What Is Market Segmentation? (A Comprehensive Guide)

By Indeed Editorial Team

Published 30 April 2022

Market segmentation is the process of dividing customers into groups based on market classifications, such as demographics and consumer behaviour. By defining different groups of customers, a business can focus its advertisements on a specific group of people. Understanding how to segment a market can help you plan effective advertisement strategies. In this article, we discuss what marketing segmentation is, detail the different segments, share a guide on how to segment a market and list the business benefits.

What is market segmentation?

Market segmentation is an advertisement strategy that allows a business to classify customers into different groups. A business may segment its market by using several segmentation methods, such as demographics, firmographics, psychographics and consumer behaviour. The segmentation of a market helps a business create advertisement strategies that target a specific group of customers. When a business segments its market, it can also gain an understanding of its customers' desires and interests. This allows the business to create better products and improve its services.

Related: 10 Careers in Marketing (With Salaries)

What are the methods of segmentation?

There are typically four segmentation methods that a business may choose to implement. The type of method they choose can depend on the goals and industry of the business. For example, if a clothing business wants to sell children's apparel, they would use demographic segmentation to identify the average age of their market. Below, you can find details on the four methods of segmenting a market, along with an example of each method:

Demographic

Demographic segmentation is one of the primary methods of segmentation across most industries. Demographic segmentation refers to the grouping of customers based on their age, gender, occupation, education, number of family members and geographical locations. The demographics of customers can also allow a business to predict the behavioural and psychological traits of those customers. Demographic segmentation can be popular because it covers a wide range of marketing aspects, such as how customers use products and how much they would spend on a product.

Example: A business that sells clothing is trying to expand its products to the international market. It currently sells clothing in Canada and executives hope to enter the Australian market. The business uses demographic segmentation to identify the products it can sell to Australian customers. The marketing team realises the company's products are currently for winter climates and recommends the business creates a new range of clothing for warm climates. From the demographic segmentation, the team also identifies the typical age and occupation of the potential customers. From this information, they can plan effective advertisement strategies that target the specific demographic.

Firmographic

Firmographics and demographics are similar methods of segmentation, except firmographics focus on the aspects of an organisation, rather than an individual. Businesses that supply goods or services to other businesses often use firmographic segmentation because their customers are organisations and not individuals. Firmographic segmentation includes the size of a business, its industry, location and number of employees. This method of segmentation can help a business determine appropriate advertisement strategies for organisations of varying sizes and industries.

Example: A business that supplies construction materials to building companies wants to expand its range of products to include construction machinery and tools. It conducts a firmographic segmentation analysis to determine the businesses that require construction machinery. The business identifies several civil engineering and commercial construction companies that it might supply. From the segmentation, the business also determines the average number of employees for those types of building companies. From this information, the business can predict how many units of machinery a construction company might require. This can allow the business to stock an appropriate amount of machinery and tools.

Behavioural

Behavioural segmentation categorises customers based on their actions and decision-making processes. This type of segmentation is an excellent way to determine how customers might respond to a change in product or price. Behavioural segmentation can identify the purchasing patterns, level of consumption, types of lifestyle and product usage of customers. Segmenting the market by behavioural aspects can allow a business to release a new product effectively. This is because the business understands what the consumer wants and how much they would spend.

Example: A technology business that produces mobile phones is trying to determine an appropriate release date for their new products. The business conducts a behavioural segmentation of its market and discovers that most customers would purchase a new mobile phone every year. From the segmentation, it also identifies the typical customers who are likely to purchase a new phone. The business discovers that people aged 19-29 and people who earn over $75,000 per year are most likely to purchase a new phone. The business plans a yearly release schedule and creates advertisements that focus on that demographic.

Related: What Is a Marketing Specialist? (With Duties and Salary)

Psychographic

Businesses may use psychographic segmentation to determine the interests, values and goals of customers. The aim of psychographic segmentation is to allow a business to align its product with its most likely customers. Businesses involved in sports, fitness, music, activism and travel often utilise psychographic segmentation when planning advertisement strategies.

Example: A gym plans to create advertisements to boost its membership. The gym conducts a psychographic segmentation of the market to determine the typical values of its customers. The gym discovers its customers value healthy living and an active lifestyle. From the psychographic segmentation, the gym plans advertisements that relate the business to these values. Potential customers who view the advertisement feel compelled to join the gym because it embodies their core values.

How do you segment a market?

Below, you can find some common steps to take when segmenting a market:

1. Review the current customers

The first step you can consider is to review information about your current customers. This can provide you with a good indication of their typical spending patterns and behaviour. By researching your customers, you can determine which type of segmentation is best for the business. Understanding how your customers respond to business activities can help you predict the behaviour of potential customers.

Related: How to Become a Market Researcher

2. Determine your ideal customer

Before you segment the market, it can be a good idea to determine which type of customer is ideal for the business. This often includes their spending patterns and spending capacity. By establishing what the perfect customer is, you can understand the type of segmentation you require. For example, if a business wants to gain customers who make weekly purchases, it can then segment the market to determine which type of customer is most likely to make weekly purchases.

3. Identify an appropriate segmentation method

Once you understand your current customers and have established the ideal behaviour of potential customers, you can choose which segmentation method to implement. The type of segmentation you choose can depend on the business goals, products and values. For example, a global retail store may conduct demographic segmentation, while a dating application business might use psychographic segmentation. You can also use multiple methods of segmentation to develop your marketing strategy.

Related: What Is Brand Marketing? (And How to Do It)

4. Test your marketing strategy

Once you develop a marketing strategy from the segmentation, it may be a good idea to check the performance of the strategy. If the marketing strategy is underperforming, you can review your segmentation method to ensure it's targeting the right market. There are many tools that can help you track the performance of your advertisements. Conversion tracking can be a popular method to understand what customers are doing after they interact with your advertisements. This can give you an idea of the effectiveness of your marketing strategy.

Related: 8 Marketing Communications Careers (Plus Types of Marketing Communications)

Benefits of segment marketing

Below, you can find some of the typical business benefits of implementing a segment marketing strategy:

  • Targets the customers who matter: Market segmenting can allow you to focus your advertisements on the customers most likely to make a purchase. This can allow you to create marketing strategies that utilise resources efficiently.

  • Retains current customers: While the segmentation of a market is usually for gaining new customers, it can also help the business keep its current ones. By segmenting the market, you can identify the values and cater to the needs of your current customers.

  • Improves products and identifies new ones: Segmentations that outline the needs and desires of customers can help you identify opportunities in the market for new products. By discovering what customers need, you can also evaluate your current products to see if they satisfy your customers.

  • Improves customer service: By implementing segment marketing, you can improve the customer service of the business. Segmentation can provide you and the business with a better understanding of what customers want and the type of treatment they prefer.

  • Increases sales and revenue: If you implement an effective marketing strategy, you may increase the sales and revenue of the business. This is because effective segmentation can improve the marketing strategy, which can lead to more customers.