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The No-Nonsense Guide to Market Segmentation (With Tips and Examples)

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Marketing to the wrong segment can feel like barking up the wrong tree, or more specifically, barking up tens of thousands of wrong trees. That’s where effective marketing segmentation can bring in some serious value for your business.

Nearly everybody in sales 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.

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. Unfortunately, it’s not that straightforward.

Building a sales process can be complicated. What one audience might find valuable might just be noise for another.

Different demographics respond differently to marketing campaigns, and finding the right target market for your products or services can help you tailor your marketing strategies to be the most impactful they can be.

This guide to marketing segmentation will help you find your target audience and choose the best market segmentation strategies.

What is market segmentation?

Market segmentation is the process of qualifying companies (or people) into groups that respond similarly to specific marketing strategies. This is the first critical step in creating a marketing and sales process tailored to differentiate your business in the market and resonate across multiple demographics.

Market segmentation divides customers into segments based on shared characteristics, behaviors, or other attributes so you can create marketing strategies that appeal to entire groups. Your marketing segmentation strategy will be mainly influenced by what your product is and which types of companies are already buying it.

The history of market segmentation

Wendell R. Smith first coined the expression “market segmentation” 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 actively contrast 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. As time passed, more and more emerging brands began offering similar products and thus needed to differentiate themselves through branding and targeting different markets.

It wasn’t enough to just manufacture ketchup. You had to identify your brand as America’s ketchup, kids’ ketchup, or fancy ketchup.

market segmentation example of an ad for cigarettes from the 1970s
This 1970s Virginia Slims advertisement is marketing cigarettes to women. Thankfully, we’ve come a long way (baby) from terrible advertising.

What are the benefits of market segmentation?

Market segmentation provides several benefits to small teams and enterprises alike, including:

  • Bang for your buck: 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: 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.
  • Customer retention: By marketing toward 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 the 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 that have something in common with your current markets.  

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The 4 most common types of market segmentation

Market segmentation helps savvy marketers categorize their target customers based on shared characteristics to keep their efforts focused and effective. Below are the 10 most common types of market segmentation: 

  1. Demographic segmentation
  2. Psychographic segmentation
  3. Behavioral segmentation
  4. Geographic segmentation

1. Demographic 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 market segmentation examples:

  • 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.
  • Commercials for vacation homes may target people across ages, genders, locations, and other demographics, but they all appeal to customers with disposable income who are interested in travel.

2. Psychographic segmentation

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 essential because two individuals can possess identical demographic information but make purchasing decisions completely differently, thus requiring different marketing.

Psychographic market 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 introverts who would much rather snuggle up with a book than be surrounded by other people.

3. Behavioral segmentation

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. Still, any company with a mailing list has already performed behavioral segmentation simply by tracking prospects who have signed up to receive emails.

Behavioral market segmentation examples:

  • 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.

4. Geographic segmentation

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.

people wearing gigantic coats

Geographic segmentation variables and examples:

  • Climate: Swimwear brands shouldn’t be targeting Alaska residents in January.
  • Cultural preferences (based on location): For obvious reasons, 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, and more durable frames), urban (road bikes, thin tires, and lightweight frames), etc.
  • Density: A giant strip mall may require a high density of foot traffic to thrive.

10 other market segmentation techniques you should know

5. Price segmentation
6. Firmographic segmentation
7. Generational segmentation
8. Life stage segmentation
9. Seasonal segmentation
10. Technographic segmentation
11. Needs-Based Segmentation
12. Value-Based Segmentation
13. Usage Rate Segmentation
14. Micro-Segmentation

5. Price segmentation

Price segmentation alters the price of similar products and services sold to different consumer groups. 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 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 revenue for each transaction.

Price market 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.
  • Even more granular: A marketing consultancy may base its prices entirely on the value it can generate for each client’s unique situation.

6. Firmographic segmentation

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 market segmentation examples:

  • Running different ads for different industries—real estate, finance, legal firms, etc.
  • A B2B sales team only targeting companies with revenues over $100m.

7. Generational segmentation

Generational segmentation is almost comparable to the “age” variable in demographic segmentation. However, generational market segmentation goes beyond age by considering a particular generation’s preferences, habits, lifestyles, and attitudes.

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.

Generational market segmentation examples

  • Utilizing more memes on Facebook to target a larger percentage of Millennials.
  • Altering your content publishing schedule to mornings to target a more significant percentage of Baby Boomers.

8. Life stage segmentation

Life stage segmentation is the process of dividing your market based on the life stage of your target audience. For example, someone married with five kids may respond well to an emotional advertisement about convertibles during their midlife crisis.

Life stage market 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.

9. Seasonal segmentation

Seasonal segmentation targets people based on their purchasing habits during certain periods of the year. It can include actual seasons (spring, summer, fall, winter), events (Coachella, Super Bowl), and holidays (Christmas, Mother’s Day).

Seasonal market segmentation examples

  • A local you-pick berry farm may want to target its ads based on the fruit in season.
  • A flower shop specializing in same-day delivery may want to ramp up its ad spend around Mother’s Day, targeting forgetful children.

10. Technographic segmentation

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 customer relationship management (CRM) platform, a website CMS, or a niche-specific software tool, utilizing technographic segmentation can help enhance sales and marketing efforts.

Technographic market segmentation examples

  • A company that develops WordPress plugins would have no business targeting companies that use a different CMS, like Wix.
  • It would make sense for a SaaS company to target businesses using an app it just integrated with.

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11. Needs-based segmentation

The needs-based segmentation method focuses on the underlying needs and motivations of the target audience. This technique requires drilling down below the psychographic, demographic, and behavioral surface to uncover the “why” behind the customer’s actions.

With a needs-based analysis and market segmentation approach, marketers can deliver messaging that resonates with their audience on a much deeper level. When done correctly, needs-based segmentation often results in higher audience engagement, conversions, and customer retention.

Needs-based market segmentation examples

  • A financial services company with a recently developed mobile banking app may want to target young adult career starters looking for guidance on managing their finances.
  • It would benefit a sports apparel company with a high-performance, sweat-wicking line to market to athletes who seek a balance of functionality and comfort in their sportswear.

12. Value-based segmentation

Once marketing teams have determined a customer’s financial worth to the company, they can employ a value-based market segmentation strategy to define their target market. Knowing how much your customers contribute to your bottom line separates the high-value customers from the others for optimized revenue growth campaigns.

At the heart of this segmentation technique is the customer lifetime value (CLV), which is an estimate of the total revenue expected from the customer during their relationship with the company. Marketers must consider factors such as purchase history, average order value, and retention rate to determine the CLV.

Value-based market segmentation examples

An airline might divide its target audience into two primary value-based segments: High-value and low-value segments. 

The high-value segment could include frequent flyers, possibly those who travel often for business and purchase more expensive seats and upgrades. Its low-value segment might consist of price-sensitive travelers who travel occasionally and usually opt for discounted options.

These are the marketing strategies the airline might implement for each:

  • High-value segment: The airline could offer this segment priority boarding, VIP airport lounge access, and travel miles points to encourage brand loyalty.
  • Low-value segment: Setting up an email campaign for this segment with messages about flight promotions, deals, and tips on stretching your travel budget could have a positive impact.

13. Usage rate segmentation

In usage rate market segmentation, marketers group their target audience according to two variables: The degree and frequency with which they interact with the company’s products and services. With this segmentation technique, marketers can create marketing strategies hyper-focused on a particular subset of customer needs and behaviors.

This is another segmentation approach that requires serious data analysis. It delves deep into when and how customers engage with your products and services. Some important metrics to consider are purchase frequency, feature usage, and website engagement.

Usage rate market segmentation examples

  • It may make sense for an e-learning platform to offer high-usage students advanced course options, personalized recommendations, and opportunities to interact with instructors.
  • A fitness tracker app could create in-app educational campaigns showcasing app functionality and personalized workout recommendations for users who don’t actively engage with the app.

14. Micro-segmentation

Micro-segmentation involves dividing a customer base into even more precise target groups in line with various factors. These factors can include any one or more of the segmentation techniques mentioned above. But, these micro-groups can also be determined through predictive analytics.

Marketers opt for micro-segmentation when they plan to run highly targeted campaigns to ensure they resonate with everyone in the target group. This type of segmentation calls for in-depth data analysis to pinpoint ideal candidates for the target audience.

Micro-market segmentation examples

  • To promote a new line of work-appropriate attire, an ecommerce clothing retailer may target the following group: Young professionals between 25 and 35 living in urban areas who have recently purchased business casual clothing.
  • A streaming service advertising its broad range of children’s shows and educational programs could consider targeting a group like this: Families with young children who primarily watch shows and other content on tablets.

Market segmentation strategies (and their pros and cons)

Every market segmentation strategy is different, but most of them follow one of two fundamental outlines:

1. Concentration strategy

Concentration strategy is when a company determines that its efforts are best focused solely on a single market segment. This strategy is particularly great for small, growing businesses with 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 your marketing efforts could be wasted. Be sure to carefully plan 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

2. Multi-segment strategy

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 the 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 highly receptive and converts well, it’s easy to tailor your strategy to market more directly to that segment.

  • Pros: Safer, appeals to more consumers, diverse marketing, high growth potential
  • Cons: Lower conversion percentages, greater marketing spend

How to do your own market segmentation in phases

Ready to complete market segmentation for your company? Here are three phases to follow during the process that will help you ensure you’re analyzing your markets effectively:

Phase 1: Gather the data

First things first—it’s time to gather data so you can use it to form your market segments. There are many ways to go about it—some people like to buy pre-made lead lists, and others prefer to do their own research. 

Two helpful methods of researching prospects are web forms and surveys. You can place high-quality data behind web forms that require site visitors to submit their name, email address, and other information to access the content. Surveys can get specific information from potential buyers in exchange for tangible rewards, like a gift card or special offer.

If you’re doing your own research, you can frame your searches along the following categories:

  • Researching by company size: Size can mean several things, but it is most often measured by the number of employees, number of customers, or overall sales revenue a company claims. Some companies have greater transparency on their websites, which makes reaching out to the correct person much easier.
  • Researching by industry: It’s unlikely that your product is applicable across all industries, which is why industry segmentation exists. Industry segmentation will help you ensure you’re not wasting your time by targeting a company without needing your product.
  • Researching by location: If you’re offering a location-specific product or service, like landscaping services within the local community, your geographic market segmentation is probably pretty airtight—You probably use handy tools like lead maps, and engage in local marketing wherever possible. For other industries, like IT staffing, your reach might be international. Whatever your product, location is a crucial thing to know about a company because it will help you decide which sales tactics to use and when to send your emails if you’re communicating across time zones, at the least.
  • Researching by requirements: This segmentation method entails qualifying companies based on whether they need your products or services. While this definition is straightforward, the process behind making this determination may not be, depending on what you’re offering. You can use Google Maps to look up a company’s HQ if you sell landscaping services. If their office is in a tower in New York City, they probably don’t need any landscaping.

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Phase 2: Sort the data into segments

There are many ways to sort data. Most involve expensive analysts, marketers, and lots and lots of time. Although the DIY route is faster, it is no substitute for a comprehensive market segmentation strategy.

Assuming time and money are an obstacle—You can approximate your own market segmentation by compiling your data into one single source and running filters on it to group your prospects and companies manually by segment.

Remember, ask yourself the following:

  • Is this segment measurable?
  • Is this segment large enough to earn a profit?
  • Is this segment stable and not going to vanish after a short time?
  • Is this segment reachable with my marketing strategies?
  • Is this segment homogenous, and will they respond similarly to my marketing strategies?

Phase 3: Plug in your marketing channels

Now that your segments have been firmly established, it’s time to connect the dots and breathe life into your marketing. This means establishing a plan for each of your marketing tools and channels and coming up with real ways to reach your segments with them.

You’ll be attributing different marketing and sales tactics to each stage of your pipeline and determining what sticks. The good news is that your market segments are clearly defined, and you’ll be able to speak to them clearly.

The real challenge is continuously improving your efforts with trial and error to get the best possible conversion rates.

There’s a good, old-fashioned way to map this out quickly and easily:

  • Draw your pipeline stages horizontally across a sheet of paper.
  • Above each pipeline stage, jot down marketing channels, like Linkedin, emails, or webinars, with blank space in between them.
  • Below each marketing channel, write exactly how you will use this tool at this pipeline stage, like “email prospects a link to a recorded webinar.”

Repeat this exercise for each market segment to help establish a concise and repeatable process for marketing to your various audiences. You can fully flesh out your segmented marketing strategy by configuring your sales software and email automation around the outline you’ve created, then make tweaks as needed.

To this end, some CRMs offer reporting and performance tracking, as well as custom reporting, to help you figure out what’s working and what needs to change.

Frequently asked questions about market segmentation

Still have questions about market segmentation? Check out the FAQs below for answers to some common questions:

What are some common challenges faced when implementing market segmentation? 

Here are a few of the challenges you may encounter when implementing your market segmentation strategy:

  • Creating segments that are too broad: Your product or service may appeal to several different market segments, but trying to appeal to too many can lead to ineffective marketing and high ad spending.
  • Creating segments that are too narrow: The opposite problem can also arise. Small segments might be challenging to quantify and distract from other segments with greater buying power.
  • Not being flexible: Just because a particular segment currently buys from you doesn’t mean they always will. Be willing to reevaluate your market segments over time to maximize your marketing spending and revenue.

What are the key factors to consider when selecting a target market segment? 

Five key factors to consider when selecting market segments for your marketing strategies are:

  • Whether the segment is measurable
  • Whether the segment is large enough to generate a profit for your business
  • If the segment is stable and won’t vanish after a short time
  • If the segment is reachable by your marketing strategies
  • Whether the segment is homogenous and will respond similarly to your marketing strategies

How can you effectively redefine your target market?

If you’ve determined that your target market no longer fits, you can always identify new markets. Here are a few tips for doing so: 

  • Identify trends and patterns: Do companies that make a certain amount of annual revenue seem to be shying away from your offerings? If you want to reach those customers, identify any patterns in which products or services they choose instead and strategize for how to provide the value they’re looking for.
  • Listen to customer feedback: Your current (or former) customers are valuable sources of feedback. Consider what they say about your product or service and whether you’re meeting their needs. You may be able to identify new opportunities.
  • Diversify your marketing channels: Using multiple channels to reach your target market can be a highly effective way to increase your brand’s exposure. Consider diving into new channels like content marketing, email marketing, SEO, and online advertising to drive engagement with your target audience.

Additional resources:

Market segmentation in a nutshell

Now, you’ve clearly segmented your demographics, figured out your strategy, and mapped your sales processes tightly to your market segments.

Because of this, you should clearly understand how to talk to your prospects and differentiate your outreach efforts based on the market segment.

The challenges that lie ahead are rooted in constantly adjusting your marketing. That means testing your messages and tactics and measuring your audiences’ responses.

If you’re ready to put your sales and marketing automation into action, get started with a free trial of Nutshell today!

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