What is market segmentation? Types and benefits
Market segmentation: the reason to which many of the challenges - and failures - occurring during the development of a marketing strategy can be attributed.
But why is it so important?
Given that it is an essential element in any planning, its importance is probably taken for granted. However, we believe that a deeper understanding of such an important concept can help us not only to understand our objective a little better but also to set goals that are in line with reality.
Therefore, in this post, we want to share a key definition, the main segmentation methods, as well as some of its benefits.
What is market segmentation?
Market segmentation is a methodology used in market research to refer to the creation of sets of potential buyers into groups or segments, based on their common needs and their response to a brand's calls to action.
For companies, market segmentation allows them to direct their offer to different targets and categories of consumers, as it helps them to identify who perceives the value of their brand differently from other segments, i.e., who prefers their offer over similar ones.
To do this, companies typically use three segmentation criteria to identify their market.
- Consistency: the degree to which the tastes and needs of a market segment are identical (or very similar, in any case). This criterion allows the marketing area to consolidate a segment under the same solution.
- Distinctiveness: this refers to the characteristics by which each segment distinguishes itself from the others. This criterion is applied when the brand's offer appeals to different segments.
- Reaction: this is the response of the different segments to the same message. Generally speaking, this is what is measured to know whether a strategy is successful or not.
For instance, let's think of a car brand, which, as a product, are manufactured with the same technology.
The brand in question may have in its portfolio products aimed at a family segment, so that the offer would be adapted to the needs of a family of, say, five members: five seats (at least), a large trunk, and even entertainment centers for passengers (e.g., screens).
However, this car brand may also target young professionals looking to buy their first vehicle as a key segment of its offer, so the product may offer a smaller engine, low energy consumption, and a less sober color palette.
In short, market segmentation is an extension of market research that aims to identify which consumer groups are most interested in which types of offerings, and then tailor your products (through design and branding) to what your key segments find attractive.
Now let's see how they do it.
Types of market segmentation
As we have already established, market segmentation is a methodology that enhances the results of integral and comprehensive market research. In other words, it is a tool that adds to the range of tools available to find out to whom to direct the offer of a brand or company.
Now, there is no one type of segmentation that is more or less valid or effective than another. The key is to analyze the problem at hand and choose the one that best suits its resolution.
Let's look at some of the most commonly used segmentation types in the industry.
Perhaps one of the most common methods, because as its name suggests, it basically involves segmenting the market based on basic demographic data: age, sex, income, education, etc. We may exaggerate, but it would make no sense to advertise a shaving razor to people under the age of 10.
The premise behind demographic segmentation is that individuals whose demographic profile is similar tend to form similar needs.
For example, the videogame industry, for some time now, has begun to transform its offerings: the mechanics have become more complex, the narratives touch on more sensitive issues, and even the price of the products has increased.
This can be attributed to the fact that the industry's target segment has grown along with technology so those who were children or teenagers during the first iterations are now adults with disposable income.
This type of segmentation focuses on the same data set as demographic segmentation, except that instead of analyzing individuals, it focuses on gathering data about groups or organizations.
Among the data you are interested in are the number of employees or members, the amount of clients, the branches they have, or their annual revenues. This type of segmentation is useful for companies that provide services to other companies.
An example would be a software provider, which may offer its product to a multinational company with customizable features and pricing adjusted to the number of users. But it can also offer its services to a segment of smaller companies, creating a monthly subscription package with essential functionalities, which are increased as the company grows.
For many, geographic targeting is an accessory to demographic targeting: one should start by delimiting the area that a company intends to impact. However, since digital advertising has become an important part of any marketing mix, this type of targeting has become more relevant.
Moreover, considering it as a dataset in itself adds variables such as weather, terrain conditions, and even public safety issues. Some companies —especially those in the growth stage— even take it into account when deciding where to open new offices and attract the best talent in the area.
Likewise, we can see its application in retail companies. For example, clothing stores tend to give preference in their creativity to the elements of their collection that best fit the climate of each city.
This type of segmentation approaches consumer groups based on how they have interacted with similar products in the past. In other words, it assumes that the purchasing habits generated from consumer habits and practices are indicators of consumer preferences in the future, without ignoring the fact that trends are evolving.
Therefore, for behavioral segmentation, the data obtained from market preferences, consumer actions, and decision-making patterns are fundamental.
An example of this is how the same product category is affected by generational changes. Consider how the most recent generations, such as Millennials and Gen Z, have developed a taste for craft beers, unlike past generations, which were much more attached to national brands (not to mention that their consumption is not exclusive to a single group, but only representative).
Considered the most complex type of segmentation, psychographic segmentation aims to classify consumers based on their lifestyle, personality, opinions and interests.
Why is it complex? Mainly because segmentation criteria of this type are entirely subjective: the way our age changes is successive and constant, but our opinions can vary from one day to the next. The data obtained in these exercises is often limited by these conditions.
However, with great risks come great rewards, as betting on a psychographic segmentation exercise can result in sets that are identified by their internal motivators (preferences, feelings, tastes).
Indeed, psychographic segmentation answers the big question: what is the consumer looking for?
One example of those who seem to have cracked this question is streaming services. Currently, the content available on these platforms appeals to the audience's feelings and beliefs. The representation of diverse points of view, according to the cultural climate, are a constant in the entertainment offer of these companies.
Now that we know some of the main types of market segmentation methods, let's point out their benefits.
Benefits of market segmentation
It can be argued that each type of segmentation has its own benefits. And it's true: applied in their proper context and with the right degree of rigor, any of them can pay off in dividends.
However, if we talk about specific benefits, we can come up with a list that cuts across the concept of segmentation itself.
The first - and, in our view, most important - is undoubtedly risk reduction. Marketing is an area that lives on experiments, and these are based on trial and error: some are successful... others, not so much.
Starting from a market segmentation is essential to obtain, at least, the minimum viable result. If the experiment fails, obtain data to optimize the next iteration; and if it is successful... well, celebrate the success and improve the next version.
With this in mind, let's look at how risk disparity impacts the rest of the segmentation strategy:
Increases resource efficiency
An issue that often occurs in marketing departments when designing a strategy is that budgets are based on objective indicators (such as the company's financial status), but the results of a campaign are often vague.
You never know precisely what you are going to get: it can be leads, sales increase, or positioning, among others. And what's more: how many leads, sales or positioning can be expected for each unit of investment?
Carrying out a market segmentation allows you to understand the scope of your strategy, such as how fragmented your target market is or how demanding your potential customer is. This gives you an idea of how to propose objectives that are realistic with your resources, given the market situation.
Strengthen your brand
Having at least some influence over the way your consumers perceive your brand is an opportunity you cannot overlook.
Especially if you are just positioning yourself in an industry, you must identify your key segments to accurately communicate your offer and the values that define your brand.
Spreading this message in small segments, very well-identified and defined, allows you to have control and test if your lines of communication are the right ones.
More potential for customer loyalty
Knowing what a customer wants to listen to and telling them clearly is a challenge in itself. But it counts for little or nothing if the words are not followed by action.
That is why effective market segmentation should open up the possibility of building customer loyalty by addressing a solid message, along with a robust and realistic offer that meets the expectations that you yourself create.
Nothing is more direct, compelling, and personalized than honoring your offer with a product or service that delivers. If this lands in the right eyes and ears, it will help you decipher who your ideal customers are and how you can attract and convince them to stay with you.
The market is currently saturated with offers. Even in those sectors in the experimental stages (such as cryptos or the metaverse), the number of suppliers is growing exponentially.
Market segmentation, in this context, gives a company the opportunity not only to communicate the right message to the right customer, but also to show the rest of the market the attributes that make it different from the rest.
Your product may be essentially identical to your competitor's, but perhaps they don't have customer service like yours. It could also be that your prices are lower, or that your onboarding is hassle-free.
Anyway, these are just a few benefits of market segmentation. If your ultimate goal is to reduce risk, identify exactly how it can benefit you and design your strategy around that benefit: messages, channels, and differentiators. Everything counts.
Don't lose sight of the fact that market segmentation is a process that virtually all companies consider in building their offerings.
The difference between an optimal application of this technique and meeting a requirement is how much you care about knowing your audience.
Figuring out the latter can help you not only to design a robust marketing strategy but also to fine-tune the accuracy of your budget plan.