What is market segmentation?

Marketers today face challenges with data overload. They also struggle with identifying and understanding their target audience's diverse needs. Have you been overwhelmed sifting through customer information? Have you found the methods of getting organized are time-consuming and labor-intensive?

Marketing segmentation can help. When you divide a broad target market into smaller, more manageable groups based on shared attributes, you can understand your audience better. An example of one segment could be "Young Professionals," consisting of people aged 25-35 who work in urban areas and are interested in trendy, professional attire. Another segment could be "Outdoor Enthusiasts," comprising individuals of all ages who enjoy outdoor activities such as hiking, camping, and skiing, and are interested in durable and functional clothing.

By segmenting audiences based on actionable criteria and using data insights, your business can deliver targeted messages that resonate with specific audience segments. It all boils down to your prospect's behaviors or demographic. And from there, you can deliver what's needed to different people.

The good news is, you can achieve scalable personalization with data-driven marketing segmentation. And the talk of how AI can help is true. According to our research, 74% of marketers that use AI say it helps improve customer segmentation. (Don’t worry, we’ll get into how you can use AI in your strategy in this blog.)

What you’ll learn:

• What is market segmentation?
• What are the types of marketing segmentation?
• How do you collect data for marketing segmentation?
• What are the best practices for effective marketing segmentation?
• What are some common segmentation mistakes to avoid?

Marketing segmentation is when you divide a broader target market into smaller groups based on shared attributes. Segmentation enables you to better understand your diverse audience, tailor messages to specific segments' needs, and ultimately increase the effectiveness of your campaigns. Technologies for segmentation include customer relationship management (CRM) systems, data analytics platforms, and marketing automation tools, all of which help collect, analyze, and use data to identify and target relevant audience segments with precision.

Your work becomes tailoring your marketing efforts to specific sections with the goal of meeting the preferences of each group. Once you do that, you’re on your way to personalizing your marketing campaigns. A clothing retailer might tailor promotions differently for young adults seeking trendy styles versus middle-aged professionals looking for classic attire. Both segments will resonate with the campaign, which makes them feel “seen .” This level of personalization leads to higher conversion rates and customer satisfaction.

Segmentation also facilitates product development and refinement. By understanding the unique preferences and pain points of different segments, you can iterate on your products or services to better address specific needs. A software company might analyze segmentation data to identify features that appeal most to small businesses versus enterprise clients, resulting in more successful product launches and increased market share.

Segmentation helps optimize your marketing budgets. By focusing efforts on high-potential segments, you can allocate resources more efficiently. By delivering personalized content and experiences, your business can foster stronger connections with targeted audiences. 

Each type of marketing segmentation provides insights into different aspects of consumer behavior. This specificity enables you to tailor your strategies more effectively.

• Understanding demographic characteristics such as age, gender, income, and education helps you identify distinct groups. This segmentation is valuable because demographic factors often correlate with consumer needs, preferences, and purchasing behaviors. For example, a retirement planning service would target older adults nearing retirement age with specific financial planning solutions.
• Psychographic segmentation delves into consumers' lifestyles, values, interests, and personalities, providing a deeper understanding of their motivations and decision-making processes. With it, you can create more emotionally resonant marketing messages and products that align with consumers' beliefs and aspirations. For instance, a sustainable fashion brand targeting environmentally-conscious consumers can develop messaging that appeals to their values of eco-conscious living.
• Behavioral segmentation focuses on consumers' purchasing behaviors, including their usage patterns, brand loyalty, benefits sought, and occasion of purchase. This reveals how consumers interact with products or services, so you can tailor your marketing efforts to address specific needs and motivations. Example: A subscription-based meal kit service might target busy professionals with time-saving solutions for weekday dinners.
• Geographic segmentation divides the market based on location, climate, population density, and cultural preferences. It recognizes the diversity of consumer needs and preferences across different regions. With it, you can alter your strategies accordingly. A sunscreen manufacturer will prioritize marketing higher SPF products in regions with intense sunlight exposure, while focusing on water-resistant formulas in coastal areas. 

Collecting data for marketing segmentation involves advanced analytics tools, data mining techniques, and technology platforms.

You’ll need to consider how you deal with first-party data, among other things. In an environment where third-party data is becoming more restricted due to privacy regulations and changes in digital advertising practices, first-party data offers a secure and compliant alternative for driving effective segmentation strategies. First-party data provides your businesses with accurate and reliable insights directly from your customers. With it, you can create more meaningful segments based on real customer behaviors, preferences, and interactions with your brand. This data helps you tailor personalized marketing campaigns. When you do that you can deliver the messages that resonate with your audience segments.

So what are the sources from which to collect comprehensive customer data?

• Using customer surveys and feedback provides valuable firsthand insights into consumer preferences, opinions, and behaviors. For example, a clothing retailer might conduct surveys to gather feedback on product preferences, sizing issues, and shopping habits, enabling them to tailor their product offerings and marketing messages accordingly.
• Using website analytics and user behavior data allows you to track and analyze how consumers interact with your online platforms. You can uncover valuable insights into browsing patterns, content engagement, and conversion metrics. Example: An e-commerce website might use analytics to identify pages with high bounce rates, indicating potential usability issues or ineffective marketing messaging. This will prompt the e-commerce site to make adjustments to improve the user experience.
• Integrating CRM (Customer Relationship Management) systems enables your businesses to centralize customer data from various touchpoints, facilitating a comprehensive view of individual customer interactions and preferences. Let’s say a telecommunications company integrates CRM data to track customer service inquiries, purchase history, and subscription preferences. Their customer support representatives can provide personalized assistance and targeted offers based on each customer's unique needs and preferences.

Data harmonization and unified customer profiles are crucial. By integrating data from various channels into a unified view of the customer, you gain the big-picture understanding of individual preferences, behaviors, and needs. This begets more accurate segmentation, targeted marketing efforts, and tailored product recommendations. Remember, the goal is to foster stronger customer relationships and drive higher levels of engagement and loyalty.

AI plays a pivotal role in this by automating and streamlining the process of analyzing and synthesizing large volumes of data from disparate sources. Machine learning algorithms can identify patterns, correlations, and insights within complex datasets. Predictive analytics help you anticipate future behaviors and preferences.

AI enables real-time decision-making and personalized experiences at scale by continuously analyzing and adapting to customer interactions and behaviors. For example, AI-powered recommendation engines can dynamically personalize product recommendations based on individual browsing history, purchase patterns, and contextual signals.

Effective marketing segmentation relies on several key best practices to maximize its impact. Follow these steps to integrate what we’ve reviewed so far:

• Begin by gathering and harmonizing data from various sources to create unified customer profiles. This ensures a holistic view of your audience, enabling more accurate segmentation and personalized targeting.
• Establish clear and relevant segmentation criteria based on demographic, psychographic, behavioral, and geographic factors. Ensure that these criteria align with your business objectives and target audience characteristics.
• Focus on segments that offer the greatest potential for ROI and alignment with your marketing goals. Prioritize segments with distinct needs, behaviors, and responsiveness to your offerings.
• Continuously test and refine your segmentation strategies based on performance data and feedback. Experiment with different segmentation variables, messaging approaches, and campaign tactics to optimize results over time.
• Incorporate segmentation into every stage of your marketing strategy, from product development and messaging to channel selection and campaign execution. Ensure consistency and relevance across all touchpoints to enhance the overall customer experience.

Building segmentation based on actionable criteria is crucial for ensuring that marketing efforts are targeted and effective. By focusing on criteria that directly impact consumer behavior and purchasing decisions, you can identify segments with clear needs, preferences, and responsiveness to your marketing messages.

But don’t stop there. As consumer preferences, behaviors, and market dynamics evolve, your job is to adapt your segmentation strategies. By regularly reviewing and refining segments based on the latest data and insights, you can identify emerging trends, shifts in consumer behavior, and new opportunities for engagement. And don’t neglect the capabilities of AI. Using it to analyze vast amounts of data efficiently can help you identify patterns and trends, and automate personalized campaign delivery at scale.

The effectiveness of your marketing efforts depends on avoiding some common pitfalls, such as over-segmentation, overlooking diverse demographic data, inconsistencies in data collection, and more.

Keep these tips in mind as you define your strategy:

• Don’t lose focus. Creating too many segments can dilute resources and lead to fragmented messaging. Instead, focus on creating a manageable number of segments that capture the most significant variations in consumer behavior and preferences.
• Use multiple data sources. Relying solely on demographic segmentation overlooks the diverse needs and behaviors within each demographic group. Supplement demographic data with psychographic, behavioral, and geographic insights for a more comprehensive understanding of your audience.
• Check for duplicate customer profiles. Do you have duplicate customer profiles from different data sources? This can lead to inaccurate segmentation and personalized targeting. Implement data governance practices to ensure data quality and integrity across all systems and platforms.
• Review your feedback. Failure to adapt segmentation strategies based on customer segments can result in missed opportunities and decreased effectiveness over time. Regularly solicit feedback from segments and analyze performance metrics to identify areas for improvement and optimization.

Good segmentation serves as the foundation for your current marketing campaigns and shapes your entire business ethos. The sooner you establish effective segmentation practices, the sooner you can begin refining your understanding of your audiences.

Segmentation is an iterative process. It helps you reach customers in better ways and makes your marketing more efficient. Investing in good segmentation sets the stage for long-term success, driving sustained growth, customer satisfaction, and competitive advantage.