This article was originally published in 2020, but has been updated to reflect new research and consumer trends. A lot has changed since we first covered this topic, but the need for marketing segmentation has not!
A famous American editor once said, “I cannot give you the formula for success, but I can give you the formula for failure—which is: Try to please everybody.” Top brands understand the wisdom of this. They know that marketing to everyone in a noisy and crowded world dilutes the power of their message, making it irrelevant and therefore easy to ignore.
Rather, they use segmentation marketing to customize messaging based on customer needs, preferences, and other factors. Because the messages are more relevant, customers feel validated and their engagement increases. When done well, market segmentation helps brands avoid costly mass-marketing techniques and enjoy a better ROI on carefully targeted campaigns.
What is Market Segmentation?
Market segmentation is the process of dividing a target market into groups—or segments—based on common characteristics, such as age, occupation, affiliation, location, behavior, and interest. Marketing segmentation is based on the theory that people who have similar characteristics have similar unmet needs. Thus, people will respond similarly to a brand’s marketing efforts, increasing its effectiveness.
With market segmentation, you can:
- Consolidate and sharpen customer pain points. Market segmentation helps you zero in on your customers’ most pressing problems, such as easy, affordable access to essential products or services.
- Simplify messaging to make it more relevant. Customers respond to clear, direct marketing messages that prove you understand—and can help address—their pain points.
- Build effective marketing campaigns. You can use segmentation to create targeted campaigns and identify the best channels for reaching your audience—such as social media, events, content marketing, or digital advertising.
- Attract high-quality prospects. Properly targeted messages draw in ideal prospects, who in turn make ideal customers: high-value, repeat buyers who share messages and offers with friends and family.
- Stand out from the competition. The more specific the message, the less it sounds like everyone else’s. Messages based on the needs and attributes of a specific market segment stand out.
- Deepen customer loyalty. When brands know what their customers value, want, and need, they can create offers and messages that incentivize them to buy again and again.
Why is Market Segmentation More Important than Ever in 2022?
While market segmentation has always been an effective marketing strategy, it has become even more relevant with recent changes in data privacy practices. As customers have become more protective of their personal data, platforms such as Google Chrome and Apple are making the historic choice to phase out third-party cookies. Meanwhile, regulations such as the GDPR are cracking down on invasive data collection methods. As a result, many marketers who previously relied on third-party sources are struggling to gather sufficient customer data. According to a study by Forrester Consulting, 72% of marketers say that data deprecation is making it hard to acquire customer data, and 70% said it’s limiting their ability to create personalized messaging.
But customers still crave a high level of personalization; 44% of customers say they might buy again after a personalized experience with a brand. This means it’s time for marketers to turn to more privacy-friendly forms of data collection—namely first and zero-party data. Fortunately, customers share zero-party data directly and willingly in exchange for something of value, making it high-quality, high intent, and highly effective at driving individualized marketing campaigns.
The Different Types of Market Segments
There are four basic types of market segmentation:
Geographic segmentation identifies consumers in a defined geographic area. This can be very specific, such as ZIP code, city, state, or country. Less well-defined geographic segmentation includes the type of area, such as a cold or warm climate, or whether an area is rural or urban. Geographic factors greatly influence consumer needs, interests, and preferences, and they can help brands determine where and how to focus their marketing efforts.
Examples: Coca-Cola sells different drink products around the world, including Ciel bottled water in Mexico and Kuat, a Brazilian guaraná-based drink. John Deere sells snow blowers to customers who have snowy winters in common, such as in the Northeast.
Demographic segmentation targets customers using basic information such as age, gender, education level, income level, family size, ethnicity, and occupation. This is a popular form of segmentation because the types of products and services consumers commonly buy depend on demographic factors.
Examples: Market segmentation examples include senior living communities that aim their marketing efforts toward people aged 65 or older as well as their adult children. Luxury car brands focus on high-earning individuals, although they have diversified to reach nontraditional segments.
Brands use behavioral segmentation to reach customers based on their preferences and behavior. It explores how a customer responds to a brand, including their:
- Purchasing and spending habits.
- Use of a product or service.
- Behavior during the purchase process.
- Interactions with the brand’s website.
Examples: Hospitality brands such as airlines reward customer purchases with frequent flyer programs. And analyzing online activity such as website click behavior helps brands optimize their site navigation to improve conversions.
Psychographic segmentation is based on deep-seated attributes, such as lifestyle, values, opinions, interests, and personality traits. Members of certain occupations or stages of life—typically elements of demographic segmentation—often share core identity attributes. For example, members of the military and teachers exemplify dedication and loyalty. Young adults and students are highly social and connected.
Example: Streaming services giant Comcast created a bold offer that appealed to Gen Z: a steep discount to college students on plans that included free access to Amazon Music and HBO. Because the offer aligned well with Gen Z lifestyle and interests, it performed well. “Our new gated student offer has taken off,” said Cheri Davies, senior director of acquisition marketing. The company saw “an enormous spike in traffic to our site and a significant lift in conversions.”
Other Market Segments Becoming More Popular
In addition to the more traditional market segments listed above, some newer categories are growing in importance:
This considers how customers use technology in their lives and groups them accordingly. You might group consumers based on:
- How quickly they adopt new technologies
- The devices they use
- Their reason for using technology
- Platforms or software they use (i.e. Photoshop or Salesforce)
Example: A video game company might group together customers who use a certain computer for gaming and create custom content related to playing on that specific device.
Generation and Life-Stage Segmentation
A subsegment of demographic segmentation, these methods group customers based on where they are in life. Generational segmentation focuses on—you guessed it—generation, grouping customers based on age. Life-stage segmentation, rather than focusing on age, considers significant life events; say, getting married, having children, going to college, or buying a home.
Example: New movers spend an average of $10,000 on furniture, appliances, and repairs within the first year of purchasing a home. Brands that sell these items can then market to these new home buyers telling them about these products, providing guides for how to pick the right item, or offering discounts for people who have recently bought a house.
Here, you segment customers based on previous transactions or other interactions with your brand. Factors to consider include order frequency, order amount, products purchased, and time since last purchase.
Example: If you have a segment of customers that purchases regularly but only in small orders, that might tell you that more expensive items are out of their price range. You could encourage these loyal customers to make larger purchases by offering free shipping or some other discount on bigger ticket items. Or, you could recommend other products in a lower price range.
This is a B2B strategy that considers the attributes of businesses, such as size, industry, or location. Categories to consider include non-profits, government agencies, or startups. Firmographic segmentation can help a B2B brand determine how best to market to these different types of businesses.
Example: If your business sells project management tools like Asana or Trello, you might analyze your customers to see what industries appear most often. Based on what you find, you could create targeted ads and other marketing campaigns that focus on how your software can benefit a particular industry, such as tech or human resources.
How to Implement a Market Segmentation Strategy
Once you understand what are market segments, you can build your own market segmentation strategy. It includes these five steps:
01 Define your target market.
To do this, ask questions like:
- Where does your brand fit in the current marketplace?
- Can you identify a need for your product or service?
- What is the market size?
02 Divide your market into segments.
Decide which of the segmentation types to use—of course, you can use more than one!
03 Analyze your market
Do this by asking your audience questions based on the segmentation types you’re using. Use polls, surveys, focus groups, and other methods to get quantifiable answers.
04 Create your customer segments
Base your segments on the analysis of your audience’s responses. These segments should be unique and fit well with your brand.
05 Test and adjust
Assess to see if the market segments you’ve chosen work for your brand. If not, change your survey method and analysis to create a more suitable segment.
The Benefits of Marketing Segmentation
Marketing segmentation provides valuable insight into your customer base, and the more you know about your target audience, the more effective you are at meeting their needs. Here are some of the top benefits you can expect when you begin investing in marketing segmentation:
Better Product Development
Armed with a thorough understanding of your customers, you can refine your product offerings to address their specific pain points. You may even discover that there is room for additional products or services you might not have thought of without this research. This could also help your business earn revenue, as more specialized products have less competition.
Higher Customer Satisfaction
Because you know more about your customers, you can tailor the customer experience to make them happier. For example, if you know the majority of your customer base is young and shops on their phones, you could reasonably assume you need a speedy customer support system that works well on mobile.
Improve Campaign Performance
Insights gathered through segmentation research can point to areas of focus for your campaigns. Rather than taking blind guesses about what types of campaigns will work well for your audience, you can narrow in on smaller, segmented strategies more likely to succeed. Your research may even reveal potential audiences you have been neglecting, giving you the opportunity to bring those groups into the fold.
More Efficient Spending
Because market segmentation allows you to develop highly educated plans based on solid research, your odds of success are higher. You’ll get better leads because you’re focusing on the most relevant audiences for your brand, which means you will waste less money on ineffective marketing strategies.
Increase Customer Loyalty
Consumers feel special when they get personalized products and offers. This effect is amplified when you recognize and reward important attributes of someone’s identity, such as their job or their life stage. For example, 94% of military members have a positive impression of brands that recognize their military status with discounts, while 66% report feeling valued. These feelings, in turn, generate customer loyalty, improving retention and boosting Customer Lifetime Value (CLV). Loyal customers are also more likely to tell others about your brand, and this word-of-mouth buzz could bring in many new customers.
Data Collection Methods
From demographic-based mailing lists to digital analytics and customer surveys, brands have multiple methods for collecting data on their target segments. Each method affects the quality of data and engagement. The data collection methods listed below range from low to high levels of engagement.
Inferred data is passively collected as someone navigates through a digital property like a website or third-party media property. The data is collected without the consumer’s explicit consent. This is typically used for most behavioral data collection.
Consumers explicitly provide declared data through a form or feedback process. This could be a survey or questionnaire that the consumer fills out to provide more information about them in exchange for a more personal experience.
This is attribute data, such as military status, verified by an authoritative third-party service. This service validates that the person has that characteristic or attribute. Data that is verified is collected through a declared data collection method.
The Challenges of Market Segmentation
Market segmentation shares some of the pitfalls of traditional personalized marketing—especially regarding the value of the market segment data and how it’s collected.
Incomplete, Low-Value Information
Demographic segmentation is easy and inexpensive to obtain, but it provides only the most basic attributes on prospects and doesn’t qualify them. The intent signal to buy is weak, which lowers the conversion rate.
Customer data platforms (CDPs) collect information such as purchase history and product usage—helpful for behavior segmentation. However, CDPs are expensive to set up and maintain. They also provide limited value, offering extensive information on existing customers but little to no information on prospects.
Lack of Privacy
Behavioral marketing, which uses third-party data from Facebook and data management platforms (DMPs), offers greater insight on potential prospects. However, this information is unverified and relies on unethical data collection. Eighty-one percent of consumers are concerned about how companies use their data.
Members of a particular segment don’t know who else is in their group, so when they receive a targeted (personalized) offer, it ends at their doorstep. For example, most customers at AT&T don’t know everyone else who uses the carrier. When these customers get a personalized offer, they can’t spread the word in a way that would help the brand.
Identity Marketing, a Modern Approach to Market Segmentation
Identity marketing rises above the shortcomings of traditional market segmentation. Rather than using costly, limited methods of data collection to build a market segment, identity marketing is based on a consumer community that aligns with a brand’s values—the ultimate market segmentation! These consumer communities share deep-seated identity attributes such as their life stage (students, seniors), occupation (teachers, nurses, first responders), or affiliation (the military community).
Identity marketing campaigns boost customer acquisition by helping brands harness the networking power of consumer communities to make an offer go viral. Unlike traditional market segments, consumer communities are socially connected, which greatly enhances sharing. For example, 83% of Gen Z would share a gated offer with friends.
Here’s how identity marketing works:
- A company creates a personalized offer for a consumer community that aligns with its brand and invites prospects to take advantage of it through whatever channels the company normally uses.
- Consumers opt in to redeem the offer and are digitally verified to ensure the offer’s integrity and prevent discount abuse.
- Brands use this zero-party data to nurture ongoing customer loyalty.
Identity marketing builds on three key pillars:
01 Personalization Is Rooted in Identity
Marketing to consumer communities with identity-driven offers creates a strong emotional connection— something customers want. When brands are willing to align their identity with these segments and demonstrate they truly “see” consumers, people are motivated to act. Nearly 95% of consumers given a personalized offer based on their identity would redeem it.
02 Consent Creates a Reciprocal Exchange
Identity marketing is a form of “invited” market segmentation, where brands respect consumer privacy by meeting them on equal terms:
- A brand invites all members of the consumer community to enjoy a gated, personalized offer.
- Consumers choose to opt in, “inviting” the brand into their lives.
- The brand and its new customers form a relationship built on mutual respect.
03 Verification Launches a Brand Relationship Built on Trust
To attract the correct market segment, brands need to verify customers actually belong to the consumer community they’re targeting. Verification ensures the integrity of the offer in the eyes of the audience because they know the offer is truly exclusive. Verification also protects a company’s margins by preventing discount abuse, which can reach as high as 35%.
Identity marketing further strengthens consumer trust by using third-party verification. Nearly three in five Americans would rather be verified for a gated, personalized offer by an independent third party than a brand’s customer service representative.
Identity Marketing Success Stories
Leading brands in retail, streaming, software, hospitality, and finance use identity marketing to acquire high-value consumer communities:
CheapCaribbean Brings 8,000 Nurses into Its Travel Club
CheapCaribbean wanted to create a promotion for its nurses—a consumer community that pairs well with the brand. The brand’s personalized offer brought 8,000 nurses into its “ER&R Club,” reduced fraud by 36%, and saved more than 100 hours of staff time.
Targus Uses Identity-Driven Offers to Increase Orders by 389%
Targus wanted to generate greater brand awareness and loyalty while rewarding key consumer communities and corporate clients. After running the identity-driven offers for a year, it decided to ramp things up. The new programs generated a 389% increase in the number of orders and a 413% increase in revenue, year over year.
Headspace Acquired 25,000 New Subscribers
Headspace, the popular subscription-based meditation app, wanted to honor educators with a personalized offer that gives them free access to the app and classroom support. Headspace acquired 25,000 new educator subscribers in three new markets, reduced fraud by 41%, and boosted engagement.
A Final Word on Market Segmentation
Brands use market segmentation to break through the noise and deliver meaningful content to their audience. But traditional audience segmentation has built-in drawbacks—privacy concerns, high cost, and limited reach—that make them less effective, especially in a soon to be cookieless world. That’s why modern market segmentation strategies should be paired with identity marketing and zero-party data.
With SheerID’s Identity Marketing Platform, marketers can attract customers with community deals. In doing so, they will also obtain high-value zero-party data that enables them to segment their customers into communities and build highly targeted campaigns. The result? Brands target and acquire high-value customers in a way that builds trust, respects privacy, and inspires word-of-mouth marketing. That’s a win-win for everyone.