Pros and Cons of Market Segmentation in Business

Market segmentation is a strategy that companies use to identify their target demographic and the purchasing habits of their existing target audience and potential customers. The strategy involves analyzing and dividing their target demographic into smaller, more defined market segments, or subgroups, based on similar characteristics.

Marketers use customer segmentation to break their audience down by the following factors: age, income, marital status, ethnicity, location, lifestyles, and personality traits. They obtain these datasets through interviews with existing clients or retailers, surveys, focus groups, transactional emails, and social media.

Marketing segmentation is a valuable tool that can help brands discover new customers and new markets, improve product development, create stronger messaging through more effective marketing campaigns, and increase customer loyalty and profitability. Ultimately, marketing segmentation helps businesses identify which of their products has a competitive advantage within a target market so they can invest more in them for a stronger return on investment (ROI).

There are five types of market segmentation:

1. 1. Behavioral segmentation: Behavioral segmentation considers the patterns of behavior that influence how consumers interact with companies and their products. These behaviors can include habitual purchases—goods and services bought as part of a routine—and purchases based on the frequency of use, holidays, and brand loyalty. Behavioral segmentation can help companies personalize marketing strategies and predict the frequency and reasons why certain customers buy a product.
2. 2. Demographic segmentation: Demographic segmentation is one of the most commonly used forms of customer segmentation. This type of segmentation involves sorting groups of consumers by demographic data, such as age, educational background, ethnicity, marital status and family size, gender, occupation and income, and nationality. Companies frequently use demographic segmentation to identify the purchase decisions of specific consumer groups to cater products and marketing to their needs.
3. 3. Geographic segmentation: This market segmentation strategy is occasionally included in demographic segmentation and works as an individual segmentation process. Geographic segmentation involves sorting groups of people according to which state or region of a country they live or work in and factors in population density and type, climate, language, and timezone.
4. 4. Firmographic segmentation: The business world is the consumer base for this form of marketing segmentation. Segmentation variables for firmographic segmentation include industry, company size, number of employees, and sales cycles, and which individuals or different segments of the company are responsible for decision-making. Business-to-business (B2B) companies can use firmographic segmentation to provide more personalized ad campaigns for their target audiences.
5. 5. Psychographic segmentation: Psychographic segmentation involves examining the personality traits that impact the purchasing decisions of its target customers, including goals, values, beliefs, and lifestyles. Segmenting current customers according to personality may require more detailed research than other segmentation examples. Still, its data can also lead to very effective marketing messages that directly address a customer’s needs.

There are several advantages to market segmentation:

1. 1. Effective marketing: Market segmentation adds focus and strength to marketing efforts, giving businesses actionable information about specific customers and allowing them to speak directly to their customers’ needs to retain their business.
2. 2. Business growth: Market segmentation provides businesses with insight into different markets and new products they can sell to meet customers’ specific needs. It can uncover niche markets within a customer database that can become new sources of revenue and opportunities for product development, expanding the scope of a business into new venues.
3. 3. Improved customer experience: Customer segments who believe a company understands and addresses their needs through their products are more likely to exhibit brand loyalty. Market segmentation can increase customer satisfaction and lead to prolonged customer retention.
4. 4. Less spending: Concise, segmented information about a customer base eliminates the need to spend excess funds revising a market strategy and greater efficiency in translating a company’s message to its target audience. Less spending means more time and funds to focus on other aspects of the business.

There are a few disadvantages to market segmentation:

1. 1. Marketing expenses: Refining the marketing strategy to explore the customer base in detail means more money for marketing and research. Promoting these items to different customer bases will also add to a company’s growing costs.
2. 2. Production issues: Smaller market segments also mean fewer buyers for a company’s products and possibly fewer profits. Producing multiple versions of products to meet these segments’ individual needs can also run up costs, as can maintaining a consistent inventory of these narrowly focused products.
3. 3. Unprofitable target: While market segmentation can uncover profits through new market segments, it can also turn up segments that aren’t strong or sizable enough to generate a profit. There is also the chance that the attempt to tap into a new market will not reach or generate new customers despite a company’s best efforts.

There are a few steps to successful market segmentation:

1. 1. Define your current market. The first step in this process is to determine the makeup of your primary customer base. There are many ways to obtain information on your target audience, including interviews, surveys, social media interaction, focus groups, and even giveaways. Use these tools to ask questions that will provide you with a picture of your customers’ wants and needs and how your products can best serve them.
2. 2. Segment your market. Choose one of the market segmentation types and apply it to your target audience: Companies often choose more than one segmentation type. If the one you choose doesn’t yield solid results, try another one until you have a detailed picture of your customer base.
3. 3. Analyze your findings. You can find market segments within the dataset you’ve obtained from your research by asking questions about your brand and audience: What characteristics are immediately identifiable? Which demographics aren’t in your audience? How does your brand solve your audience’s needs, and where does it fall short?
4. 4. Test your market segments. Create a few campaigns to explore audience response. If one approach yields more positive results than others, continue testing and rework the other campaigns to draw more conclusive responses. Analyze the data culled from these tests to determine your next move.

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