Segmentation

Introduction

Identifying the needs of different customer groups and targeting them with tailored offerings is a hallmark of successful businesses. This practice is called Segmentation. It helps organizations to divide large, diverse markets into smaller target segments more likely to be receptive to a product or message. Subsequently, they can hone in on one target audience and customize their marketing to be meaningful to that audience.

Customers are categorized based on shared needs, demographics, priorities, common interests, and other psychographic or behavioural criteria. It is a helpful way to discover and understand the needs and desires of potential customers.

There are various types of segmentation, each of which serves a specific purpose in targeting particular consumers.

Demographic Segmentation

Demographic segmentation is a popular method of segmentation. It involves understanding the makeup of a business's market and dividing it into distinct groups based on factors like age, ethnicity, socioeconomic background, religion and marital status. Other demographic segmentation factors are:

• Employment status and work experience
• Family size and composition
• Income level
• Sex and sexual orientation
• Education level
• Residential environment (urban, rural, suburban)

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Psychographic Segmentation

Psychographic segmentation groups people into different segments based on their psychological profiles. When dividing people into groups, this approach looks at factors such as personality, values, lifestyle, and interests. The goal is to create homogeneous segments in terms of their psychological makeup so that marketing messages can be tailored to appeal to each group.

Psychographic segmentation can be used to target specific audiences with tailored marketing campaigns. For example, a company might use psychographic segmentation to target young adults with an advertising campaign that appeals to their sense of adventure and desire for new experiences.

This type of segmentation can effectively reach consumers who are difficult to reach with other methods.

Behavioural Segmentation

Behavioural segmentation groups customers and potential customers into segments based on their behaviour and actions. Such behaviours include purchasing habits, usage patterns, and responses to marketing efforts. It is based on the idea that customer behaviour is a better predictor of future behaviour than other factors such as demographics or psychographics. By understanding these behaviours, businesses can create more targeted and effective marketing strategies.

Streaming services often rely on behavioural segmentation through algorithms to track user behaviour on their platforms. By monitoring actions such as watching, rating, or skipping content, the service can gather data on individual user preferences and use this information to personalize the content they display. This allows the streaming service to tailor recommendations based on individual user behaviour.

This is a classic example of behavioural segmentation based on customers' content consumption habits.  

Geographic Segmentation

As the name implies, Geographic segmentation groups people based on their geographic location, such as their country, region, city, or neighbourhood. Geographic segmentation recognizes that customers in different areas may have unique needs, preferences, and behaviours. There are a few considerations businesses need to account for when using geographic segmentation as a marketing strategy.

1. The impact of regional differences in customs, culture, and language. For example, what works in North America may not work in Asia. To be successful, businesses need to tailor their marketing mix to the specific region they are targeting.
2. The climate's impact on demand. For example, the need for cold weather gear will be higher in Canada than in tropical countries.
3. The stability of the political and economic climate when choosing a target market. Countries experiencing political or economic turmoil may not be the best markets to target.
4. Consider the cost of entry into a given market. For example, it may be more expensive to enter a market like the United Kingdom than New Zealand.

Firmographic Segmentation

Firmographic segmentation is a business-to-business grouping method that categorizes customers based on shared company or organization attributes. Organizations use it to tailor their marketing efforts and messaging to specific groups of businesses with similar needs, goals, and challenges. Some common firmographic characteristics used for segmentation include industry, company size, annual revenue, location, environmental orientation, and business model.

For example, a technology company that sells enterprise software solutions may want to target small businesses with annual revenues between $1 million and $10 million in the north-eastern United States.

To do this, the company could use firmographic data to first identify businesses in this specific geographic region with the desired revenue range. Then create marketing campaigns and messaging tailored to the needs and challenges of these businesses. The company could also use such data to identify potential partners and competitors in this market and tailor its sales and marketing efforts accordingly.

Benefits of Segmentation

Segmentation helps businesses market and sell more effectively. Some of the benefits of segmentation are:

1. Increased revenue: Businesses can boost sales by tailoring their content and marketing efforts toward specific customer groups. They will be able to sell more product or service because it is relevant to the needs of their specific audience.
2. Improved ROI: Segmentation helps businesses identify which channels will work best to reach each customer group. This information helps to optimize spending and achieve the greatest return on investment possible.
3. Effective marketing communications: Businesses can dump the one-size-fits-all communications and refine their messaging for a specific group. Thereby establishing a more meaningful connection with their audience.
4. Higher customer retention: Meaningful connections also mean customers feel understood and well-served. This feeling leads to increased loyalty, lower customer churn rates, and a higher Customer Lifetime Value.
5. Enhanced consumer engagement: When customers feel like they're getting value from, and are valued by, a business, they are more likely to tell others about it.
6. Identification of niche opportunities: Segmentation helps businesses identify and gain new insights into underserved markets and find new ways of satisfying existing customer base needs. This leads to brand and business expansion of their business and brand.

Segmenting Effectively

• Identify the target market: Determine who the product or service is aimed at and what their needs and preferences are.

• Select segmentation variables: Choose the criteria that will be used to divide the target market into distinct groups, such as demographics, geography, psychographics, or behaviour.

• Collect data: Use market research methods to gather relevant data on the different segments.

• Analyze the data: Use statistical tools and techniques to analyze the data and identify the key characteristics and differences between the segments.

• Define the segments: Clearly define and name each segment based on the characteristics and differences identified in the analysis. Well-defined segments should be Measurable, Accessible, Substantial, and Actionable.

• Evaluate the segments: Assess each segment's potential value and attractiveness based on market size, competition, and trends.

• Select the segments to target: Choose the segments that offer the greatest potential value and are most likely to respond positively to the product or service.

• Develop a marketing strategy: Create a tailored marketing plan for each selected segment, including messages, channels, and tactics that resonate with that segment.

• Monitor and evaluate: Regularly monitor and evaluate the effectiveness of the segmentation strategy and make adjustments as needed.

Choosing the right segment

Knowing the right customer segment to target is about understanding the type of customers the business can serve based on its existing capabilities. A business with a generic product cannot expect to target a luxury-loving segment successfully. Here are three steps to follow when picking a customer segment:  

1. Understand the business's capabilities: The first step in targeting the right customer segment is understanding the business's capabilities. What type of product or service does the business produce? What type of customer will find it appealing? Are employees trained enough to deliver excellent customer service? What else is the business capable of producing, and at what quality? Knowing the answers to these questions will help determine which customer segments are a good fit for the business.  
2. Research the market: The second step is to research the market. Where are the customer segments that currently fit the business gathered? What is the cost of reaching them? Can the company afford it? This information will help you narrow down your choice of location.  
3. Test the market: It is time to hit the ground running and test your assumptions. Which segment visits the business most? Which customer thinks the product and price is perfect? What is their feedback about the employee's service? Testing the market will help fine-tune the business's assumptions and determine which customer segment best fits the business in its current state.

Case Study

Taste of the City is a food truck business that offers various international street food options in the urban part of town. Since its inception, the company has always catered to diverse customers.

However, the owner soon realized they needed to develop marketing goals to increase customer loyalty and repeat business. Many customers were trying their food for the first time and not returning, leading to a lack of consistent revenue. They also wanted to increase their average order value and overall profitability.  

And so, the food truck implemented a segmentation strategy to target specific customer segments and effectively engage with them. They started by dividing their potential customers into segments based on demographics, lifestyle, and behaviour.  

One of the segments they decided to target is young urban professionals, who often look for quick and convenient meal options during their busy workdays. This segment will likely have a higher disposable income and be willing to spend more on premium food options.  

The second segment the food truck targeted is culinary enthusiasts, who are likely to be interested in trying new and unique food options. This segment is more engaged with social media and word-of-mouth marketing, providing potential for positive brand awareness and referral business.  

The food truck implemented targeted marketing campaigns on social media and through local food events and festivals to target these segments. They also launched a loyalty rewards program for regular customers to encourage repeat business.  

The strategy increased customer loyalty, repeat business, and a higher average order value from the targeted segments. They also experienced increased brand awareness and referral business through social media and word-of-mouth marketing.