Marketing to the wrong segment can feel like barking up the wrong tree, or more specifically, barking up tens of thousands of wrong trees.
Market segmentation didn't always exist:
Since the invention of funnel reports, salespeople have been standing around whiteboards trying to crank up their conversion rates.
Nearly everybody in the industry has, at one point or another, heard someone reasoning that simply adding more people to the funnel will improve their sales numbers while preserving their conversion rate.
“Of 10 prospects, 5 bought the product. This must mean that if we market to one million people, 500,000 will buy.”
Similarly, if you’re a sales rep making 30 calls a day, you might reasonably extrapolate that making 60 calls a day would double your closed deals. Or, if you send prospects 1-2 emails a week, you might consider sending 3-4 emails instead. Unfortunately, it’s not that straightforward.
Sales processes are complicated. What one audience might find valuable might just be noise for another. For instance, a restaurant mailing BOGO offers might have a high success rate on residents who live within one freeway exit’s distance of your establishment.
However, mailing those same BOGO offers across state lines would see those conversation rates drop down near zero. This no-brainer is a textbook example of market segmentation as it illustrates how demographics respond differently to marketing strategies.
What is market segmentation?
Market segmentation is the process of qualifying companies (or people) into groups that respond similarly to marketing strategies. This is the first critical step in creating a sales process tailored to resonate across multiple demographics.
Your marketing segmentation strategy will be mainly influenced by what your product is, and which types of companies are already buying it.
An ideal market segment is:
- Large enough to earn profit
- Stable, not going to vanish after a short time
- Reachable by your marketing strategies
- Homogenous and responds similarly to your marketing strategies
The expression “market segmentation” was first coined by Wendell R. Smith in his 1956 publication Product Differentiation and Market Segmentation as Alternative Marketing Strategies. Smith wrote that modern marketing appeals to selective rather than primary buying motives.
In other words, consumers are actively contrasting products against one another rather than simply purchasing a product to satisfy an immediate need. This realization was the inception of the modern market segmentation we practice today.
Before 1956, there wasn’t a huge market variety, and general stores tended to carry only one or two brands’ versions of the same product. At the time of the publication, more and more emerging brands were offering similar products and thus needed to differentiate themselves with branding and by targeting different markets.
It wasn’t enough to just manufacture ketchup, you had to identify your brand as America’s ketchup, or kids’ ketchup, or fancy ketchup.
The 4 most common types of segments
Savvy salespeople and marketers categorize their prospects into customer segments in order to keep their efforts focused and effective. When your prospects are grouped correctly, it’s much easier to target specific groups and tailor your efforts for maximum impact. Below are the most common forms of segmentation.
Demographic market segmentation is the most commonly used form of market segmentation and entails categorizing your market based on age, gender, income, profession, race, religion, education, location, family situation, etc.
Demographic segmentation examples:
- A great example of this: Switch to the cartoon channel and check out those commercials. Do Nerf guns and neon-colored slime appeal to someone your age? Yeah us too, bad example.
- A recruiter running one of those mostly annoying LinkedIn InMail campaigns. Ideally, they’d be targeting people who are currently looking for a job. Yet, somehow they manage to flood my inbox daily.
More specific characteristics are categorized under the umbrella of psychographic segmentation. Less tangible than demographic segmentation, this classification method includes details like lifestyle, personality, beliefs, values, and social class.
This evaluation is important because two individuals can possess identical demographic information but make purchasing decisions completely differently, and thus require different marketing.
Psychographic segmentation examples:
- Health and wellness advertisements might not go a long way with someone who prefers to spend their money on video games and energy drinks, even if they work in the same industry and live in the same apartment building.
- Advertisements for large social gatherings (events, clubs, bars) might not appeal to extroverts who would much rather snuggle up with a book than being surrounded by other people.
At its core, behavioral segmentation is the act of categorizing prospects based on their actions, usually within your marketing funnel. For instance, prospects who visited a landing page for an upcoming event might benefit from receiving a personalized invitation.
Segmenting your market based on behaviors is typically done by marketers within their marketing automation software, but any company with a mailing list has already performed behavioral segmentation simply by tracking prospects who have signed up to receive emails.
Behavioral segmentation examples:
- Grammarly sends new users who have stopped using their chrome extension for a few days an email which addresses common reasons of churn - technical difficulties, not seeing the value, not enough features, etc.
- Sending emails to website visitors who have left items in their cart. “But wait…come back.”
- A retargeting campaign that only displays ads to people who have previously purchased an item.
The most straightforward of the gang, geographic market segmentation takes into account prospects’ locations to help determine marketing strategies. Although SaaS sales are relatively unaffected, a salesperson of gigantic coats knows to avoid pitching to Arizona residents.
Geographic segmentation variables and examples:
- Climate: Swimwear brands shouldn’t be targeting Alaska residents in January.
- Cultural preferences (based on location): For obvious reasons, the McDonald's in Germany sells beer.
- Population type: A bicycle company may segment its audience differently depending on the population type - rural (mountain bikes; thicker tires; more durable), urban (road bikes; thin tires; lightweight), etc.
- Density: A giant strip mall may require a high density of foot traffic to thrive.
6 less common types of market segmentation
Price segmentation is the process of altering the price of similar products and services to different consumer groups.
If you still have a student ID to get those sweet discounts, even though you graduated years ago, then you’ve experienced price segmentation. Or, if you ever forced your kids to pretend to be under a certain age to qualify for the “kids eat free” special, then you understand the power and utility of price segmentation.
However, price segmentation can get much more granular. It can be used to identify customers who may be willing to pay more for a particular product or service that they perceive to be more valuable.
Done correctly, price segmentation can capture the maximum amount of revenue for each transaction.
Price segmentation examples:
- Broad: Senior discount, veteran discount, coupons, etc.
- Granular: Computer processors are priced differently when sold to a company as a part (like inside an iMac) than when sold to a consumer as a standalone product. For one, this is because of bulk discounts, but it’s also because the processor may be a large chunk of the total cost of goods for the iMac. Apple’s high price sensitivity means the computer processor manufacturer doesn’t have much flexibility in its pricing.
- Even more granular: A marketing consultancy may base their prices entirely on the value they can generate for each of their client’s unique situations. They may charge a small business $75/hr for a low-level consulting call. And they may charge a multinational corporation $2,000/hr to review their Q1 marketing budget.
Firmographic segmentation is similar to demographic segmentation...but for a firm. Take a second to let the creativity of the wording waft over you.
Instead of categorizing consumers based on age, location, income, etc, firmographic segmentation categorizes companies based on industry, annual revenue, job function, company size, location, status, performance, etc.
For B2B marketers, utilizing firmographic segmentation is non-negotiable to a high-performing marketing strategy.
Just as the demographic segmentation variables can help you form a buyer persona at the consumer level, firmographic segmentation can help you develop a buyer persona at the company level.
Firmographic segmentation examples:
- Nutshell running different ads for different industries - real estate, finance, legal firms, etc.
- A B2B sales team only targeting companies with revenues over $100m.
“Ok, boomer” - Something you’ve either been on the giving or receiving end of at some point in your life - whether you know it or not.
Generational segmentation is almost comparable to the “age” variable in demographic segmentation. However, generational market segmentation goes beyond age by considering the difference in preferences, habits, lifestyles, and attitudes of a particular generation.
It’s self-evident that the generations are vastly different.
Someone born in the 1960s will likely have experienced a different culture than someone born in the 2000s.
According to a segmentation survey conducted by Buzzstream and Fractl:
- Baby Boomers consume the most content
- Baby Boomers consume a larger portion of their content in the morning
- Gen Xers are the least active tablet users
- More than 25% of Millennials use their mobile phones as their primary content viewing device
- Baby Boomers view more world news and politics than other generations
- Millennials are more likely to share memes than other generations
- Baby Boomers are more likely to share videos than other generations
- Gen Xers are more likely to share content on Twitter
Generational segmentation examples
- Utilizing more memes on Facebook to target a larger percentage of Millennials.
- Altering your content publishing schedule to mornings to target a larger percentage of Baby Boomers.
Life stage segmentation
Life stage segmentation is the process of dividing your market based on the life stage of your target audience. Someone who is married with 5 kids may respond well to an emotional advertisement about convertibles during their midlife crisis.
Life stage segmentation examples
- Ads about life insurance may not appeal to sophomores in college, but they may appeal to someone who just started a family
- Someone who just entered the workforce for the first time may be more interested in a new apartment than someone who is retired.
Seasonal segmentation targets people based on their purchasing habits during certain periods of the year. It can range from actual seasons (spring, summer, fall, winter), events (Coachella, Super Bowl), and holidays (Christmas, Mother’s Day).
Seasonal segmentation examples
- A local company selling crop tops and hangover antidotes may want to target people based on the timing of Coachella.
- A flower shop that specializes in same-day delivery may want to ramp up their ad spend targeting forgetful sons and daughters.
Much like firmographic market segmentation, technographic segmentation only applies to B2B audiences. It’s used to target companies based on the types of technology they’re using. Whether it’s a CRM, a website CMS, or a niche-specific software tool, utilizing technographic segmentation can help enhance sales and marketing efforts.
Technographic segmentation examples
- A company that develops WordPress plugins would have no business targeting companies that use a different CMS, like Wix.
- Let’s say a SaaS company just launched a valuable cross-compatible integration with another app. It would make sense for them to the target businesses using the app they just integrated with.
What are the benefits of market segmentation?
Market segmentation isn’t just for big businesses. In fact, smaller teams whose efforts aren’t yet focused benefit the most from segmenting their audiences.
When companies are still struggling to get off the ground and maintain their momentum, it’s easy to get too hung up on what has worked in the past to try marketing to new groups.
The benefits of market segmentation are:
Bang for your buck
Market segmentation can help companies get the most out of their marketing efforts. With tailor-made, demographic-specific messages and advertising, companies can more effectively communicate with their audiences, begin boosting their conversion rates, and actually spend less on broad advertising.
Better conversion rate
Simply put, the more information you have about your various audiences, the more specificity you can add to your outreach, which will help your prospects convert more easily.
By marketing towards customers who have already gone through their own buyer’s journey, segmentation makes it easier to keep them engaged and pitch them with occasional upgrades. And with their segment data you’ve captured, you know how to talk to them.
Expanding your efforts
Segmentation can be a great way to pursue new markets. Clothing retailers are a great example: The Gap clothing company, after studying its audience, determined it would be advantageous to launch a new brand called Baby Gap, and completely reoptimized their business from a supply chain level just to do so.
Because of all the information you gather about your prospects, proper segmentation can help you determine if there’s a case to explore new endeavors such as this.
Without market segmentation, companies are at risk of getting pulled into a self-perpetuating cycle, wherein they inadvertently market to a specific demographic, and then assume that that demographic is their only viable demographic because they’re the only ones buying:
“Everyone who responded to our direct mailer was over the age of 65. This must mean that our target market is only people 65 or older.”
Market segmentation strategies (and their pros and cons)
Once you’ve completed your market segmentation and you have very clear insight into your various marketable audiences, you’re in a great position to create an impactful marketing strategy. Every strategy is different but most of them follow one of two fundamental outlines:
Concentration strategy is when a company determines that their efforts are best focused solely on a single market segment. This strategy is particularly great for small, growing businesses who have demonstrated a viable use case within a specific market. Focusing on one segment will allow the company to invest more time, energy, and resources into one specific market, which minimizes advertising spend and potentially mitigates wasting efforts across multiple segments.
Concentration strategy is like putting all your cards on the table—if it doesn’t work out, it can end badly. If the market segment hasn’t been properly vetted and turns out to be a bust, all of your marketing efforts could be wasted. Be sure to do some careful planning and execute thorough market testing before committing your business to a single market segment.
Pros: High conversion percentages, repeatable marketing practices, less marketing spend
Cons: “All-or-nothing,” growth potential is limited to segment size
Multi-segment marketing (or differentiated marketing,) is when a company’s marketing strategies are designed to advertise one product to more than one market segment.
Although apparently “safer” than concentration strategy, multi-segment marketing is a much larger tax on a company’s marketing spend, as it requires completely different campaigns for each market segment.
However, if a particular segment is extremely receptive and converts well, it’s easy to tailor your strategy to market more directly to that segment.
Multi-segment marketing is “safer” from the standpoint that if a company advertises across numerous channels, they’re bound to scrape up some revenue from one of them.
The downside is that it’s a less targeted use of a company’s marketing efforts, and thus could result in a potentially lower average ROI than a concentrated one-segment strategy.
Pros: Safer, appeal to more consumers, diverse marketing, high growth potential
Cons: Lower conversion percentages, greater marketing spend