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Identifying market segments and types of market segments

In this post, we will highlight the importance of market segments for businesses in terms of marketing and sales, define market segments and its types, and how businesses can identify the relevant market segments to improve their marketing and achieve higher sales.

Businesses need to understand their target audience and its needs and preferences to measure and improve the effectiveness of their marketing efforts and to improve sales. Companies need to define these customer groups to target them effectively and boost sales by improving the reach and effectiveness of their marketing efforts and the appeal of their products for the various segments. Market segments are mostly at the core of a company’s marketing strategy. Identifying the right market segments for a business or product helps companies focus their marketing efforts at the right segments and improve the effectiveness of their marketing campaigns. Many times a business can target several segments or serve the needs of many different segments. Identifying the various segments right at the outset helps businesses improve their marketing ROI, expand their customer base and increase revenue.

However, before discussing how to identify the right market segments for your business, let’s know what market segments are and why they are important in terms of marketing and business profitability.

What is a market segment?

A market segment is a small subset or a segment of a market. However, you do not divide a market into segments in just any manner. A market segment is a subset of the overall market based on specific factors like needs, interests, demographics, behavior, psychography and other factors. Segmenting your market into distinguishable segments helps marketers better understand their target audience and manage their marketing and sales strategy accordingly. It also makes it easier to serve customer needs efficiently. Needs, demands and preferences can vary from one segment to another. Similarly, the method of targeting and promotion can also vary by group. For example, a business may serve various market segments including individual customers, families, businesses and NGOs. Segmenting helps understand the distinct needs and preferences of each group.

Market segmentation offers some critical advantage in terms of marketing and sales as well. It helps businesses develop more effective marketing campaigns and target each segment more effectively. For example, a fashion brand that sells to teenagers, professionals, women, and kids may design promotional campaigns for each individual segment.  Customizing the advertising and promotions according to the preferences of each group can help drive sales and business growth. A business can segment its consumers on the basis of profession which may make it easier for the business to serve the distinct needs of each profession. Effective segmentation will help businesses identify the common needs of each segment and help identify the right channels and methods for marketing and sales. While the same product may appeal to several segments, the reaction of individual segments to the marketing campaigns may vary.

Four types of market segment:

There are mainly four types of market segments. However, understanding the types of market segments makes it easier for marketers to identify the relevant segments and evaluate the various segments relevant to your industry sector. Marketers rely on a mix of these segmentation strategies to increase the impact of their marketing strategy. Here are the fur primary types of market segments:

Demographic: Demographic segmentation segments markets on the basis of demographic factors like age, sex, income, race and similar other variables. In the B2B situations, the variables may be different like job function, industry sector, company size etc.

Psychographic: The focus of psychographic segmentation is different from demographic segmentation. Its focus is on variables like personality, values, motivations, opinion etc. However, the details obtained from psychographic segmentation helps businesses develop their brand positioning and marketing communication strategy. Marketers use the psychographic data in conjunction with demographic to develop their positioning strategy.

Behavioral: Behavioral segmentation segments markets on the basis of consumer behavior like purchasing habits, consumption patterns and interactions. Marketers use behavioral data to refine their marketing strategy since it provides richer insights into how a user interacts with a brand or product.

Geographic: Geographic segmentation segments markets on the basis of geographic location. Businesses segment customers by individual markets or countries or sometimes more broadly in terms of geographic location like the Americas, Middle east, Europe and Asia Pacific. At a finer level, geographic segmentation may use categories such as cities, states etc.

Why are market segments critical to business and marketing?

One can go to the market without segmentation but then it will hurt the product’s ability to compete against its rivals in the market. Apart from having the right product that addresses the needs of a particular group, it is important to target the right group that will purchase your product. Identifying the relevant market segments helps marketers at differentiating their products and services from the others. In this process, one can also find new segments where competition is low and it might be easier to build a customer base. Identifying the needs of each customer segment will help businesses serve them better and build higher customer loyalty. Let’s take the example of athletes. How their needs differ in terms of clothing and footwear from the average consumer. A brand that targets the athletes will focus on developing products to serve their needs better. Moreover, knowing the relevant market segments will also help businesses determine the product attributes that will yield higher sales. The information generated from market segmentation is critical for designing market campaigns. However, it is also crucial in many more areas including pricing, business location and sales channels.

Identifying market segments:

When marketers start out, an important question before them is how to determine the right market segments that are relevant to their business. Once they have identified the relevant segments, they can use the information for marketing and sales. However, the first step in this direction is to analyze your overall market.

Define your overall market:

The process of identifying the right market segments will begin from determining the size and scope of the overall market for your products and services. A market may be quite broad unless the products you offer are targeted at a small and very distinct segment. For example, if you have a product for women, your overall market may include women above 25 in the urban and suburban areas which have access to your stores or can order it online. Your market will only include the people that might need or want your product. So, if you have a product for female customers, you know your overall market will be limited to women only in a particular area where you are going to make it available.

Setting objectives for the segmentation process

A critical question business marketers need to ask at the outset of the segmentation process is that what they want to achieve from it. Based on these goals and objectives, you will be able to evaluate the overall effectiveness of your market segmentation process. These objectives can be related to conversion, sales, customer engagement or other similar factors. Setting these objectives in the beginning helps keep the segmentation process on track and ensure that it is working to help the business achieve the desired objectives.

Select important variables

The marketers must check out the entire product mix of the company and then determine the variables that are most important in terms of segmentation. Take the example of an automobile brand that sells cars from entry level to luxury vehicles. It may consider income as the most important variable. In another case, a business that makes and sells products for athletes like Nike will consider preferred sports activity like running, soccer, basketball, etc as the important variable.  In another case, a financial services provider like a bank may consider age and income level as important variables. However, one must have more than one and at least three variables to define market segments conveniently.

Assign variables to each segment:

Assign the variables selected to the various market segments of the company.  For example, one segment may represent married couples without children while the other may represent married couples with children younger than ten. The main target segment of the company in both cases are the married couples. The age of the child provides additional information regarding the market segment. In case, the business needs, it can target the young unmarried adults in another campaign. While in some cases, variables may overlap, as in the first case, where the primary target are the married couples, some times they may not. The critical thing is that each segment is a distinct one with a distinct identity of itself.

Determine the viability of each segment in terms of business

Each of the segments you selected must be real, distinct, large enough, and accessible. You will need to evaluate each of these segments on some criteria to determine they are viable in terms of business. If they are not, you may need to revaluate your segmentation strategy.

  • You must be able to identify people with given characteristics with the help of market research data.
  • The segment must be large enough to be considered.
  • The segment can be accessed using available marketing techniques and channels.
  • If the segment responds better to a targeted rather than generic marketing campaign.
  • If the needs of each segment are distinct from the others.

Once you have evaluated your segments based on these criteria, you will have the answer to your question which is if these market segments are viable or not. If the market segments do not emerge as viable or do not fit, you will need to take a second look at your segmentation strategy.

Create a detailed profile of each segment:

Marketers must create detailed and clear profiles for each of the market segments to effectively target the segments. There are various types of details to include while developing a segment profile. The size of a segment and its share of the total market are important factors in this regard. Product usage levels and consumer needs may differ by segment and these factors are also crucial when developing a segment profile. Some other factors that you may find useful while developing a segment profile include price sensitivity, brand loyalty, product involvement, and preferred media. Apart from these, you must also evaluate your primary competitors in each segment when developing a segment profile. Once you have the detailed profile of each segment, you will be able to better identify each one’s needs, preferences, consumption patterns, and purchasing ability.