Market segmentation

What are the different types of market segmentation, why are they important, and what benefits do they offer?

In today’s hyper-segmented, highly competitive marketplace, segmentation is a no-brainer. Not only does market segmentation provide a higher-value, lower-cost way to find and reach customers, but it also gives businesses data that’s essential for branding and product development.

But there’s a big difference in knowing that you need a market segmentation strategy, and getting it right. From the types of market segmentation to benefits, examples and use cases, here’s a crash course to a concept that no business can afford to ignore.

What is market segmentation?

In its most basic terms, market segmentation means dividing a customer base into different groups based on shared traits. These groups can be somewhat narrow, like fans of a specific basketball team, or they can be extremely broad — such as everyone living in the United States.

Different types of market segmentation can be used to group people in different ways. For instance, geographic segmentation groups everyone who live in a particular region, while behavioral segmentation creates groups based on where people eat, drink, travel or shop.

Valuable as all of this consumer data is on its own, market segmentation is best used when different types of segmentation are in coordination with one another. Doing so helps businesses better define the traits shared by existing customers, which in turn helps them both speak more effectively to those customers. It also provides the perspective needed to expand that group into new segments.

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The benefits of market segmentation

What are the benefits of marketing segmentation? In the face of rapidly diverging consumer tastes, niches and channels, effectively targeting the right people in the right place at the right time isn’t just sound strategy but increasingly necessary for long-term viability and growth.

Businesses that can clearly define their customers can better understand them and communicate with them. With today’s emphasis on the customer experience, this ability to use targeted messaging to address specific pain points can earn high marks among buyers.

What’s more, meeting buyers in their preferred channels facilitates easy transactions, but makes for happier, more engaged customers. With even more focus, these people can be turned into repeat customers and even actual brand ambassadors — the kind who can provide free marketing in the form of word-of-mouth referrals and social media shoutouts.

Given this lineup of benefits, market segmentation can serve as a powerful competitive advantage for businesses that take a proactive approach. And companies that fail to do so could be leaving money on the table to their more aggressive competitors.

Which types of market segmentation are there?

There are a number of different types of market segmentation. Some of them create groups of people using basic, widely available information like birth date or place of residence. For businesses able to conduct more in-depth research — or who are willing to purchase it — more specific types of segmentation can be created using proprietary information on habits, preferences, beliefs, interests, and known and predicted behavior, among many other factors.

The primary  types of market segmentation are:

  • Geographic market segmentation
  • Demographic market segmentation
  • Behavioral market segmentation
  • Psychographic market segmentation
  • Firmographic or B2B market segmentation

Let’s take a closer look at each, as well as a quick look at secondary types like generational, lifestage and seasonal segmentation.

Geographic market segmentation

Geographic market segmentation groups customers and prospects based on where they’re physically located. This isn’t just where they live, but also the place they work, were born, or where their family comes from — all of which can strongly influence their purchasing decisions.

For instance, different types of food, beverage, cars and even architecture can be tied to certain cities and states. The climate of a given geographical region will often dictate the purchasing preferences (or limitations) of its residents regarding everything from clothing to insurance to gardening supplies. And those who live in a metropolitan area may simply be easier to reach than those in more isolated regions.

Offering powerful baseline information, geographic segmentation is a cornerstone for most market segmentation strategies. It’s relatively easy to collect, with much of the applicable data available by public record. Defining a competitor’s sales performance within a certain state can be easier than among, say, a specific age group.

At the same time, the effectiveness of geographic segmentation in recent years has been diminished by the prevalence of online shopping. Because it can be difficult to get actionable data from a strategy that relies only upon geographic segmentation, it’s often best used in combination with another type.

Demographic market segmentation

Demographic market segmentation groups people based on personal identifiers like age, gender, education and income. Some of the biggest driving forces behind purchasing decisions can be tied to these traits, making demographics an essential component of most segmentation strategies.
Like geographic data, demographic information is relatively easy to get. What isn’t available from government sources like the U.S. Bureau of Labor Statistics can generally be either purchased or acquired via surveys. Though this information may come at a price, it’s also much more likely to yield actionable insights
In addition to identifying potential customers, demographic segmentation can also give businesses an idea of the size of the market for new products or services, which can help drive overall business strategy. Like geographic segmentation, it’s best used in coordination with other segmentation strategies.

Behavioral market segmentation

Behavioral market segmentation is the grouping of customers and prospects by behavior, rather than by a physical attribute like age or geographic location. In theory, this behavior could be anything; in practice, it usually applies to patterns of interaction with a particular business, brand, product or website.
It makes sense to speak differently to people based on how they perceive a product. For instance, a frequent buyer should receive different messaging than someone who’s never used or heard of that product or service. And the ability to focus on known or likely customers rather than cold leads can save substantial time, effort and expense marketing and sales efforts.
However, actionable behavioral market segmentation can be difficult to achieve. Especially if the desired data is specific to a company, it must be newly researched, which can be expensive and time consuming. However, the resulting information can provide a depth of knowledge that more than justifies the expense — especially when combined with geographic or demographic segmentation.

Psychographic market segmentation

Psychographic market segmentation groups customers and prospects by personality and social identification. This includes everything from political affiliations, religious beliefs and club memberships, to personality types — for instance, introverts and extroverts, or those who closely watch their budgets versus those who prefer to spend more freely.

If some of these categories seem broad, consider the benefits of being able to define groups by criteria such as wine enthusiasts, frequent flyers or fans of Marvel or the NFL. The purchasing preferences of these groups can be predicted with a specificity far beyond what’s possible with just demographic or geographic segmentation.

Psychographic information isn’t as readily available as geographic and demographic data. Surveys can be a good source for this data, as can focus groups, market research panels, and digital analytics that track customer behavior — although businesses must be careful to adhere to applicable data privacy laws like the California Consumer Privacy Act (CCPA) and Europe’s General Data Protection Regulation (GDPR).

Firmographic segmentation (and B2B)

Firmographic market segmentation groups companies, as opposed to people. Useful for B2B strategy, this type of segmentation breaks down organizations by factors like revenue, number of employees, type of industry, and so on. Like demographic data for consumers, this data can be used to help businesses better understand and communicate with potential clients.
Firmographic data has the benefit of specificity — simply put, there are fewer businesses than customers, making for easier identification and outreach. Firmographics can also help businesses better understand their viability within certain parameters, helping them make important decisions about product development and whether or not to enter a specific market,
Firmographic data is also relatively easy to acquire; for instance, an organization’s industry can be determined by its North American Industry Classification System (NAICS) code. Ownership and legal status can be found online at government websites and in trade journals. When more specific information is needed, targeted surveys can be created.

Other types of market segmentation

There are other types of market segmentation that, while less prominent, can still be highly useful for businesses, particularly those with niche offerings. Providing more specific or esoteric data than the primary methods, these other types of market segmentation include:

  • Generational segmentation, which groups people by birth group like Boomers, Generation X and Millennials.
  • Lifestage market segmentation, which is based on a continuum of major life events like college, marriage and even end-of-life care.
  • Technographic segmentation, which groups people by technological familiarity and use — are they early adopters, or laggards or luddites?
  • Value segmentation, which groups people based on transactional worth — i.e., what they can afford or are likely to spend.
  • Seasonal segmentation, which doesn’t group people but times of the year, such as the holiday season, flu season or election season. This data can be particularly useful when combined with demographic or geographic information.

What type of companies use market segmentation?

Market segmentation is a valuable tool for any company seeking to better define its potential customers, or to gain vital information for business development, brand management and product improvement.
But how should companies approach market segmentation? Small businesses may want to focus on establishing fundamentals like ideal age or income of their most likely buyers. On the other hand, a larger business may choose to conduct independent behavioral research to better match upcoming product upgrades with the specific needs of its target market.
Similarly, local businesses that cater to a specific region or state may find more value in analyzing demographics and behavior, since the location of their customers isn’t in question. On the other hand, national and international companies can benefit from geographic research to see where their products and services have the most integration, and the most potential for.

Examples of market segmentation

For example, McDonald’s uses geographic segmentation to determine what it’s going to sell in its restaurants on an international level by adjusting its menus to match a country’s cuisine and preferences when entering a new market — but just for that new market.
Essential as it is, though, geographic data isn’t enough for this task. The decisions made also depend upon demographic and behavioral data like religious and social preferences. For instance, beef products were removed from the menu entirely in India, but not in Israel, where it remains the staple of a kosher menu. Such decisions come not only from information on location, but also historic cultural patterns.
Nike’s pursuit of the female market is often cited as a pivotal demographic segmentation campaign. The company’s deliberate targeting of women led not only to an entirely new market, but also a 24% growth in revenue. In the process, Nike also discovered that females were more willing to pay a higher price for stylish athletic apparels than men — 40% more overall, as it turned out.
A less successful example is the recent launch of the nonalcoholic Guinness Clear. With the knowledge that as many as 6.1 million people within its market of Guinness Six Nations Rugby Cup fans chose to avoid alcohol consumption, the company launched the new drink to grab more market share. But the company soon faced widespread criticism over unclear messaging associated with the campaign — perhaps underlining the importance of combining effective segmentation research with the expertise of a marketing specialist.

How GfK can help

By understanding how to address pain points and how to give customers what they desire, market segmentation helps businesses not just improve sales, but their products and brand, too. Yet the data needed for effective marketing segmentation is continuously fluctuating, and pinning it down is becoming increasingly difficult and time consuming for leaders and their marketing teams.
For businesses looking to seize the advantage of successful market segmentation, the best bet is to partner with a skilled specialist. At GfK, we’re proud to be true pioneers in the field, offering a full range of market research and segmentation tools, including our proprietary tools for capturing geodata, behavioral information and much more. 

From market research to campaign implementation, Gfk is the best choice to help today’s businesses meet their goals — quickly, efficiently and cost effectively.