data you use to segment your audience. Each type of market segmentation has specific use cases, but as you’ll see, they can also be combined for a more effective approach.

1. Demographic Segmentation

Demographic segmentation divides your target audience based on demographic data such as age, gender, income, education, occupation, marital status, and family size. This type of segmentation is often used because demographic characteristics are easy to measure and can significantly impact consumer behavior and preferences. While using customer demographics is a common approach to market segmentation, it may not capture important information about why they choose to buy.

2. Geographic Segmentation

Geographic segmentation groups your target audience based on their geographic location, such as country, region, city, or even neighborhood. This type of segmentation is necessary because consumer preferences and needs may vary across different geographic areas due to factors like climate, culture, and economic conditions. In some industries, geographic segmentation also tells you about potential competitors.

3. Psychographic Segmentation

Psychographic segmentation focuses on the psychological traits and preferences of your target audience, such as personality, values, attitudes, interests, and lifestyle. By understanding these aspects of your target customers, you can create more personalized and appealing marketing messages. This type of segmentation often fuels strategic partnerships with other businesses.

4. Behavioral Segmentation

Behavioral segmentation categorizes your target audience based on their behavior, such as purchasing habits, product usage, and brand loyalty. This type of segmentation helps you identify patterns in consumer behavior and tailor your marketing efforts accordingly. Behavior segmentation is commonly used when you have access to robust first-party data on existing customers, and can be hugely helpful when upselling or cross-selling.

Advanced Segmentation Techniques

market segmentation strategy

Beyond the basic four types of market segmentation, there are more advanced techniques that can provide deeper insights into your target audience. Cross-sectional segmentation combines two or more segmentation variables to create more specific and targeted segments.

For example, a company could use both demographic and behavioral data to identify high-income customers who frequently purchase a particular product. Adding additional layers of data in this way can help you create hyper-focused campaigns.

Predictive segmentation forecasts future customer behavior using historical data and machine learning algorithms. This technique can help sales professionals anticipate the needs and preferences of their target audience, allowing them to create proactive marketing campaigns that address potential customer pain points before they arise.

Market Segmentation Strategy

Creating a successful segmentation strategy requires several steps.

Conduct Market Research

Gather data on your target audience, including demographic, geographic, psychographic, and behavioral information. This data can be obtained through surveys, focus groups, and analyzing existing customer data. In the digital world, you might also consider data from your own systems, purchase history, and other brand interactions.

Identify Specific Market Segments

Analyze the collected data to identify distinct groups within your target audience that share similar characteristics. For example, you might create segments based on age, income, interests, or location. The goal is to identify groups of people who have similar needs and preferences, so you can tailor your messaging and offerings accordingly.

The specific analysis will change depending on the type of segmentation and data you choose, but look for groups of customers for whom you can build a clear marketing message.

Develop a Marketing Strategy for Each Segment

Once you’ve identified groups of target customers, develop marketing strategies and campaigns tailored to their needs and preferences. This includes identifying the unique needs, preferences, and pain points of each segment and tailoring your messaging, products, and services to address those needs. It may also include developing new products or services specifically designed for each segment.

Monitor and Adjust Your Strategy

Continuously track the performance of your marketing efforts and iterate as quickly as possible to continue fine-tuning your techniques. Use metrics such as sales, customer satisfaction, and customer retention to evaluate the effectiveness of your strategy. This will help you identify areas for improvement and make adjustments as needed to ensure you are continually meeting the needs of your target audience.

Focus on Boosting Brand Loyalty

Market segmentation plays a crucial role in building and maintaining brand loyalty. By targeting a particular market segment with tailored marketing messages and offers, you can create a more personalized and relevant experience for your customers. This, in turn, can lead to higher customer satisfaction and increased brand loyalty.

Strategies for increasing brand loyalty through market segmentation include offering exclusive deals and promotions for loyal customers, personalizing marketing messages based on customer preferences, and providing exceptional customer service tailored to the needs of each segment.

Combine Market Segmentation With Other Strategies

Market segmentation can be integrated with other sales and marketing strategies to create a more comprehensive approach to targeting and engaging your audience. 

For example, combining market segmentation with account-based marketing (ABM) allows sales professionals to target specific accounts within identified market segments, creating highly personalized marketing campaigns for each account. Integrating market segmentation data into your customer relationship management (CRM) system can help sales professionals track and analyze customer interactions, providing valuable insights for future marketing efforts.

Market Segmentation Examples

If you’re still wondering, “what is market segmentation?” some examples may help. Successful market segmentation strategies can be found across various industries.

Automotive Industry

For example, in the automotive industry, car manufacturers often target different market segments based on factors like income, family size, and lifestyle preferences. By doing so, they can focus their efforts and have more success.

In this example, it doesn’t make sense to sell a pickup truck to a busy mom with three car seats. Highlighting a crossover’s safety features in sales collateral makes much more sense for the “mom” market segment. Sales material about electric vehicles makes sense for a geographical segment near many charging stations — and the sales campaign might mention how easy charging stations are to use.

Consumer Goods Industry

In the world of consumer packaged goods, Procter and Gamble (P&G) has mastered market segmentation. P&G makes many different laundry soaps, not because laundry soap is complex, but because different customers want different things.

Some care most about price, some want soap that’s safe for their children, some want environmentally friendly products, etc. P&G has an option for each of these market segments, and targets each segment with specific marketing campaigns.

Market segmentation companies can also assist in developing and implementing market segmentation strategies. In addition, these firms specialize in gathering and analyzing customer data, helping businesses identify and target specific market segments more effectively.

By using market segmentation, businesses can improve their marketing efforts and sales by better understanding and addressing their target customers’ unique needs and preferences.

How Marketing Segmentation Works With a B2B Audience

market segmentation

B2B businesses will likely use more psychographic and behavioral segmentation than demographic segmentation. The B2B buying journey typically involves many stakeholders and a more involved process, so segmentation needs to consider interests, challenges, motivations, roles, and influencing factors rather than pure demographics or geography.

In a B2B environment, market segmentation might consider additional data layers so that campaigns can be customized for each stage of the buying journey as well as the psychographic factors listed above.

Remember: The goal of market segmentation is to put the right information in front of the right people. In the world of B2B, that means accounting for the job and needs of stakeholders across the organization, not just the final decision maker.

Some things to keep in mind when implementing market segmentation in B2B sales:

  • Try identifying alternative variables for segmentation, like company size, industry, and job title.
  • Accurate, up-to-date data on business customers is critical, but can be more challenging than in B2C sales.
  • B2B sales cycles can be quite long, so your segments should account for a weeks or months-long approach.

Challenges and Pitfalls of Market Segmentation

Despite its many benefits, market segmentation can also present challenges and pitfalls. One potential issue is the accuracy and relevance of customer data. Outdated or inaccurate data can lead to ineffective segmentation and marketing efforts. Use the most up-to-date customer data, and gather more, if necessary, to succeed with market segmentation. 

Another potential pitfall is over-segmentation. Focusing too narrowly on a small number of groups can quickly make your potential audience so small that it no longer represents a significant opportunity. Striking the right balance between targeted and comprehensive marketing efforts is crucial for success.

Perhaps the largest challenge with marketing segmentation is data privacy. Customers are rightly concerned that their data may be used inappropriately, and companies using customer data need to be sure that they are properly handling it.

To be ethical with customer data, you should:

  • Ensure that customers have provided support for their data to be collected and used for market segmentation purposes.
  • Implement robust data security measures to protect customer information from unauthorized access or breaches.
  • Be clear and open with customers about how their data is being used and provide options for them to opt out of data collection or request the deletion of their information.

Despite these challenges, market segmentation remains a powerful tool for sales professionals.

Market Segmentation Tools and Software

Several tools and software solutions are now available to assist sales professionals in finding their target market. These tools can help with data collection, analysis, and visualization, making it easier to identify and target specific market segments.

Some popular devices, tools, and software to consider include the following:

  • Claritas: A segmentation system that classifies U.S. households into various consumer segments based on demographics, lifestyle preferences, and purchasing behavior.
  • Tableau: A data visualization tool that enables sales professionals to analyze and display market segmentation data in an easily digestible format.
  • HubSpot: A CRM platform that offers customer segmentation features, allowing sales professionals to organize contacts based on various criteria, such as demographics, company size, or industry.

Final Thoughts

Market segmentation allows you to group your target market into smaller groups with similar interests or needs. Now that we’ve answered the question, “What is market segmentation?” you can update your marketing strategy and messaging to target each group.

This will lead to more significant growth and profitability for your business over time. So, take the time to develop a comprehensive segmentation strategy today and see how it can help take your business to the next level.