Market segmentation is one of the top reasons why startups don’t make it in the long run. Failing at segmenting the marketing in the right way leads to wrong marketing activities, which bring poor results. As part of any business activity, understanding the customer base we want to target is fundamental. Put it this way, if you don’t know who you are talking with, how can you create the right business proposition?
What Is Market Segmentation?
According to Investopedia, market segmentation is a “marketing term that refers to aggregating prospective buyers into segments with common needs and who respond similarly to a marketing action“.
Basically, when you launch a new product or a service, you need to take into consideration who is the right audience for this. Most likely, there will be different groups of potential buyers that you might want to reach. It’s important, however, to know very well where each user-type sits and what common characteristics they have.
For example, it might be that your new product appeals to both recent graduates and young employees. Although very similar in age and attributes, these two are very different groups when it comes to the type of communication and marketing message. Recent graduates who are still looking for jobs might not have the same income availability that young employees already have. For this reason, it’s important to adapt your message and strategy accordingly.
Why Should You Care About Market Segmentation?
The main reason why you should be looking at segmenting your market is to gain competitive advantage by understanding the needs of each and every target group. Back in the days, companies used to talk about, and implement, “mass marketing”, thinking that all customers had the same interest and wanted the same thing.
That’s not possible today anymore.
Ignoring that each segment behaves in different ways will result in wasted marketing efforts, as one voice won’t appeal to every person.
Another important point to keep in mind is that not all targets are created equally. If you don’t understand which target audience has the most potential of buying your products or services, you won’t be able to focus your effort on those that yield the best returns.
How Can You Define Market Segmentation?
There are different ways to define a segment. You need to start to use common segment descriptors, which are customer characteristics that are significant enough to divide your customer base.
There are five common descriptors that you need to keep in mind when going through a market segmentation activity:
- Demographic: Customers are grouped by common traits in terms of age, income, family size, race, language, religion, etc.
- Psychographic: The grouping happens according to lifestyle, social status, personality types.
- Behavioral: This factor refers to how users relate to your brand. Are they heavy, medium, or light users?
- Geographic: This is more specific to where they live. Is it in urban or rural areas?
- Distribution: This factor refers to the buying behavior of your users. Do your user prefer online or offline interactions?
What Are the Requirements of a Market Segments?
Once you have identified the segments that are relevant to your company, your results will need to meet these five tests for actionability.
It is crucial to relate some purchasing variables to your segment to understand its value and contribution to your company bottom line.
KEY QUESTION: How much money is this market segment contributing to your growth?
Being able to identify a segment in your market is not enough. You need to be able to reach those users in an effective and cost-efficient way. Refer to the distribution factor seen above to define what channel is best to engage with them.
KEY QUESTION: How do I talk with my users?
Another important characteristic of your target audience is that it needs to be able to purchase whatever you are offering. If the buying power is not strong enough or they don’t have access to the capital you require them to have for your service or product, then you might be in a weak market, which will lead you to failure.
KEY QUESTION: Can my users afford my product/service?
The market segment needs to react to your marketing effort, that is they need to be willing to purchase.
KEY QUESTION: Will my users buy the product/service I am offering?
A consequence of all the previous tests is to understand whether the segments identified are stable and strong enough to justify marketing campaigns.
KEY QUESTION: Will my users buy several times my product/service?
When considering market segmentation, you need to take into account these five tests for actionability to make sure that whatever audience you are targeting is strong enough to keep your business going in the long-term.
Ignore Market Segmentation & You Will Die
When market segmentation is done correctly it has huge advantages for companies of all sizes. Here below we take a look at the 6 main advantages of a market segmentation strategy.
1. Increase Focus
Market segmentation has the obvious advantage of giving focus to a company’s activities. If an organization knows who to talk with and how to talk with them, it will naturally have a stronger relationship with its users, maximizing every single interaction and increasing profit in the long run.
2. Reduce Costs
When a company segments the market, it also limits the field of customers it reaches. As a consequence, this creates a better and leaner communication style with its users. Adopting specific marketing communication styles will naturally decrease the costs of users interactions, as it will also increase the return for each user group.
3. Improve Customer Retention
Having a tailored communication to different audience groups will increase also the way users react to messages through the customer lifecycle. Organizations that are able to identify different segments and adapt their messaging will be able to engage with them over and over again, increasing profits.
4. Improve Product Development
Listening to the needs of specific customer segments will also help organizations understand what is needed by each one of them. Prioritizing product development according to the needs of the top user segments will increase results. Companies that listen and adapt their roadmap to address exactly their market segment’s needs will yield better results.
5. Increase Growth Opportunities
By segmenting the market, companies can identify niche products or needs that haven’t been addressed yet. This will result in a competitive advantage for organizations, leading them to potentially expand their market opportunities. Entrepreneurs often focus on the big picture ignoring niches. It might very well be that there is already a market leader for a specific type of product, however, by further segmenting the group, companies could also find smaller and more profitable niches.
6. Better Use of Internal Resources
With market segmentation, the management of a company can use more efficiently the internal marketing (but not only) resources to get results. Especially in the early days of any startup, resources are limited. Focusing on specific segments will help the company addressing what is really needed.
Every entrepreneur should take into consideration the advantages of market segmentation when working on growing his or her own startup. Too often, while trying to conquer the world, we are blinded by the need to be the first in the biggest market available.
Remember what the ancients used to say “divide et impera“, divide and conquer.
- Take a big enough market
- Identify sub-segments
- Understand what they have in common
- Adapt your strategy to the relevant niche
- Conquer each niche at a time
By having a clear market strategy focused on segmentation, companies will be able to maximize their efforts and reach better results.