Market segmentation: the complete guide

Content Marketing Associate, Nutshell

Selling your product to the wrong market segment can often feel like barking up the wrong tree, or more specifically, barking up tens of thousands of wrong trees.

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. Sorry.

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.

Skip ahead:

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 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:

  • Measurable
  • 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.

This 1970s Virginia Slims advertisement is marketing cigarettes towards women. Thankfully we’ve come a long way (baby) from terrible advertising.

The 4 most common types of market segmentation

Savvy salespeople and marketers categorize their prospects into 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 Segmentation

Demographic segmentation is the most commonly used form of market segmentation and entails categorizing your market based on age, gender, income, profession, race, etc. At a bare minimum, most companies have a general idea of which demographics purchase their products. For 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.

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 important because two individuals can possess identical demographic information but make purchasing decisions completely differently, and thus require different marketing. For instance, 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.

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

Geographic Segmentation

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.

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.

  • Customer retention: 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

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

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 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 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

The best sales email is the one that gets read.

Download the Complete Guide to Writing MUCH Better Sales Emails for over 50+ pro tips on how to make your emails stand out in a crowded inbox.

GET THE GUIDE

How to do your own market segmentation

Gather the data

First things first, it’s time to gather data so that you can use it to form your market segments. There are many ways to go about it—some people like to go with pre-made lead lists, others prefer to do their own research. If you’re in the latter category (you probably should be), you can frame your searches along the following categories.

Researching by company size:

Size can mean a number of things, but is most often measured by the number of employees, number of customers, or overall sales revenue a company claims. Some companies have transparency on their websites, which makes reaching out to the correct person much easier. Using free references like Bloomberg can help uncover basic information about a company in question.

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 that you’re not wasting your time by targeting a company with no need for your product. Some companies have nondescript names like Amphastar and Wong, Doody, Crandall, and Wiener, so make sure you know what they actually do before you place them into a category.

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 needs:

This method of segmentation 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. If you sell landscaping services, you can use Google Maps to look up a company’s HQ. If their office is in a tower in New York City, they probably don’t need any landscaping.

Capturing data in web forms:

Web forms are the industry standard for capturing prospect data. The practice is simple: if you have high-quality content that would provide a lot of value to your site visitors, you can place that content behind a web form that requires users to submit their name, email address, and other information before they can see it. The form’s questions should be light and noninvasive, as to not discourage users from filling it out, but constructive enough to give you enough context when communicating with them in the future.

Surveys

Somewhat of a niche marketing method, surveys can be tactically deployed to get highly specific information from potential buyers in exchange for highly specific content or rewards. The standard survey format usually offers a tangible reward—like a gift card or a free product—in exchange for a decent chunk of voluntary user data. Although somewhat abstract, surveys are still one of the best methods of obtaining hyper-targeted data about users and companies. Because, let’s face it, no one is going to advertise their meme habit right on their company website.

Just kidding. 

Sort the data into segments

There are many ways to go about this process. 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 manually group your prospects and companies together by segments.

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?

This sample data template can help you get started! (Just make a copy so you can add your own customer data.)

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 your 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 towards 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, and then make tweaks as needed. To this end, some CRMs have reporting and performance tracking as well as custom reporting to help you figure out what’s working and what needs to change.

Want to be a better leader?

The Sales Manager’s Survival Guide includes 70+ expert tips on hiring, coaching, and motivating your sales team. Download it today!

GET THE GUIDE
sales management advice sales leadership strategies sales management tips

Market segmentation in a nutshell

Now you’ve got your demographics clearly segmented, your strategy figured out, and your sales processes mapped tightly to your market segments. Because of this, you should have a clear understanding of how to talk to your prospects, and how to differentiate your outreach efforts based on the market segment. The challenges that lie ahead are rooted in constantly adjusting your marketing—testing your messages, your tactics, and measuring your audiences’ responses.

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

Educational resources:

Share