What is Market Segmentation? 4 Types & 5 Benefits (2024)

When trying to reach customers with a marketing message or ad campaign, targeting the right market with the right message is essential — If you aim too broadly, your message might reach a few people who end up becoming customers, but you’ll also reach a lot of people who aren’t interested in your products or services. When your messaging isn’t optimized for your audience, you’ll end up with a lot of wasted advertising dollars.

Market segmentation can help you to target just the people most likely to become satisfied customers of your company or enthusiastic consumers of your content. To segment a market, you split it up into groups that have similar characteristics. You can base a segment on one or more qualities. Splitting up an audience in this way allows for more precisely targeted marketing and personalized content.

• Types of Market Segmentation
• 5 Benefits of Market Segmentation

The Importance of Market Segmentation

Market segmentation is important because it can help you to define and better understand your target audiences and ideal customers. If you’re a marketer, this allows you to identify the right market for your productsand then target your marketing more effectively. Similarly, publishers can use market segmentation to offer more precisely targeted advertising options and to customize their content for different audience groups.

Say, for example, you’re a marketer who’s advertising a new brand of dog food. You could split an audience into segments based on whether they have a dog. You could then segment that audience further based on what kind of dog they have and then show them ads for food formulated for their dog’s breed.A publisher could use this same information to show content about dogs to people who have or like dogs.

Market segmentation allows you to target your content to the right people in the right way, rather than targeting your entire audience with a generic message. This helps you increase the chances of people engaging with your ad or content, resulting in more efficient campaigns and improved return on investment (ROI).

Types of Market Segmentation

There are many different kinds of market segments you can create. Below arethe four main methods of market segmentation. You can also create more niche segments within the types below.

1. Demographic Segmentation

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Demographic segmentation is one of the most common forms. It refers to splitting up audiences based on observable, people-based differences. These qualities include things like age, sex, marital status, family size, occupation, education level, income, race,nationality andreligion.

Segmenting a market according to demographics is the most basic form of segmentation. Combining demographic segmentation with other types can help you to narrow down your market even more. One benefit of this kind of segmentation is that the information is relatively easily accessible and low-cost to obtain.

Some products are targeted explicitly towards a specific demographic. One personal care company, for example, might make two deodorant products — one labeled as men’s deodorant and one labeled as women’s deodorant.

Automotive companies often segment their audience by income and market different makes and models of cars to each segment. One company may have a luxury brand, an economy brand and a mid-range brand.

There are numerous ways to gather demographic data. One way is to ask your customers directly. This can be time-consuming, but getting the information directly from customers will help ensure its accuracy. If you go this route, be careful to be respectful in how you ask and give customers sufficient response options so you get accurate results. You may also be able to obtain demographic data directly from customers by looking at social media and other online profiles where they may provide information about themselves.

You can also get demographic fromsecond-party and third-party data providersincluding marketing service providers and credit bureaus. Public records, such as those kept by the U.S. Census Bureau and the U.S. Postal Service, can also provide useful information.

Collecting this data ina data collaboration platform (DCP) will help you to organize it and use it to target your marketing campaigns or content personalization efforts.

2. Behavioral Segmentation

You can also segment your market based on consumers’ behaviors, especially regarding your product.Dividing your audience based on behaviors they display allows you to create messaging that caters to those behaviors. Many of the actions you might look at relate to how someone interacts with your product, website, app or brand.

Some types of behaviors to look at include:

• Online shopping habits:You might consider a users’ online shopping habits across all sites, as this may correlate with the likelihood they will make an online purchase on your website.
• Actions taken on a website:You can track actions users take on your online properties to better understand how they interact with them. You might look at how long someone stays on your site, whether they read articles all the way to the end, the types of content they click on and more.
• Benefits sought:This refers to the need a customer is trying to meet by purchasing a product.
• Usage rate:You can categorize users based on usage rate. Your messaging will be different depending on whether someone is a heavy user, medium user, light user or non-user of your product.
• Loyalty:After using a product for some time, customers often develop brand loyalty. You can categorize customers based on how loyal they are to your brand and tailor your messaging accordingly.

Behavioral data is useful because it relates directly to how someone interacts with your brand or products. Because of this, it can help you market more effectively to them.

You can collect this data through various sources including cookies placed on your website, the purchase data in your customer relationship management (CRM) software and third-party datasets.

3. Geographic Segmentation

Geographic segmentation, splitting up your market based on their location, is a basic but highly useful segmentation strategy. A customer’s location can help you better understand their needs and enable you to send out location-specific ads.

There are several kinds of geographic segmentation.The most basic is identifying users based on their locations such as their country, state, county and zip code.You can also identify consumers based on the characteristics of the area they live in, such as its climate, the population density and whether it’s urban, suburban or rural. Identifying characteristics can require you to get more specific since one county could have rural, suburban and urban areas.

Dividing a market according to location is critical if you need to target an ad to people in a specific area, such as if you’re advertising a small local business. It can also be useful if you’re targeting a broad area because it enables you to tailor your messaging according to regional differences in language, interests, norms and other attributes as well as the differing needs of people in different regions.

You may need to change the language your messaging depending on the region you’re targeting. People who live in different countries may also have different interests. Baseball is very popular in the United States, for example, while cricket is more popular in India. If you’re marketing sports equipment or publishing sports articles, you will want to take these different preferences into account.

Companies can also consider different needs in different regions. A clothing company, for instance, will show ads featuring warmer clothing to people living in cooler climates and show the opposite to people living in warmer climates.

4. Psychographic Segmentation

Psychographic segmentation is similar to demographic segmentation, but it deals with characteristics that are more mental and emotional. These attributes may not be as easy to observe as demographics, but they can give you valuable insight into your audience’s motives, preferences and needs. Understanding these aspects of your audience can help you to create content that appeals to them more effectively. Some examples of psychographic characteristics include personality traits, interests, beliefs, values, attitudes and lifestyles.

If you find that members of a demographic segment are responding differently to your content, you might want to add in some psychographic information. While demographics provide the basic facts about who your audience is, psychographics give you insight into why people decide to purchase or not purchase your product, click on or ignore your ad and otherwise interact with you.

Say you’re a furniture and home decor company, and you have a market segment consisting of newlyweds in their 20s and 30s with a household income above $60,000. Some members of this segment are converting, while others are not. When you add psychographic information into the mix, you may find that people that purchase your products often value community and friendships and are environmentally conscious. Based on this information, you could create ads that show people entertaining friends in their home and emphasize the environmentally friendly attributes of your brand.

You can collect this data in many of the same ways you can gather demographic data. You can ask your existing customers for this information using surveys. You can also look at the way people interact with your website and see what types of content they engage with, which gives you insight into their interests and preferences. You can also supplement your first-party data with second-party and third-party data.

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Other Methods of Market Segmentation

Demographic, psychographic, behavioral and geographic segmentation are considered the four main types of market segmentation, but there are also many other strategies you can use, including numerous variations on the four main types. Here are several more methods you may want to look into.

• Value segmentation:Some businesses will split up a market based on the “transactional worth” of their customers — how much they’re likely to spend on their products. To determine a customer’s transactional worth, you can look at previous purchase data such as how many purchases they make, how often they make purchases and the value of the items they purchase.
• Firmographic segmentation:Business-to-business (B2B) companies may use firmographic segmentation to divide up the businesses in a market. This is similar to demographic segmentation with individual consumers but instead looks at the characteristics of companies that may become customers. Examples of data to look at include industry, revenue, number of employees and location.
• Generational segmentation:Businesses may segment consumers by generation and group them intocategories that includeGen Z, Millenials, Generation X, Baby Boomers and the Silent Generation. These generations are believed to share certain preferences, behaviors, personality traits and beliefs. Of course, not every member of a generation is the same, but generational segmentation can give you some additional insight into your audience.
• Lifestage segmentation:You can also segment your market into groups based on where they are in their lives. Going to college, getting married and having children are examples of key life events to consider. People at different stages of life need different things. For instance, soon-to-be college students may need apartment furniture. New parents will be looking to purchase baby food.
• Seasonal segmentation:Similarly to how people buy different products in different periods of their lives, people also buy different items at different times of the year. Major holidays such as Christmas and Hanukkah also significantly impact purchasing behaviors.

How Can You Ensure Effective Market Segments?

Creating effective market segments is crucial for tailoring your marketing strategies to specific customer groups. To ensure that your segmentation is useful and actionable, consider the following criteria:

1. Measurability

For a segment to be viable, it must be measurable. This means that the characteristics of the segment should directly relate to purchasing behavior. You should be able to quantify how much each segment is likely to spend on your product.

• Example: If you identify a segment that tends to shop more during promotions or sales, you should be able to estimate their potential spend during those periods.

2. Accessibility

It’s essential to not only understand your customers but also to reach them effectively. Your segments should help you identify the best communication channels.

• Example: One segment might respond well to mobile app notifications, while another prefers traditional media like newspapers or radio.

3. Substantiality

Ensure that the segment is substantial enough to be worth targeting. The market segment should have sufficient purchasing power.

• Example: For a high-end retailer, targeting only individuals who can afford luxury goods is crucial. Your target market might include affluent retirees, eco-conscious enthusiasts willing to pay more for sustainable products, or successful entrepreneurs.

4. Actionability

Your segments must produce differential responses when exposed to your marketing efforts. This means each segment should be unique and respond differently to your marketing tactics.

• Example: If you find that people passionate about pets have similar purchasing patterns as those who care about the environment, consider combining these groups into one segment for a more streamlined approach.

Iteration and Refinement

Market segmentation isn’t an exact science. Be prepared to iterate on your findings. If traditional demographics don’t yield actionable insights, try behavioral segmentation or another method. Continuously refine your segments to best suit your marketing, sales, and product strategies.

By adhering to these principles, you’ll increase the likelihood of creating segments that are both practicable and highly effective.

What are Common Segmentation Errors to Avoid?

Segmentation is a powerful tool in marketing, but it comes with potential pitfalls. Here are some common errors to steer clear of:

• Creating Overly Narrow Segments: While specificity has its benefits, segments that are too small or niche can lead to insubstantial data. Such segments may not provide meaningful insights, causing more confusion than clarity.
• Ignoring Financial Viability: Prioritizing segments without considering their purchasing power can waste valuable resources. Even if a segment appears large, it needs to have a genuine interest and the financial means to buy your product for it to be worthwhile.
• Lack of Flexibility: Market conditions and customer preferences are always evolving. Rigid segmentation strategies that don’t account for these changes can become obsolete quickly. Ensure your segments are adaptable to shifting trends and customer behaviors.

Key Takeaways

1. Balance Specificity with Size: Ensure your segments are large enough to yield actionable insights.
2. Assess Financial Potential: Target segments must have the capacity and interest to convert into sales.
3. Stay Agile: Keep your segmentation strategies flexible to adapt to market dynamics.

By avoiding these common errors, you can develop more effective and insightful segmentation strategies that drive better outcomes for your business.

5 Benefits of Market Segmentation

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In a recent survey of marketing professionals in North America,62 percent of respondents saidimproving audience segmentation to enable more precisely targeted messaging was a top priority. There’s a reason improving segmentation was the most frequently reported priority in the survey. Market segmentation offers many benefits to marketers, publishers and others, including the following advantages.

1. Improves Campaign Performance

Market segmentation can help you to improve the performance of your marketing campaigns by helping you to target the right people with the right messaging at the right time. Segmentation enables you to learn more about your audience so you can better tailor your messaging to their preferences and needs.

Targeting a specific segment that is likely to be interested in your content or product is much more effective than targeting an overly broad audience. If you advertise to an entire market, you will end up spending a massive amount of money on ads, but a relatively small percentage will convert. If you instead direct your marketing to a segment with the right characteristics, you can increase the conversion rate of your campaign considerably.

The more specific the audience of people interested in your brand, the more beneficialtargetingcan be. For example, there’s no reason to market dental tools to anybody but dentists. Marketing them to a broad audience would result in wasted ad dollars.

Even if you’re selling a product with broad appeal, customer segmentation can help you tailor your messaging to different groups to better engage with them. Say that you’re advertising furniture. You might split your audience up by age and push individuals ads that show people who are close to their age.

2. Informs Product Development

Market segmentation can also help companies to develop products that better meet the needs of their customers. You can create products to appeal to needs your main market segment may have and develop different products tailored to different parts of your customer base.

Say, for instance, you run an automotive company, and your primary market segment is middle-class families. You would likely design your car with lots of seating, leg room and space to accommodate a family with multiple kids. You would also create mid-range priced vehicles.

You could, however, also segment your audience further, and create vehicles that appeal to each of those segments. For example, one segment might be families who like to go on outdoorsy vacations. To appeal to this group, you could offer a vehicle with four-wheel drive and lots of cargo space. Another segment might prefer to take trips into the city. You might make this car smaller so that the drivers can easily navigate narrow city streets and fit into tight parking spots.

Designing your products with the needs of your customers in mind will help you to sell more and will make your customers happier. Your customers will also feel like you understand their needs, improving your company’s reputation.

3. Reveals Areas to Expand

Market segmentation can also help businesses to identify audience segments that they are not currently reaching with their marketing efforts and then expand into new markets.

When you look at your audience data, you might discover interests that you didn’t realize your customers had. For example, a company might make the majority of their sales in physical stores. When looking at behavioral data, they might see that many of their customers like to shop online. Based on this information, they could then either open an online store or stat advertising their online marketplace more.

As another example, a clothing company that primarily targets middle-aged women might decide to start selling kids clothing as well. They could introduce these items and market them to their current customers, encouraging them to buy them for their kids.

4. Improves Business Focus

Market segmentation can also help businesses to focus their efforts, which enables them to establish a brand identity and specialize in a particular type of products. A brand that tries to appeal to everyone in their marketing will come off as generic and unmemorable. It could also leave customers confused about what the brand stands for and what kind of company it represents. Similarly, a company that tries to sell everything likely won’t make a big impact in any one market, and its offerings may be of lower quality compared to companies that specialize. As your company grows, you can expand your offerings, but when first starting out, it can be challenging to differentiate your company if your product offerings are too broad.

5. Informs Other Business Decisions

Market segmentation can also help to inform other important business decisions regarding how you get your product to customers. These decisions may involve matters such as pricing and distribution.

Businesses can use segmentation to help them decide on pricing that maximizes sales while keeping customers happy. Companies may consider demographic information such as income levels. They may also take into account their customers’ price sensitivity — the degree to which their price affects their purchase decisions. Paying attention to seasonal demand changes can help businesses time special deals to boost sales.

Market segmentation can also help companies to determine the optimal strategies for the distribution of their products. Some groups of people, for instance, are more likely to shop online, while others are more likely to shop in a store. Companies can also decide which stores to pitch their products to based on where their market segment shops. Their customers may, for example, shop at luxury boutiques or bargain outlets. Looking at geographic data can also help a company decide where to set up a new store.

How We Can Help

To take control of your segmented audience data, you need the right data tools, along with the right partners. We can provide you with both. Lotame’s end-to-end data collaboration platform, Spherical, offers a suite of solutions for digital marketers toextract the maximum value of their first-party data through onboarding, enrichment and activation.

Lotame is the premier all-in-one data solution provider for savvy brands that want to supercharge their data-enhanced customer acquisition and current customer expansion efforts. From audience discovery, segment creation, to targeting and dissemination across the entire ad-tech ecosystem, Lotame is the only data partner that you need to help you achieve your customer acquisition and audience expansion goals.

To learn more about how Spherical helps marketers and media owners drive growth and revenue with actionable customer intelligence, data informed audiences, and identity powered activation, contact us today.