In the cutthroat world of business, there’s a strategy that sharpens a company’s competitive edge by honing in on the individuality of each customer. It’s called market segmentation, and it’s the art of breaking down a broad consumer base into smaller groups more homogenous in their preferences.
Through this comprehensive guide, we’ll walk you through the what, why, and how of market segmentation, and provide you with real-world examples to turn this strategic insight into actionable results for your business.
What is Market Segmentation Analysis?
Market segmentation analysis is the practice of dividing a broad market into subsets of consumers or businesses who have, or are perceived to have, common needs, interests, and priorities.
The purpose of segmentation is to allow for more targeted marketing and service efforts to groups that are likely to respond favorably to such strategies. Think of it as the process of peeling back the layers of a market to get to its core and, in the process, discovering the individual kernels.
Benefits of Market Segmentation Analysis
The fundamental benefit of market segmentation is that it enables businesses to understand their customers on a more granular level, leading to more efficient strategies and higher customer satisfaction.
From personalized marketing messages that resonate with specific groups to tailoring products to meet the exact needs of a segment, the advantages are clear:
- Improved Customer Retention: Understanding and catering to the unique needs of segments foster customer loyalty.
- More Effective Marketing: Segmentation can drastically improve the return on investment for marketing by reaching the right customers with the right message.
- Innovative Product Development: By focusing on segments, companies can develop products or services that meet specific demands or solve particular problems.
- Increased Profits: All the above factors, in aggregate, lead to higher sales, better customer relationships, and ultimately, increased profits.
Types of Market Segmentation Analysis
Market segmentation can be performed using various categories. Some segments will be more useful to specific businesses, so it’s important to consider which criteria align with your strategic goals. Here are a few segment types to get you thinking:
Demographic Segmentation
This classic method divides consumers based on variables such as age, gender, income, occupation, education, family size, religion, race, and nationality. It’s one of the most straightforward ways to understand consumer behavior.
Geographic Segmentation
Dividing a market based on geographic units, such as nations, states, regions, counties, cities, or neighborhoods. This method allows businesses to tailor their offerings to a location’s specific needs or preferences.
Behavioral Segmentation
This approach divides consumers based on their behavior, using knowledge of the occasion, benefits sought, user status, usage rate, loyalty status, and readiness stage. It can paint a detailed picture of how consumers interact with a product or service.
Psychographic Segmentation
This method classifies consumers by their lifestyle, activities, interests, and opinions. It goes beyond ‘what’ they buy to ‘why’ they buy, helping companies develop a marketing plan that resonates with the customer’s motivations.
Firmographic Segmentation
Firmographic segmentation applies demographic segmentation to businesses, with characteristics including company size, industry, revenue, and business structure. It aids in the B2B targeting and tailoring of products and services to specific types of organizations.
Needs-Based Segmentation
This method categorizes consumers by the specific problems they are trying to solve and the benefits they seek. It’s used to identify the unmet needs in the market and create products or services to meet them.
Intent Segmentation
Identifying and grouping customers with the strongest buying signals can be a compelling way to focus marketing and sales efforts where they are most likely to yield results.
8-Step Process of Market Segmentation Analysis
The process of slicing a market into meaningful segments requires a mix of data analysis, creativity, and strategic thinking. Here’s a step-by-step guide to nailing your market segmentation analysis:
1. Define Your Market:
- Identify your industry and product/service category. What broad market are you operating in? (e.g., fitness wear, productivity apps)
Here’s a step-by-step funnel to help you identify your industry and product/service category for market segmentation, along with 3 examples:
1. Broad Category:
- Start by identifying the broad industry your product or service falls under.
Examples:
- Fitness Tracker (Health & Wellness Industry)
- Plant-Based Burger (Food Industry)
- Online Language Learning Platform (Education Industry)
2. Sub-Category:
- Within the broad industry, define a more specific sub-category that better captures your product’s unique value proposition.
Examples:
- Fitness Tracker (Wearable Tech Sub-Category within Health & Wellness)
- Plant-Based Burger (Vegetarian/Vegan Sub-Category within Food)
- Online Language Learning Platform (Subscription-Based Learning Sub-Category within Education)
3. Target Market:
- Finally, based on the sub-category, identify your ideal target market. This is the specific group of people most likely to benefit from your product’s features.
Examples:
- Fitness Tracker (Targeting Athletes vs. Casual Fitness Enthusiasts)
- Plant-Based Burger (Targeting Environmentally Conscious Consumers vs. Health-Focused Individuals)
- Online Language Learning Platform (Targeting Business Travelers vs. Students)
- Specify your value proposition. What unique benefit do you offer to customers? (e.g., stylish workout clothes, time management tools) Develop this into one sentence that highlights how your product addresses their pain points.
Fitness wear example: Our new anti-perspiration jog-wear wicks away moisture, keeps you cool, and lets you focus on crushing your fitness goals in style and comfort.
Kitchen appliance example: Silence the mornings and savor the freshest coffee with our ultra-quiet, no-noise electric grinder.
Stroller example: Cruise through parenthood effortlessly with our ultra-lightweight, ergonomic stroller that offers comfort for your baby and maneuverability for you.
- Research market size and trends. Use market research reports, industry publications, or online tools like Google Trends to understand the overall market landscape, growth potential, and any emerging trends.
Where to look:
- Market research reports (e.g. Government websites, university research centers)
- Industry publications (e.g. McKinsey Research)
- Google Trends
2. Gather Customer Data:
- Identify existing data sources. Do you have customer demographics, purchase history, or website analytics data available? (Tools: CRM software, website analytics tools)
- Choose market research methods based on your target audience and budget. Consider online surveys, phone interviews, in-person focus groups, or social media listening tools.
Note: Make sure you know the full range of market research methods and types before you choose. Check out our comprehensive market research guide here to get the full list.
- Develop a data collection tool. Create a survey questionnaire or interview guide with clear and concise questions aligned with your segmentation goals. Focus on questions that reveal demographics, psychographics, behaviors, and attitudes. (Tools: Survey creation platforms like (e.g., Google Forms, SurveyMonkey)
- Pilot test your data collection tool with a small sample group. This helps refine your questions and ensure clarity before full-scale data collection.
Let’s say you’ve developed a new online survey to gauge customer satisfaction with your e-commerce clothing store. Here’s how you could pilot test it with a small sample group:
1. Define Your Goals:
- What aspects of the survey do you want to assess? Is it clarity, ease of use, question flow, or response time?
2. Recruit Your Sample:
- Select a small group of 5-10 participants who represent your target customer base.
- You can recruit them through email lists, social media channels, or offer them a small incentive for participation.
3. Prepare the Pilot Test Environment:
- Set up a mock version of the survey using your chosen data collection tool.
- Ensure the pilot environment replicates the actual survey experience, including branding and layout.
4. Conduct the Pilot Test:
- Briefly explain the purpose of the pilot test and what feedback you’re seeking.
- Have participants complete the survey and ask them to think aloud as they navigate it.
- Observe their behavior and record any difficulties they encounter.
5. Gather Feedback:
- After completing the survey, conduct short individual interviews with participants.
- Ask questions like:
- “Did you find the survey questions clear and easy to understand?”
- “Did the flow of questions make sense?”
- “Were there any technical issues or confusing parts?”
- “How long did it take you to complete the survey?”
- Encourage honest feedback and offer a small token of appreciation for their time.
6. Analyze the Results:
- Review the recorded observations, interview notes, and any survey completion time data.
- Identify any recurring issues with question clarity, survey design, or technical problems.
7. Refine the Tool:
- Based on the pilot test feedback, revise the survey questions, layout, or overall design to address identified issues.
3. Clean and Organize Your Data:
- Validate and clean your data. Ensure data accuracy by removing inconsistencies, duplicates, or missing information.
(Tools: Data cleaning tools in Excel, Google Sheets, or specialized data management software)
- Organize your data by relevant categories. Group data points based on demographics (age, income, location), psychographics (values, interests, lifestyles), behavioral data (purchase history, website usage), and firmographics (company size, industry), depending on your segmentation goals.
(Tools: Excel, Google Sheets, data management software)
Using the highlight cells rule in Excel is especially useful when organizing your data.
- Consider using data analysis software. Tools like Excel with pivot tables, Google Sheets, or specialized market research software can help manage large datasets and perform basic analysis.
Filter your PivotTables by a list of values
4. Explore and Analyze Your Data:
- Identify patterns and trends. Look for commonalities in demographics, behaviors, or attitudes within your data. Analyze responses to identify groups with similar characteristics.
- Use data visualization tools. Create charts, graphs, or heat maps to represent trends visually. This can help identify distinct clusters within your data.
(Tools: Excel charting tools, Google Sheets charting tools, data visualization software like Tableau, Power BI)
Tableau: This platform is known for its powerful features and flexibility in creating customized dashboards and visualizations. It allows for in-depth data exploration and caters well to data analysts comfortable with manipulating data.
Power BI: Streamlines data visualization, particularly for Microsoft users. It integrates seamlessly with Microsoft products like Excel and offers a user-friendly interface for creating reports and dashboards.
- Segmenting techniques: Consider using statistical methods like cluster analysis (grouping data points based on similarities) to identify distinct customer segments. You can also explore techniques like RFM analysis (Recency, Frequency, Monetary value) to segment customers based on buying behavior.
Tools: Statistical software like R, Python with libraries like scikit-learn
RFM Analysis Example: Fitness Tracker Company
Customer Segment: Active Young Professionals (22-35 years old, health-conscious, busy schedules)
Data: We analyzed purchase data for the past year for a fitness tracker company targeting young professionals.
RFM Scores:
- Recency: This is categorized into 5 groups (R1: Most Recent Purchase, R5: Least Recent Purchase) based on the time elapsed since their last purchase.
- Frequency: This is categorized into 4 groups (F1: Most Frequent Buyer, F4: Least Frequent Buyer) based on the total number of purchases made within the year.
- Monetary: This is categorized into 3 groups (M1: Highest Spenders, M3: Lowest Spenders) based on the total amount spent on fitness trackers and accessories.
Analysis:
Looking at this customer segment (Active Young Professionals), we might see a concentration in the following RFM groups:
- R2F2M2: These customers purchase somewhat regularly (every few months) and spend a moderate amount, indicating consistent interest in maintaining their fitness goals but not necessarily needing the latest trackers or accessories.
- R1F3M1: These customers might have recently made a significant purchase (new tracker and accessories) and are less likely to buy again soon. However, their high spending indicates a strong interest in fitness tracking.
- R4F1M3: These customers might buy infrequently but spend a small amount when they do, possibly indicating they only upgrade to new trackers every few years but are not big spenders on accessories.
Marketing Strategies:
Based on these RFM segments, the fitness tracker company can develop targeted marketing campaigns:
- R2F2M2: Offer educational content on using their trackers more effectively or highlight new features to encourage continued engagement. Promote subscription services for workout plans or personalized coaching.
- R1F3M1: Target them with post-purchase surveys or personalized recommendations for accessories that complement their new tracker.
- R4F1M3: Run targeted ads showcasing the latest tracker features or offer discounts to incentivize an upgrade. Partner with fitness apps or services to create bundled deals.
Note: This is a hypothetical example, and the actual RFM distribution and marketing strategies would depend on the specific data for your customer segment.
5. Build Buyer Personas:
- Create profiles for each customer segment. Give each segment a name that reflects its defining characteristics (e.g., “Tech-Savvy Professionals,” “Eco-Conscious Millennials”).
- Describe the demographics, psychographics, and behavioral traits of each segment. What are their age, income, location, values, interests, lifestyles, and buying habits?
- Develop a narrative around each persona. Describe their typical day, challenges, goals, and how your product/service fits into their life.
- Consider using empathy mapping. This visual tool helps visualize the thoughts, feelings, and experiences of your target customer persona. It can include sections for what they see, hear, say, do, think, and feel related to your product/service. (Tools: Online empathy mapping templates, mind mapping software)
6. Identify Gaps and Opportunities:
- Analyze the market landscape. Consider existing competitors, their target audiences, and any unmet needs in the market based on your research.
This may seem like a redundant step in the process, but in fact it’s crucial. For a full break down on where to look and what to look fo follow our guide on market research tips.
- Compare your segments to the overall market. Are there any under-served groups or specific needs within the market that your product/service could address?
- Identify potential new market opportunities. Based on your segmentation, are there adjacent markets or new customer segments you could explore?
7. Validate and Refine Your Segments:
- Test your segmentation with external data. See if industry reports or competitor research aligns with your identified segments. (This step circles back to the work you did in Step 1.)
- Refine your segmentation criteria. Are there any segments that need to be merged or further divided based on additional insights?
- Ensure your segments are actionable. Can you tailor marketing strategies and messaging to each segment effectively?
8. Monitor and Measure Results:
- Track the performance of your marketing campaigns across segments. See which segments are responding best to your efforts.
- Refine your approach based on data and customer feedback. Continuously optimize your segmentation strategy for better results.
Market Segmentation Examples
Putting theory into practice, here are a few hypothetical examples across industries that highlight the power of market segmentation:
- Demographic Segmentation in Automotive: Car manufacturers like Volvo and Porsche segment by age, income, and family size, creating models aimed at young, affluent, single professionals or large, middle-aged, family-oriented consumers.
- Target Market: Young professionals (22-35 years old, single or young families, good income)
- Segmentation Basis: Age, income, and family life stage.
- Why? This group prioritizes style, fuel efficiency, and safety features for their commutes and occasional weekend trips.
- Marketing Approach: Focus on sleek designs, highlight MPG (miles per gallon) ratings, and safety technology advancements in advertising. Partner with influencers popular with young professionals.
- Geographic Segmentation in Food and Beverage: Regional tastes see soft drink giants adjust their recipes to cater to different palate preferences across countries and even states.
- Target Market: Health-conscious consumers in urban areas.
- Segmentation Basis: Location and lifestyle preferences.
- Why? Urban areas tend to have a higher concentration of people interested in healthy eating options.
- Marketing Approach: Partner with local gyms or health food stores to offer product samples or discounts. Promote convenient delivery options through local apps.
- Behavioral Segmentation in Technology: Companies like Apple and Samsung observe user behavior patterns to release products at the right stage within a consumer’s device usage cycle.
- Target Market: Early adopters of new technology.
- Segmentation Basis: Buying habits and tech-savviness.
- Why? Early adopters are eager to try the latest gadgets and are comfortable navigating new technology.
- Marketing Approach: Offer pre-orders for new releases, highlight innovative features, and leverage social media platforms popular with tech enthusiasts to generate buzz.
- Psychographic Segmentation in Attire: Fashion retailers like H&M and Gucci cater to different consumer segments representing a variety of styles and social aspirations.
- Target Market: Environmentally conscious millennials interested in ethical fashion.
- Segmentation Basis: Values and social consciousness.
- Why? This segment cares about the environmental and social impact of the clothing they wear.
- Marketing Approach: Highlight sustainable materials, fair labor practices, and charitable partnerships in branding and advertising. Partner with eco-conscious celebrities or influencers for promotions.
- Firmographic Segmentation in B2B Financial Services: A bank might offer different services and terms to a small, local business compared to a multinational corporation, based on unique industry and revenue needs.
- Target Market: Fast-growing startups in the tech sector.
- Segmentation Basis: Company size, industry, and growth stage.
- Why? Fast-growing startups have specific financial needs related to scaling their business.
- Marketing Approach: Develop financial products tailored to the funding needs of startups (e.g., venture capital loans, lines of credit). Partner with accelerators or incubators to reach target businesses directly.
Conduct Real-Time Market Segmentation with Prelaunch
All the steps we mentioned above are crucial to prividng you with wellrounded insights for your future marketing efforts. As you can see though, the process requires several tools. For those looking for an all-in-one approach to market segmentation you need look no further than Prelaunch.
This platform is a powerful tool that helps you conduct market segmentation. The platform allows you to gather real-time feedback from consumers, split-test (A/B test) various product concepts and marketing angles, and segment your market based on actual consumer response.
Prelaunchfocuses on the genuine buying intent of customers. Instead of paying casual observers to take part in surveys, at Prelaunch, users themselves pay to express their views. The unique Prelaunch Reservation Funnel allows users to make a small deposit to secure upcoming innovations. This act of making a payment online serves as a compelling indicator of real purchasing commitment.
Through our customer-centric approach to product development, each concept is scrutinized and fine-tuned by the ideal market segment before it’s made available for sale. This allows businesses to allocate their resources to products with greater potential, averting the wastage of finances and time on products that don’t appeal to the market.
Its market segmentation analysis is brought to life in an intuitive and actionable way for your business, visualized all in one place: the Prelaunch Dashboard.
Conclusion
In conclusion, effective market segmentation is not just a business strategy but a necessity in today’s diverse and dynamic marketplace. It enables businesses to understand their customers on a deeper level, tailoring their offerings and marketing messages to meet the specific needs and preferences of different segments.
By adopting a methodical approach to market segmentation — from gathering and analyzing customer data to defining and refining segments — businesses can enhance their competitiveness and foster stronger customer relationships.
Remember, the goal is to not just reach your audience but to connect with them in meaningful ways that drive engagement and loyalty. Whether you’re a small startup or a multinational corporation, the principles of market segmentation can play a pivotal role in your success.
