What is market segmentation? 5 steps to effective market segmentation

What is market segmentation? The market is divided into many market segments including different customer groups. Performing accurate market segmentation helps businesses identify potential customers. From there, it is easy to propose appropriate business directions and goals. 

So, what is market segmentation? What are the steps in market segmentation? Let’s find out with CleverAds in the following article.

1. What is market segmentation?

Market segmentation is the practice of dividing a target market into accessible groups. Market segmentation creates subsets of the market based on demographics, needs, priorities, common interests, and other psychological or behavioral criteria used to better understand an audience target. From there, deploying more effective product, sales, and marketing strategies. 

Read more: What is Marketing? Everything marketers need to Know about Marketing

For example, based on market segmentation, implement product development cycle promotion, and create products that provide different segments such as men vs women, high income vs. low input.

2. Importance of market segmentation

One factor that helps businesses to reach high-level efficiency is building a good marketing strategy. When starting a marketing strategy, identifying market segments is fundamental and must do first. Here is the importance of market segmentation:

2.1 Clearly define target customers

From market segmentation, businesses identify different customer groups and find out the target customers. From there, businesses can orient appropriate marketing methods to promote the services or products that the company provides to potential customers effectively and cost-effectively.

Read more: Everything about Marketing Objectives you must know

2.2 Create value

Based on market segmentation results, businesses will get an overview and insight into target customers. By creating valuable products or services, meeting the needs of customers, and easily being loved and selected by consumers, sales revenue also increases.

2.3 Create a competitive advantage

Because the market is segmented into small segments, businesses can focus their resources on investing and developing products and business models. Thereby increasing the competitive advantage of the business compared to other units. This is something that every business wants to have.

2.4 Cost savings

Performing effective market segmentation will help businesses get a better return on investment. At the same time, the good implementation of segmentation also helps to avoid the waste of reaching the wrong target audience. 

2.5 Increase customer retention

Through the process of market segmentation, approaching customer groups helps businesses better understand their customers. The available data will help you retain customers and make them buy the products or services of your business.

2.6 Stronger marketing messages

By segmenting the market and identifying the right target customer group, businesses will not encounter a general and ambiguous situation. Marketing will target specific audiences with unique characteristics, wants, and needs.

Read more: Understanding marketing strategy through 5 most successful examples

What is marketing strategy? Notes when building a Marketing strategy

3. Market segmentation criteria

Market segmentation can follow the following criteria:

3.1 Demographic Segmentation

Demographics are a simple and commonly used form of segmentation when segmenting a market. Since the products or services consumers buy, how they use them, and their ability to pay is often based on demographic factors. With this criterion, market segments are sorted by factors such as age. employment, gender, occupation, education, income, marital status, family size, etc.

Example: A dairy business is performing targeted customer segmentation. They found that elderly customers tend to prefer to use calcium-fortified milk, while young children tend to use milk to increase resistance and increase immunity to the digestive system.

3.2 Geographic area segmentation

Geographic market segmentation creates different target customer groups based on geographical boundaries. Potential customers have different needs, interests, and concerns according to their geographic region. Therefore, by knowing the climate and geographical regions of the customer groups, businesses can determine the place to sell, the form of advertising, and the appropriate marketing campaign.

For example:

Enterprises trading in fruit and vegetable products decided to expand the store size throughout the provinces and cities in Vietnam. In the process of customer segmentation by geographical area, they found that customers in urban areas have more need to buy vegetables and fruits than customers in rural areas.”

3.3 Psychological segment

Psychographic segmentation looks at the psychological aspects of consumer behavior by segmenting the market according to consumers’ lifestyles, personality traits, values, views, and preferences. When performing psychological market segmentation, businesses often choose to use research methods such as surveys and interviews.

For example:

In the business of gym and fitness services, these business units use psychographic segmentation when arranging their customers into groups of people with healthy, scientific lifestyles.

3.4 Market segmentation by consumer behavior

Market segmentation by consumer behavior is a division based on decisions such as purchase, consumption, lifestyle, and usage. Segmenting the market based on buying behavior allows marketers to have a more targeted approach. Because you can focus on what you know about the consumer, increasing the likelihood of a purchase.

For example:

Younger buyers may be more inclined to buy bottled shower gel, while older consumers may be more inclined toward soaps.

4. The 5-step process of market segmentation

Step 1: Identify the market

The first step in market segmentation is to identify the market you are interested in. Therefore, the different characteristics of the target market must be clearly outlined. It is important that this market is not defined too broadly but instead focuses on specific characteristics.

• Market identification often answers questions such as:
• Is there a market demand for your products and services?
• Big or small market?
• Where is your brand in the current market?

Step 2: Market Segmentation

Once the target market has been clearly defined, it is possible to start segmenting this market into different groups based on common characteristics. Depending on the type of product you want to introduce into the market, a segment type can be selected from among 4 segmentation criteria (demographic, geographic, psychographic, behavioral). 

Step 3: Understand the market

This step is done by creating and deploying a preliminary research survey, focus group, poll, etc. Specific questions related to selected segments and using a combination of qualitative methods qualitative (with ready-made answers, ticked) or qualitative (written answers, open-ended) for respondents to respond.

Step 4: Create customer segments

The survey results, preliminary research, and analysis highlight the most suitable customer segments for the brand. Once there, create a segment profile that accurately describes the segments. This profile should include detailed descriptions of demographic distribution, geographic reach, psychographic description, psychographic description, segment size, segment growth, consumer needs consumption, usage level, and details related to consumer behavior.

Step 5: Test your marketing strategy

This is the final step in market segmentation. At this step, test and evaluate the attractiveness of each market segment before selecting the most appropriate market segment to target. Then use conversion tracking to see how it works. If it doesn’t work, review the segments or research methods used. 

Properly evaluating the segments will determine the correct selection of the segments that you want to target. This is also the most important step in the entire process, as effective segmentation will shape all marketing strategies and product positioning later.

5. Some common mistakes when segmenting the market

5.1 The market segment is too small

It is necessary to determine the effect that these segments bring when implementing market segmentation. Small segments that can be difficult to quantify or inaccurate will be ineffective, distracting, and a waste of business resources.

5.2 Excessive focus on the segment

When segmenting, a large segment can be identified. However, that large segment is only effective when there is purchasing power and want or need for the product. On the contrary, if the above demand is not met, it will not bring a return on investment for the business.

5.3 Inflexible

Customer needs and the business landscape are constantly changing. Therefore, not having a plan to segment the market according to the changing stages will make marketing campaigns prone to failure. Therefore, always prepare a scenario to cope with future changes.

6. Conclusion

Market segmentation is an important stage in the marketing process for any size business (small, medium, or large). More than half, of businesses, need to follow and perform detailed market segmentation steps. Thus, new market segmentation brings accuracy, new marketing process achieves high efficiency.