Definition of market segmentation and the 6 steps of segmentation

Market segmentation is the practice of dividing a company’s total set of potential buyers (ie, its market) into meaningful groups or segments, in order to appropriately tailor future marketing and advertising efforts to each group. The goal of segmentation is to maximize the company’s return on marketing investment by designing programs that target only those prospects who are most likely to respond to your outreach efforts.

Getting market segmentation right requires about three parts science and one part art. It is primarily science because carrying out proper segmentation is a highly analytical, even mathematical process. On the other hand, since there are many ways to approach segmentation, doing an effective job also depends on the refined judgment and deep marketing experience of the marketing analyst. This is where art comes in.

Steps for market segmentation

The basic steps that must be followed in any B2C (business-to-consumer) segmentation effort should include the following:

1. Determine geographic business area: Are you only targeting homes in a small part of your city? An entire city? The whole country?

2. Estimate the size of the market: Conduct an initial analysis to determine approximately how many homes exist in your business area.

3. Eliminate any obviously unqualified household: Next, adjust your market size estimate by removing any homes that clearly fall outside of your target market. For example, if you sell swimming pools, you must remove all apartment dwellers from the market size calculation.

4. Find out who your existing customers are: If your business already has a customer base, the next step is to perform an analysis of those who have purchased from you in the past, ie your existing customers. This type of analysis can take into account a variety of household characteristics, including simple demographics (such as age and income), psychographics (including opinions and lifestyles), and typical purchasing behaviors.

5. Compare your customers to the average household in your business area: Now you need to establish a baseline of homes in your area in each category so that you can compare your existing customers to that baseline. For example, it may be the case that 10% of the households in your business area earn an annual income of $150,000 or more, while 20% of your current customers have the same income level. If so, you can say that your clients are “overindexed” for income levels in the $150,000 or more category.

6. Identify the high indexing segments in your market: Now for the fun part: identify those segments that have the highest index scores along the dimensions you identified. These are your best prospects.

Results measurement

Now that you know who your best prospects are, you can design marketing and advertising campaigns that directly reach those prospects. You can apply the results of your market segmentation campaign in two main ways:

1. Choosing advertising media that directly or indirectly target households that meet your best segment criteria, while “bypassing” households least likely to buy.

2. Tailoring your messaging and branding efforts to “speak” directly to your best customers.

Fine tune your campaign over time

Once you’ve launched your hyper-targeted marketing campaign, continue to monitor your results. You can do this by continuing to perform market segmentation analysis after each campaign. Remember to adjust your baseline by campaign; Your baseline should only reflect those your campaign targeted.

Market segmentation is a necessary step if you want to get the maximum return on investment (ROI) from your marketing and advertising efforts.