Market segmentation is the practice of dividing a company’s total set of potential buyers (i.e., its market) into meaningful groups, or segments, for the purpose of properly tailoring future marketing and advertising efforts to each group. The goal of segmentation is to maximize the company’s marketing return on investment by design programs that target only those prospects who are most likely to respond to their outreach efforts.
Doing market segmentation correctly takes roughly three parts science and one part art. It is mostly 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 relies upon the refined judgment and deep marketing experience of the marketing analyst. This is where the art comes in.
Steps to Market Segmentation
The basic steps that should be followed in any B2C (business-to-consumer) segmentation effort must include the following:
1. Determine the geographical trade area: Are you targeting only households in a small part your part of town? An entire city? The entire country?
2. Estimate the market size: Conduct an initial analysis to determine approximately how many households exist in your trade area.
3. Eliminate any obviously unqualified households: Next, adjust your market size estimate by eliminating any households that clearly fall outside of your target market. For example, if you sell swimming pools, you should eliminate all apartment-dwellers from your market size calculation.
4. Find out who your existing customers are: If your business already has a customer base, the next step is to conduct an analysis of those who have bought from you in the past – namely, your existing customers. This type of analysis may take into account a range of household characteristics, including simple demographics (like age and income), psychographics (including opinions and lifestyles), and typical buying behaviors.
5. Compare your customers to the average household in your trade area: Now you need to establish a baseline of the households 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 trade area earn an annual income of $150,000 or more, while 20% of your existing customers have the same level of income. If so, you can say that your customers “over-index” for income levels in the $150,000 or more category.
6. Identify the high-indexing segments in your market: Now comes the fun part: identify those segments that have the highest index scores along the dimensions that you identified. These are your best prospects.
Now that you know who your best prospects are, you can devise marketing and advertising campaigns that reach out directly to those prospects. You can apply the results of your market segmentation campaign in two main ways:
1. By choosing advertising media that directly or indirectly target those households that meet your best segment criteria, while “stepping over” those households less likely to buy.
2. By tailoring your messaging and branding efforts to “speak” directly to your best customers.
Fine-Tuning Your Campaign Over Time
Once you have launched your hyper-targeted marketing campaign, continue to monitor your results. You can do this by continuing to conduct a market segmentation analysis after each campaign. Remember to adjust your baseline on a per-campaign basis; your baseline should only reflect those who were targeted by your campaign.
Market segmentation is a necessary step if you are to squeeze the maximum return on investment (ROI) out of your marketing and advertising efforts.