Important Takeaways

• Market segmentation is a method of identifying profitable customer segments, and it informs pricing, distribution, and product development.
• It is more difficult to use demographics than buying patterns to predict future purchases.
• Segmentation is a key element in strategies that go beyond marketing, including pricing and product selection.
• Effective segmentation concentrates on clear goals and adjusts to changes in market conditions.
• Nearly all industries profit from market segmentation. Particularly, media and consumer goods.

Market segmentation divides a market into smaller, distinct segments of customers that share traits. It helps identify subgroups with the highest likelihood of revenue or growth.

The benefits of market segmentation are the ability to optimize distribution, the development of new products, and pricing.

Management believes that proper market segmentation is crucial to generating revenue growth, as per numerous studies conducted by Bain & Company and the Harvard Business Review.

Examining The Five Key Types of Market Segmentation

Researchers make use of five kinds of characteristics to break down market segments into subgroups that are most likely to have similar decisions regarding products and services.

Demographic Segmentation: Sorting out a market based on factors such as income, age and gender, race, and job is the first kind of market segmentation.

Geographic Segmentation: Before being a subset of the demographics, geographical segmentation (including regional and climate-related factors) is important for companies seeking to determine the best places to market certain goods and how to market these products.

Firmographic Segmentation: This is the business equivalent of demographic segmentation. Instead of race, gender, and income, firms are categorized by factors like size and the number of employees. It also informs strategies for potential business clients that range from small local businesses to large multinational corporations.

Behavioral Segmentation: The basis for behavioral segmentation is not on the individual behavior of consumers, but rather on the trackability of their behaviors in the market, such as purchasing history as well as browsing history, spending habits as well as brand loyalty, and consumption patterns.

Psychographic Segmentation: Similarly to the behavioral segmentation process, psychographic segmentation is a method of identifying subgroups of customers based upon personal characteristics, preferences, beliefs, and lifestyles, which include aspects like hobbies, lifestyle goals, priorities, values, and goals.

The Effects on Yankelovich On Nondemographic Segmentation

In 1964, Daniel Yankelovich, an influential U.S. market researcher and social scientist, invented the notion of nondemographic segmentation–i.e., the classification of consumers based on criteria other than gender, age, and income. He believed that they are not as reliable predictors of future purchases as information on actual purchasing patterns of consumers.

Psychographics replace Demographics: Since then, market segmentation has been widely utilized in the past, with psychographics replacing demographics as the primary method of determining. In an article in 2006 Harvard Business Review (HBR) article, Yankelovich revisited the subject to argue that the overreliance on psychographics is ineffective, as was the segmentation of demographics. “Despite its poor performance,” commercials featured characters that reflected the lives, attitudes, and self-images of the viewers: “High-Tech Harry” and “Joe Six-Pack.”

Famous Advertising Flaps: While Yankelovich recognized that psychographics can be efficient in promoting brand awareness as well as positioning the brand, he believed that the emotions these advertisements generate do not determine commercial results, which is the reason for the disappointing results of some famous advertisements. Take, for example, the classic case that is New Coke. It was 1985, and Coca-Cola had to face the risk of losing customers to taste tests conducted in a blind manner. Coca-Cola decided to launch a campaign to promote New Coke, which failed to gain the support of the public. The product was later discontinued.

Hard Data on Consumers’ Buying Patterns in the article of 2006, Yankelovich repeated his original argument that the most efficient segments are those based on factors that are directly connected–not just to emotional triggers, however, they also reflect the values and attitudes that determine how a consumer will perceive a particular product. This will, in turn, drive the most powerful factor in predictive effectiveness: actual purchase behaviour. The beliefs that guide purchasing behavior do not need to be assumed; they can be found through hard data about purchasing patterns among consumers, which includes loyalty to brands and products as well as the history of purchases and choice of channel. (Yankelovich also talks about how to determine the “gravity of the choice” for a key factor in the prediction of purchasing behaviour; e.g., the decision of which car to purchase has more weight than the decision about which shampoo to purchase or which shampoo to buy, etc.)

Setting up effective ground rules for Market Segmentation

Instead of basing segmentation solely on psychographics, Yankelovich suggested a wider conception of nondemographic classification to ensure that the segments analyzed could inform not just marketing campaigns, but also the strategy within the department of marketing, like the development of new products, pricing, distribution, and. To gather solid information on the most pressing business questions the segmentation was designed to address–what products to create and which distribution channels to market them through, what prices they should cost, as well as the best way to market them–Yankelovich warned marketers to remember certain rules of the road, such as:

The predictive power of Purchase History: Mostly psychographic strategies do not consider Yankelovich’s notion that patterns of buying behavior from the past can be more reliable than any other predictor of future purchase patterns than any other superficial identity. Moreover, the information from the hard can help determine long-term business results as well.

Overly Technical Segmentation Alienates Senior Management: As marketing gets more scientific and more specialized, Yankelovich also cautioned marketers to remember that, as they are “flaunting their technical virtuosity, they”– remember that the market segments identified must “make intuitive sense” to the senior managers who are the final decision makers. If marketers are unable to explain the definition of the segments or if the segments appear in some way unrelated to an executive’s extensive experience within the field, the findings will probably never be implemented.

Product Features Are More Important than Personal Identities of Consumers. Don’t let your overreliance on the identity of consumers distract your marketing strategies from highlighting the key features of your product that are relevant to current and future customers.

Different segments for various purposes: The most common error Yankelovich made clear was that he applied segments designed for a marketing campaign to strategies that weren’t intended to be guided, like entering into the market, product development, and pricing decisions. Make one segmentation for the purpose of strengthening branding and identity, while using diverse segments to decide the markets to target and what products to develop. For instance, an advertisement segmentation designed for an HVAC company was able to come up with a clever set of character descriptions (“traditional masculine” as well as “woman practicing yoga”), but did not provide executives with information about which group is most likely to need to replace the HVAC systems. In addition, the segmentation was unable to pinpoint the group that the customer’s knowledge had correctly determined to be the top buyers of HVAC systems, such as those who buy older homes in neighborhoods that are wealthy.

Segmentation must be dynamic: It is not a single, comprehensive picture of the customer that “can guide all subsequent decision-making in marketing.” Segments should be a part of an ongoing strategy to tackle urgent business issues as they pop up. Not only do the needs of consumers’ behaviours, attitudes, and needs change rapidly, but they’re continually being modified due to external factors such as changing markets, emerging trends, and the latest technology. The best segments focus on just a couple of aspects and are then “redrawn after they are no longer relevant.”

Avoiding the Common Mistakes in Market Segmentation

An often cited figure from a 2006 study conducted by Bain & Company is that 81% of CEOs believed that segmentation of customers “an essential tool for increasing profits.” Another less often mentioned statistic from that survey is much more intriguing: less than 25% of the CEOs believe that their businesses “used segmentation in a way that was effective.”

The Harvard Business Review (HBR) article on the survey suggested that of the time, companies employ market research companies to conduct expensive analysis of segmentation that pinpoints white-space segments, but the customers they target turn out to be nothing more than a myth. If companies fail to gain value from a large investment in market segmentation, the authors suggest taking two steps before conducting the research: “finding the sweet spot” (to keep from overly ambitious targeting) as well as “rigorous examination of the self” (to keep from chasing potential customers that the company does not have the capacity to meet).

Industries that benefit the most from Market Segmentation

Retailing, consumer goods, media, and e-commerce are among the top sectors to benefit from market segmentation; however, all industries benefit from the information about customers that this analysis offers. For example, Grand View Research, a U.S. market research company, provides both syndicated and customized market segmentation reports on every industry: pharma/biotech; financial services; telecommunications; computer software/hardware; materials/chemicals; manufacturing/construction; transportation/shipping; energy/resources; and agriculture.

In addition to the industry players, market segmentation research is carried out on behalf of public agencies as well as educational institutions and law firms, as well as marketing and advertising companies. For instance, Grand View Research reported its findings from a study of segmentation in the consumer experiences (CX) managing market, which is predicted to reach $38.98 billion by 2030. It will have an average annual rise (CAGR) in the range of 18.1% between 2022 and 2030 across their mobile touchpoints cloud-based, final-use and BFSI (banking financial services, banking, as well as insurance) segments.

Real-World Success Stories in the Market Segmentation

The HBR article about the Bain study offered two examples of businesses that have mastered market segmentation. Based on “hard facts” as well as “flesh-and-blood” customer behavior, these companies tapped data from both A-list customers and self-assessments that are not sassy to draw new segments of customers and create new products that are aligned with organizational capacities.

American Express: Targeting the Sweet Spot in Market Segmentation

The initial step before implementing the insights from your research into customer segmentation is to find an important subset of customers who already exist, loyal, existing customers who “really, really love you.” This group (of course) isn’t your goal–you already have these customers. Instead, the traits of your most satisfied customers are used to determine an overlap in the new segments of customers that the research you conducted generated.

This overlap — which the Bain study referred to as “the design target”– will provide your perfect spot, it’s the “bull’s-eye” of potential customers who were not just discovered by the latest research, but also are similar to your most satisfied customers. Marketing strategies that target this specific segment — sometimes a very small segment–will be extremely profitable and efficient.

American Express (AmEx) warded against intense competition in the 1990s through expanding the product line that was based on the correct type of analysis on segmentation. They focused on their sweet spot: potential customers that shared a lot of the traits of their most loyal customers, which is a lucrative segment of customers who are high-spending. AmEx also used the new analysis to determine more options to offer its loyal customers.

For instance, AmEx created credit cards connected to rewards programs that allowed business leaders to accumulate frequent flyer miles as well as hotel points. While this segment was thin, it proved to be extremely profitable in the long haul, partly because marketing expenses were minimal. All AmEx needed to do to get into the lucrative executive market was to provide improvements to their existing customers and let word-of-mouth marketing attract new customers.

Utilizing Self-Assessment to Improve Market Segmentation Success: Global Investment Bank Example

The Bain study found that identifying the”sweet spot” of segmentation of customers is “only part of the equation for growth.” The second essential step for any company that plans to take action on segmentation of the market is to conduct the “unflinching assessment” of its internal capabilities, both strong and weak points.

Product developers and marketers who conduct this type of self-assessment rigorously can assess potential customer segments based on their existing strengths and weaknesses. They can avoid the costly error of seeking out segments of customers that the business isn’t set to serve and won’t be able to convert into satisfied customers.

To illustrate an effective self-assessment process, the Bain study utilized the global investment bank’s resolution of an unaccountable disparity in which some of the bank’s highest-profit customers were extremely happy while others were clearly dissatisfied. The senior management was unsure of which segments merited more investment; they took the smart choice to study the most contented segment of profitable clients, to determine the things that they were doing well, and the unhappy customers to discover how the company was going wrong.

What the investment bank found was incredibly valuable: Many of their happiest and profitable clients were complex, large firms with complicated financial needs that operate in several countries, and often with highly-regulated sectors. These customers were impressed with the bank’s expertise in regulatory and technical matters and also rated the bankers’ ability to answer hard questions as a positive. The bank also discovered that a lot of tunhappyclients were less complicated and had fewer financial needs. The same knowledge that complex firms considered to be a solid good thing was perceived as arrogance and contempt by those who were unhappy with a less complex structure.

The self-assessment was enlightening and allowed the bank to focus on the sweet spot for its resources, which is the segment of current and potential clients who had the highest likelihood of having large-scale advisory needs.

What are the 5 types of Segmentation in the Market?

The five kinds of market segmentation include geographical, demographic, firmographic, psychological, behavioral, and psychographic.

What is Psychographic Segmentation?

Psychographic segmentation categorizes customers into subgroups according to personal characteristics, preferences, beliefs, and the way they live, which can include factors such as interests, goals for life values, priorities, and goals.

What is the difference between Psychographic and Behavioral Segmentation?

Behavioral segmentation categorizes customers based on the amount they spend and how customers interact with the brand. Psychographic segmentation is based upon the persona and their interests.

The Bottom Line

Market segmentation involves the division of the market into distinct groups that have common features and needs. To ensure that it is done correctly, businesses must conduct thorough market research, examine the behavior of consumers, and pinpoint segments that have a lot of potential.

It’s crucial to continually evaluate and adjust strategies for segmentation to keep up with changing market conditions and changing consumer behavior.

Companies that understand real-world consumer buying habits gain the useful insight they require. Segmentation results and a business’s operational capabilities need to be in sync to ensure efficient implementation.

Marketing strategies must be tailored by companies to each market segment, taking into account their individual needs and preferences to improve customer engagement and higher profitability.