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Introducing market segmentation

There is no product or service which fits every consumer uniformly. Sometimes there needs to be variation in products to suit different people – compact smartphones for people with smaller hands, for example, or simplified apps for those not so good with tech. It could be different ways of selling a product – appealing to some people with an emotional message and others with a technical pitch.

Knowing the ways consumers behave, feel, think and make decisions can help any business tailor its products and its pitches to meet their needs more fully. By breaking down the market into segments – which share certain traits, are identifiably different from other groups, or have similar attitudes – we can find efficient and effective ways of targeting products and services.

Market segmentation is one of the most commonly used market research and analysis tools. When you call your mobile network provider, for example, you can be sure you’ve been categorized into a tailor-made customer segment, and that the interaction you have with the call center is at least in part defined by the persona you’ve been assigned. It helps them understand how to talk to you, what behaviors you’re likely to exhibit, and the types of need you’ll have.

There are three reasons organizations typically commission a market segmentation project:

  1. They feel they don’t know enough about their customers.
  2. They have some basic ideas about the types of customers they have but they can’t apply that knowledge to meet their marketing needs.
  3. They have a successful segmentation analysis but they’re finding it’s flawed in some way and needs updating.

A segmentation doesn’t just shape the way businesses deal with target customers or existing clients, it informs the design of new products and services and will dictate how they decide to reach you and with what messages. It can shape marketing campaigns and entire brand strategies.

What is market segmentation?

Once upon a time, all business was local. Consumers bought products and services from nearby providers – people from their own communities who understood their needs. There were crude forms of segmentation but they were instinctive and obvious. Salespeople from the dawn of time have tailored their messages according to who they were addressing.

About a hundred years ago, that started to change. Mass-produced goods and emerging global business models meant companies needed to understand in more detail the different markets they might address. Mass media accelerated the trend. When you could reach anyone via a newspaper ad or a TV commercial, understanding who might buy your product, why they might like it, where to reach them and what to say to them became much more important.

Then in July 1958, consultant marketer Wendell Smith wrote an article in the Journal of Marketing titled ‘Product Differentiation and Market Segmentation as Alternative Marketing Strategies’ – the first time the word ‘segmentation’ had been used in this context. He argued that understanding the basic facts, personality traits and needs of different groups of potential customers – and tailoring products or messaging to suit – would increase sales.

By the 1970s, Smith and his colleagues were using what became known as ‘psychographics’ (psychology plus demographics) to come up with classic market segmentations, such as the Values Attitude and Lifestyle Study (VALS) – featuring segments such as “innovators” (high-income, motivated by status and exploration) and “thinkers” (well-educated, thoughtful decision-makers open to new ideas). 

The forms of segmentation have evolved over time, as have the specific categories and personas that companies target. Sometimes it’s as crude as defining a target audience as a particular age group but it can also be a sophisticated analysis of deep emotional needs. Methodologies have adapted and diversified, too. But a couple of things remain constant for market segmentation projects. First, they look for definable truths about customers – reliable information that enables you to group them in useful ways. And segmentation remains a cornerstone of marketing campaigns. Segmentation allows companies to target high value consumers and position their product or brand in ways to maximize their performance. That ‘STP’ approach remains fundamental to good marketing.

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Different ways of segmenting your customer base

There are four main categories of information we can use to segment a market:

  • Geographic: where do people live? What is their environment like? What local factors might influence them?
  • Demographic: how old are they? What social groups do they fall into? How educated are they? How big is their family?
  • Behavioral: how do they make decisions? How do they use products? What are their attitudes to brands?
  • Needs based: What are their needs? What are their attitudes and values?

One of the most obvious ways to approach market segmentations is by generations. But people quickly realized that simply looking at age groups glossed over huge variation in attitudes and needs within generations. There are relatively few ways in which an age cohort behaves uniformly. You must ally demographic with behavioral and attitudinal insights to create segments that are truly useful.

This is illustrated by the rise and fall of the concept of ‘Millennials’. There have been a number of  well publicized marketing fails of companies targeting millennials. Lumping them all together – rich and poor, graduates and school-leavers, different countries and cultural backgrounds – is a major misstep. Millennials are hardly homogenous and treating them as one group risks alienating your customer base.

Why ‘needs’ make for compelling segments

We believe that identifying segments by exploring the needs of your potential customers is much more valuable than thinking about any demographic aspects. And this is why the vast majority of market segmentation projects are now needs-based. 

For example, you might discover that there’s a portion of the population whose prime need is for low-cost products; another seeks quality or status from their purchases; and some need to have products that meet exacting technical specifications.  Once you have those needs-based segments mapped, you can cross-reference by demographics or behaviors if that looks like a useful way of finding other people who might fall into those need groups.

Behaviors are harder to use in a predictive sense. They can change rapidly, especially as a result of external influences. Attitudes and needs, on the other hand, are more revealing and often more predictive. For example, we worked with one academic institution to segment their alumni in order to target graduates with a high propensity to make donations. The value of ‘attitude’ was illustrated by two graduates who both worked in finance in the City. They were the same age, had similar jobs and backgrounds. But one had enjoyed their time at the school and saw it as a springboard for their career; the other had not relished their time there and was considering a career change. The demographics said they were the same segment. But attitudinally, they were poles apart. Creating a segment of ‘inspired graduates’ made more sense than one of ‘rich bankers’.

Getting granular: what really makes a difference when it comes to market segmentation?

Working towards a granular market segmentation is important. If your category is too broad (e.g. ‘millennials’), it’s likely that you’ll capture too many different attitudes to be able to develop compelling strategies. When you mash together a lot of different colors, you just end up with brown. You need to be able to pick out individual colors – those different attitudes and needs – so they can be addressed in a compelling way. 

How you’re planning to address your different segments should also help frame your market segmentation strategy. For example, if you’re planning to promote a product through newspaper advertising or on TV, there’s a limit to how granular you need to get.

But as new ways of interacting with customers have evolved – particularly in the digital era – the value of finer segmentations has risen sharply. Today, using tools like email, targeted advertising, or big data analytics, the subtleties between segments can really make a difference.

Imagine you have a product to help pensioners release equity in their homes, for example. There’s an obvious demographic segmentation: you’re only interested in the over-65s. You need to conduct an inspection of their home when they apply and your valuers only cover the South East of England. In this situation, a geographic segmentation is a no-brainer. 

But then you know from your existing customer data that people with grandchildren are much more likely to want to free up cash so differentiating between them and the childless elderly is worthwhile. Financial literacy is also a key factor and how trusting of financial services companies they are. Risk appetite can’t be measured demographically but it might define your segmentation.

How to use market segments

So when companies debate which kinds of factors will define the customer personas – and how finely to segment their audience – the most useful question to ask is: how are you actually going to use the segments?

You might be a global business, looking to understand how the same six segments present in multiple countries. Will you actually be able to tailor the product or service around those segments? Can a central marketing function use them in the same way in every country? Or will local teams who understand the nuances of their own markets offer more valuable insights, and perhaps even more relevant segmentations of their own? 

Or if you have 15 market segments, for example, and identify seven of them as high priority targets, are you going to tailor your product around every one of them? If not, might there be more value in a more limited approach?

We were approached by a large global business who had segmented the entire personal care market in the UK, which resulted in a lot of different segments. These included people who did the minimum to appear presentable, using the cheapest products infrequently. At the other end were big spenders on grooming who were the real target for that brand’s products. 

How might that segmentation have been done differently? In terms of time and money, making a first cut to eliminate the parts of the market that have never shown propensity to buy the brand’s categories of product creates headroom for a deeper segmentation of those more lucrative parts of the population, allowing for more effective targeting.

Embarking on market segmentation? Start with what you already know

The first step of that segmentation journey is looking at what you already know about your existing customers. What is your data telling you? If you’re a pay TV network, for example, your database contains a lot of raw material for market segmentation. You can analyze by frequency of contact, whether someone has switched away and come back to you, whether they opt in to promotional emails, etc. Those kinds of factors alone are a good start to segmentation.

For example, we worked with an online dating service to comb through their database, identifying key segments based on usage patterns and other behaviors, then assigning all existing members to one of those segments. It was a powerful tool for the company’s call center operators who quickly got a sense of the type of member they were talking to from the persona that popped onto their screen, as well as targeting email marketing and much more. The segments became a lens for the business to view its own customers but also gain insights into the wider market of potential users.

A high-quality customer relationship management (CRM) system is obviously a big help. You need to be in compliance with GDPR and be responsible in how data is used, of course. (And bear in mind: if you formally assign customers to a segment, they might one day see how that’s defined thanks to GDPR’s focus on subject access rights). But allying CRM analysis with an attitudinal, needs-based market segmentation can help extrapolate the behaviors you see in existing contacts to potentially untapped audiences, too.

Many traditional (typically pre-digital) businesses have started to accumulate a lot of data about customers but struggle to make the connection between what they know about them and how that might fuel a market segmentation project. Conversely, online-only businesses are typically built from the ground up around careful segmentations, whether they emerge organically from CRM data or are built as part of a formal project.

Why market personas must be instinctive

It’s important to create segments that are meaningful. The key to a really good market segmentation is that anyone can use it. 

  • It should be intuitive – so the personas you create from your segments are recognizable and understandable.
  • It should be useful to people in different functions – whether that’s new product development, marketing, communications, sales, customer service or even the finance function.
  • It should work as well for people in the boardroom as it does for people at the front line.

That means how you brand your segments is actually a very important part of the process. We all know some famous segment names – DINKYs (Dual Income No Kids); Yuppies (Young Urban Professionals); Mondeo Man and Worcester Woman in the UK, and Soccer Moms in the US. They’re memorable and self-explanatory.

When you’re working on a market segmentation project, you need to bear in mind who’ll be using the segment analysis. That should be everyone, from the board to the call center operative. Without their buy-in (and their insights) it’s much harder to make the segmentation intuitive. Each segment must make sense to them and tell at least part of the story.

At Kadence, we also have a graphic design team in-house. The use of visuals to bring a segmentation to life is critical, not only to make it live on in the organization but to frame an understanding of the segments. We often produce documentary videos to show what kind of people are in each segment and how they behave or react.

The impact of market segmentation

What difference does market segmentation make to key decisions? Which decisions does it most affect? We see many different benefits from market segmentations. For example:

Incremental gains in congested markets. Successful products and services rely on fine-tuning to gain market share or increase sell-through with existing audiences. Segmentation allows you to identify how to exploit opportunities in underserved areas, or segments where rivals currently outperform.

Product evolution. Segmenting the market allows you to see what other underserved needs exist in groups that are already customers, allowing you to fine-tune your offer, especially if the product or service has flexible elements built in.

Targeted communications. Even email costs money (and goodwill, if it’s perceived as spam). Identifying common traits among high-propensity segments not only allows for less wasted communications, it also allows those comms to be fine-tuned for maximum impact.

Smarter automation. Customer service and call centers are increasingly reliant on automated systems. A solid market segmentation can help ensure those interactions are properly tailored and high-value segments are prioritized.

Extrapolating from the existing customer base. Market segmentation can help identify traits in existing customers that might be shared by other segments that don’t seem at first glance to be fertile markets.

New product development and launch. You might already have an idea of the types of customers a product will work for, or situations where it might be applied. You might not even need a market segmentation in the development phase but once a product or service has launched, the need to optimize its performance becomes much greater. Who’s actually using it? How? Why? Those early adopters (another classic segment) can help define and exploit other segments of consumers.

The role of market segmentation within your long-term strategy

A market segmentation project, done right, is extremely valuable but it’s also a significant undertaking. Segmentation studies aren’t designed to be done every year – ideally it should have a five or even ten year shelf life.

Even then, some events are so huge as to require a fresh look at segmentation. The Covid-19 pandemic has prompted many businesses to refresh their buyer personas. For the bulk of 2020, people’s lives have been artificially constrained. How someone behaves or reacts, what they prioritize in life, and even what values they have, are all affected by ‘not going out’. 

Even when lockdowns (hopefully) abate in 2021, how the market breaks down for previously predictable products – from personal grooming and alcohol, to cars and holidays – is going to be quite different to what went before. And it’s very unlikely the old segments will move to adapt to the new reality in precisely the same ways.

We’ve already seen some significant pandemic-inspired segmentation projects, with brands wanting to understand how their market breaks down now that people are eating out much less and work-from-home consumers are shopping differently. Previous segments might not be helpful: do you need to re-cut by job status, for example, given higher unemployment?

It doesn’t matter whether you’re targeting niche markets and need to understand where to find them, or want to tailor a broad-based approach to maximize penetration among different personas, an effective segmentation will set you up for success. Find out more about our experience in running market segmentation studies, or get in touch with our team to discuss a specific challenge. 

The purpose of market segmentation is to group customers with similar attributes together so that businesses and brands can understand their wants, needs, and behaviors so that they can ultimately market to the segments that make the most profit. Market segmentation studies are a form of market research that helps brands understand the distinct groups of people that make up their target audience. They work by grouping customers with similar characteristics. This allows companies to identify and target the segments with the most value to the business.

Companies or brands who ignore segmentation as part of their research and marketing strategy run the risk of wasting marketing dollars, or running campaigns that do not resonate with a profitable or worthy segment.

Market segmentation is a process through which a market is divided into various groups based on the demographic, geographical, psychographic, and behavioral attributes of the population. Market segmentation is extremely important for brands because it is not possible to fulfill the wants, needs, and desires of all potential customers with a single marketing message. It is the process used first before target marketing.

One of the big questions we get asked about this type of research is “what is the purpose of market segmentation?”

It’s not uncommon to hear people asking:

  • “What’s the value of focusing in on specific segments rather than trying to appeal to the mass market as a whole?”
  • “Surely, my best chance of success comes from targeting anyone and everyone that could buy my product, rather than on particular groups?”

In short, we don’t believe it does. Market segmentation can be a powerful tool for any business. Targeting specific high-potential segments makes commercial sense and boosts the bottom line. Why?

First of all, not all customers are of equal value to your business. Imagine you’re a charity. Not everyone gives equally. They’ll be those that donate small amounts every now and again. They’ll be others that consistently contribute bigger sums, driven by a connection to your cause. It makes business sense to understand the latter segment. That way you can better appeal to these people and actively target them in your fundraising and marketing campaigns.

The second is that customers are different and have different needs. This is important to recognize for a whole host of business activities – from product development to marketing to customer service. By understanding who you are targeting and shaping your strategy around their needs, you can cut through and create a better experience for your customers.

(Take a look at our guide to market segmentation for more insights on how to better understand your market).

How market segmentation studies can inform your strategy

The results of a market segmentation study can guide strategy development in the following areas:

Designing more successful products and services

Successful product and service design rely on meeting customer needs. Rather than trying to be all things to all people, focusing on specific segments allows you to really understand the pain points your target customers face. You can use this to inform product and service design, helping you to create solutions that really delight your target audiences and customers.

Developing more effective marketing campaigns

Segmentation studies help you understand who to target. They can also reveal how to speak to your target customers. The result? You’re able to spend your marketing dollars more wisely and achieve greater cut through with your comms.

There are numerous ways for marketers to segment their audiences and tailor marketing easily. Email marketing to granular digital advertising to name but a few. Against this backdrop, a one-size-fits-all approach is not enough. Segmentation allows you to create sophisticated marketing strategies based on the principle that different consumers respond to different messages.

Offering more relevant customer service

Segmentations don’t just benefit marketers. They can have an impact right across a business. We’ve worked with companies to empower their customer service reps by helping them understand the different types of customers that exist. For instance, we worked with a dating app to build segmentation and integrate it into their CRM system. That way, when a customer interacted with the brand, it was easy for the customer service team to see which segment they belonged to. This approach can be really valuable. It helps customer service reps to react in the most appropriate manner to meet the customer’s needs and the company’s corporate objectives.

Using your resources most effectively

Segmentation studies can be really useful in helping businesses understand where to focus their time, money and resources for maximum effect. Insight from a segmentation study can inform how you spend your marketing budget, determine where you focus your sales staff or how you deliver your customer service.

Whether the applications of segmentations are made to product development, marketing, service or resource/budget allocation, ultimately they help businesses to better understand their target audiences and become more customer-centric. The result (and the ultimate purpose for conducting a segmentation)? You’re able to create superior customer experiences that meet and exceed your customers’ needs.

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What does a typical market segmentation study look like?

Like all of the market research projects we work on, each segmentation is designed around our client’s needs. That said, most segmentation projects involve the following stages:

Immersion  

The first step in any successful situation is immersion. This is where the agency tasked with creating the segmentation works closely with key stakeholders in a series of workshops. The purpose of these sessions is to understand the existing knowledge within the business. This can allow you to begin developing hypotheses for potential segments. Immersion sessions align key project stakeholders, ensuring that the segmentation delivers for the business. The immersion stage also has a role in establishing buy-in to the project early on. This will encourage greater adoption of the segments in the long term

Fieldwork

Next comes the fieldwork itself. This allows the business to understand more about its customers and gather the data needed to create the segments. The fieldwork stage will typically involve a quantitative study for collecting this data. However, the research that takes place around it can differ from project to project. Some segmentations we run involve a qualitative stage upfront to test hypotheses. Other involve omnibus studies to determine the incidence of customers and non-customers in the wider population.

Creating the segmentation solution

After the data has been collected, data analytics allow us to find the survey variables which best define the segments. We work closely with stakeholders to create a segmentation solution that is:

  • Actionable (allows you to target the segments at both a tactical and strategic level)
  • Future-proofed (will stand the test of time)
  • Intuitive (easy to understand)

This stage of segmentation also typically involves understanding the current and potential value of the segments and detailed analysis to understand the individual characteristics of each segment. It’s also when the all-important segment naming takes place. Giving segments memorable names shouldn’t be underestimated. This allows people across the business to instantly grasp what that segment is about. This can be crucial for helping embed and encourage the adoption of the segments.

Bringing the segments to life

After you’ve settled on your segmentation solution, the next stage is to bring the segments to life. A lengthy PowerPoint might give the insight or marketing team the information they need. But it’s likely to be too detailed for other functions. Developing impactful deliverables that allow people to easily understand the segments should be high on your priority list if you’re leading a segmentation. This could be anything from posters to infographics. One of the key deliverables we see many organizations investing in is short documentary videos that bring segments to life. It’s human nature to be able to remember stories and characters better than numbers or data points. That’s why videos like these can really help segments live on in an organization, ensuring the segments are front of mind when making business decisions.

Activating the segments

It’s not enough to hope that stakeholders will embrace and use the segments. This process needs to be actively managed. One way to do this is by running activation workshops. This is where you work closely with individual functions to help them understand the segments and what they mean for their department and their role. These sessions are action-orientated, focused on understanding the opportunities and implications for strategic planning.

Segmentations can be powerful tools for businesses. Find out more about our capabilities in this area or get in touch to discuss a specific project.

We’ve been working with Bloomberg since the start of pandemic to understand how the priorities, actions and attitudes of business decision makers across APAC are evolving. Take a look at the infographic for the key insights from our latest wave including:

  • 67% of businesses are confident that their companies can continue to operate if another wave of the pandemic strikes
  • Brands are looking towards e-commerce and social commerce to power future growth. 87% business leaders plan to use digital platforms as their sales channels in the next 1 to 3 years, with 74% looking towards social commerce. 1 in 4 expect to decrease their use of physical stores
  • Expectations of brands are rising. 66% are looking for brands that use their resources to give back to society, up from 56% in wave 2 (June 2020)
  • The pandemic has placed greater attention on health and wellness with 55% of businesses now engaging an external partner to provide health and wellbeing services
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Market segmentation studies are powerful tools for brands. They help organizations divide a market into distinct segments that share specific attributes. The company can then focus on the most lucrative of these market segments. In this article, we outline the key benefits of this approach.

What is market segmentation in market research?

Market segmentation (sometimes called marketing segmentation) is a marketing strategy that identifies select groups of customers and how to present products to these groups to maximize appeal.

Market segmentation helps brands send the right message by efficiently targeting specific groups of consumers. By dividing a target market into approachable groups, market segmentation creates subsets based on demographics, needs, priorities, interests, and other psychographic and behavioral criteria. By understanding market segments, brands leverage this targeting in product development, sales, and marketing strategies. 

The benefits of market segmentation studies

Focus on the customers that matter most

The core principle at the heart of market segmentation is to break the market into groups of customers you can target rather than addressing the market as a whole. Rather than being all things to all people, this approach allows you to zone in on the most valuable customers for your organization so that you can focus your efforts where it matters most.

So what does this look like in practice? A recent case study brings this to life. We partnered with a leading university to design a segmentation of its alums. Securing donations from alums is a core revenue stream for universities. You may assume that targeting all alums equally is a surefire way to elicit donations. But in reality, a small proportion of alums make the most difference.

There are many ways of segmenting a market. In this instance, we opted for a needs-based segmentation, where we explored the attitudes and values of past students. A demographic segmentation would have allowed us to target those in the highest income bracket or particular professions. But, what mattered, in this case, was the attitudes of the alumni towards the university. We helped our client see that those that had enjoyed their time there and considered it a valuable stepping stone towards their future career were most likely to donate. Dividing the market up in this way means that you can focus on the customers that are most profitable or easiest to convert. This in turn helps to lower your acquisition costs.

Power new product development

Another benefit of carrying out a market segmentation study is that it can uncover new opportunities for innovation. Needs-based segmentations are particularly valuable for this purpose. They do as the name suggests: break the market into distinct segments based on customer needs. 

This can be a great starting point for innovation. By understanding what customers are looking for from your brand or the category and the pain points they face, you can identify whitespace and design products, services, and experiences that truly meet their needs.

Segmentation studies can also help post-launch. They can help you to understand where a specific product falls short versus consumer needs and how it can be improved to pull ahead of the competition.

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Design more effective marketing

Segmentation studies can also provide valuable input to your marketing strategies. They indicate who to target and can reveal where to find these people and how to speak to them. Brands can spend their marketing dollars more wisely and achieve greater cut-through with their comms.

Your brand could be investing in TV advertising year after year, hoping to reach as much of the mass market as possible. A segmentation might reveal that the people you want to target are Instagram addicts or avid readers of a particular publication. This target audience could be reached on these channels at a much lower price. In a world where we can harness digital platforms to target at such a granular level, understanding who to reach and where to find them is vital for any successful marketing strategy.

Another application of segmentation to marketing strategy development is shaping your marketing messaging. Different customers react differently to different messages, and segmentations can help you understand what to say to who. Imagine you’re a mobile phone company with a broad audience of all ages and tech proficiency levels. 

Segmenting your customer base will allow you to create targeted campaigns that appeal to the needs of each segment. Your early adopters may want to see your new device’s technical specifications front and center. But your bargain hunters are likely to want to see something else entirely. By taking a targeted approach to your marketing, you’ll achieve better engagement with your campaigns and maximize conversion.

Deliver better customer service

Segmentation studies are often mistakenly seen as belonging to the marketing department. To get real value from segmentation, the segments should be shared with and understood by everyone in the business – from the CEO to the customer and sales assistants.

We worked with an online dating service to identify key segments based on usage patterns and other behaviors. We then assigned all existing customers in the company’s database to one of these segments. This information popped up wherever the customer interacted with the firm. This proved a powerful tool for the company’s call center operators, who quickly got a sense of the type of person they were talking to – and could understand how best to approach them. 

This is something you’ll have recognized in your interactions with brands yourself. That network provider that offers you new benefits to stay at the slightest hint you’re dissatisfied? The TV provider knows what service to provide you based on your viewing history? These are all based on powerful segmentations designed to empower those working in customer service. With the proper knowledge, customer service agents can up-sell or aid customer retention.

Use your resources more efficiently.

As the examples above demonstrate, segmentation studies can be instrumental in helping businesses understand where to focus. 

Segmentation studies allow for more efficient use of resources – whether they are human resources (for example, getting a sales team to focus on a specific market segment for their outbound activities), or budgetary resources (for example, investing in a trade show that you know is popular with your target customer).

This emphasis on using resources wisely is why market segmentation studies can be most beneficial for the businesses that are least likely to consider them: small to medium-sized enterprises. The most effective market segmentations do require some investment as they rely on market research to understand behaviors, attitudes, values, and needs. But until you can invest, our advice is to start small. 

Take a more fundamental approach to segmentation. This could be a geographic segmentation. You could also segment on demographic factors or behavioral data if you’re lucky enough to have this. This can cut through the noise and provide a much-needed focus for your business.

Develop a more customer-centric culture

A further benefit of market segmentation is that it can result in a more customer-centric company culture, encouraging employees across departments to understand your target market and their needs and to place this at the heart of everything they do.

But it’s important to recognize that developing a segmentation alone will not automatically result in a shift in company culture. This needs to be actively managed, and you can do several things to encourage this.

The first is to secure buy-in to the segmentation early on. You can do this by working with key stakeholders to ensure they are involved and engaged in the process. Segmentations can be disruptive. Ensuring that the people using it feel a degree of ownership of the customer segments is critical if they are to be embraced and adopted long-term.

The second is ensuring that segments are communicated across the organization. Segments should be easy to understand and distinguish from one another. Visual outputs can be a helpful tool in aiding understanding and memorability. 

Over the years, our in-house design team has developed a range of deliverables that transformed slides that may not have made it beyond the insight department into easily accessible outputs that help all employees to embrace the segments and ensure they live on in the business. These deliverables should be shared far and wide. Everyone – from the engineer working on a new car model to the sales team at the dealership – should be able to visualize the segments and have them front of mind in their day-to-day work.

Our final tip for encouraging a more customer-centric culture is to activate the segments and embed them into future strategies. We often work closely with individual teams to help them understand what the segments mean for their department and role.

Create a superior experience for customers

Ultimately, the real benefit of segmentation is the impact on the end customer. Targeted marketing, great customer service, and innovation rooted in customer needs will create a fantastic customer experience that drives brand loyalty.

Segmentations can be powerful tools. In a world where behaviors, needs, and attitudes have drastically shifted, they are more critical than ever. Find out more about our experience in running market segmentation studies, or get in touch to discuss a specific challenge.


Market segmentation is a crucial strategy for businesses to target and cater to specific customer groups effectively. By tailoring your strategy based on the needs of your key customer segments, you can better appeal to the customers that matter most. This guide explores four key types of market segmentation: geographic, demographic, firmographic, and behavioral.

Geographic Segmentation

Geographic segmentation divides the market based on location factors such as:

  • Country
  • Region
  • City
  • Area (urban, suburban, rural)
  • Climate or season
  • Timezone
  • Language

Example: An automotive manufacturer selling four-wheel drives may target rural areas where such vehicles are more practical. However, relying solely on geographic data can be limiting as other factors like income and lifestyle also play significant roles.

Demographic Segmentation

Demographic segmentation creates customer segments based on demographic information, including:

  • Age
  • Gender
  • Income level
  • Level of education

Example: A luxury brand might focus on customers who earn above a certain income threshold, as they are more likely to afford high-end products. However, assuming that people of the same age or income level are alike can lead to ineffective marketing strategies, as demonstrated by Air France’s failed millennial-targeted airline, Joon.

Firmographic Segmentation

Firmographic segmentation is often used for segmenting B2B customers and relies on similar principles to demographic segmentation, looking at factors such as:

  • Company size
  • Industry
  • Job title

Example: Segmenting businesses by company size can help tailor services to the specific needs of small, medium, and large enterprises. However, it’s important to remember that individuals within these companies have unique motivations and values that also need consideration.

Behavioral Segmentation

Behavioral segmentation analyzes customers based on their past behaviors such as:

  • Spending patterns
  • Browsing history
  • Interactions with the brand

Example: E-commerce sites can use browsing history to tailor product recommendations, enhancing the shopping experience. However, behavioral segmentation based on digital footprints only tells half the story and may miss deeper customer motivations.

Needs-Based Segmentation

Needs-based segmentation creates customer groups based on attitudinal factors such as:

  • Needs
  • Values
  • Motivations
  • Priorities

Example: This approach allows businesses to understand how their products or services fit into customers’ lives, helping to put customer needs at the heart of their strategy. It can also reveal opportunities for innovation by identifying unmet needs.

Summary

Market segmentation includes geographic, demographic, firmographic, and behavioral types, each offering unique insights into customer behavior and preferences. By employing these segmentation strategies, businesses can create personalized experiences, retain loyal customers, and effectively target their desired audience.

FAQs

What is market segmentation? Market segmentation is the process of dividing a broad consumer or business market into sub-groups based on shared characteristics.

Why is geographic segmentation important? Geographic segmentation helps businesses tailor strategies to local needs, making it easier to target specific areas effectively.

How does behavioral segmentation improve marketing? Behavioral segmentation allows businesses to tailor marketing efforts based on customers’ past behaviors, leading to more relevant and impactful campaigns.

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How do you calculate your market size and the serviceable obtainable market??

This is a crucial part of any business plan, allowing you to gain a clear idea of how many customers you can potentially reach and how much revenue you can generate. This allows you to make more concrete plans and secure budget and buy-in from key stakeholders..

Top-down market sizing is one of the two main methods we can use to calculate the serviceable obtainable market.  In this article, we’ll take a look at what top-down market sizing involves, how you can use it in your own business, and the strengths and weaknesses of this approach.

What is top-down market sizing?

When we calculate our serviceable obtainable market, there are two main ways to approach the calculation: top-down and bottom-up.

  • Top-down market sizing starts by looking at the current market as a whole, taking a macro view of all the potential customers and revenue, and then narrowing it down to a section you can realistically target. This gives you your serviceable obtainable market, (SAM).
  • Bottom-up market sizing, on the other hand, is where you start with your own product and the basic units of your business and work out how you can scale them. Where can your products be sold, how much for, and how much of the current market could you command? You start small and build up to the result.

What is Serviceable Obtainable Market or SAM?

The SAM refers to the portion of the total addressable market (TAM) that a company or business can realistically target and serve. It represents the market segment that aligns with the company’s resources, capabilities, and competitive positioning. The SAM is determined by considering factors such as geographical scope, customer demographics, and market demand.

In the context of top-down market sizing, the SAM is the result of narrowing down the initial macro view of the market to a segment that the company can effectively target. It represents the potential customers and revenue that the company can realistically obtain within its market segment. The SAM is an essential metric in market research as it helps businesses understand the true size and growth potential of their target market.

What is Total Addressable Market or TAM?

The Total Addressable Market (TAM) represents the entire demand for a specific product or service within a particular market or industry. It is the maximum potential revenue that can be achieved if a company were to capture 100% market share, considering all potential customers and their willingness to purchase.

TAM provides an estimation of the market size and serves as a starting point for market analysis and business planning. It encompasses all potential buyers who have a need for the product or service, regardless of whether they are currently being served by existing competitors or are aware of the product’s existence.

Calculating TAM involves considering various factors such as market demographics, geographic scope, industry trends, and customer behavior. TAM helps businesses understand the market’s overall revenue potential and serves as a benchmark against which to evaluate their market share and growth opportunities.

It’s important to note that TAM represents the theoretical market size and may not be fully reachable or realistic for a company due to constraints such as competition, resources, and market saturation. Nevertheless, TAM serves as a valuable reference point for strategic decision-making, market segmentation, and assessing a company’s growth potential within a specific market.

How to use top-down market sizing

To use top-down market sizing accurately, you should aim to start with a macro view of your market and work towards a micro view.

The first step is to look at industry size estimates to find the largest possible market size for your product. Then, reduce it to a segment that you can realistically target, and then calculate how many potential customers are in that segment.

For example, if you’re selling a payment management system for hair salons in the US, you’d start by calculating the total number of hair salons in the US. Then, reduce that to a smaller segment — how many of those salons have enough customers to justify a payment system? Finally, find out which ones you have already sold to, or which ones are already serviced by competitors and unlikely to buy from you, and so on, to find your serviceable obtainable market.

Here are some tips to do this process as effectively as possible:

  • Use reliable data sources. Some of the data that can help you calculate your market size is available for free or at low cost and can be obtained from analysts like Gartner and the Bureau of Labor Statistics. This can be supported by primary research to give you a rich picture of the market. Spend some time analyzing multiple, reliable sources to come up with an  estimate..
  • Be consistent and clear in your approach. Make sure your calculations are well-documented and rely on the same data.
  • Ask lots of questions throughout the process. Who are our customers? Where are they located? Is the market growing? Aim to get as full and accurate a picture of your market as possible.
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What factors to consider when using market sizing

When deciding which approach to use for market sizing, it’s essential to consider various factors that align with your business, product, and market dynamics. Here are some considerations to help you choose the most suitable approach:

  1. Market maturity: If you are entering an established and well-researched market with ample data available, a top-down approach might be more appropriate. The existing market data can provide a solid foundation for estimating market size and potential customers.
  2. Product uniqueness and disruption: If your product or service is innovative, disruptive, or targets a niche market, a bottom-up approach can be advantageous. This approach allows you to analyze specific customer segments, understand their unique needs, and project adoption rates more accurately.
  3. Available data and resources: Consider the availability and reliability of data sources. Top-down market sizing heavily relies on existing market research and industry reports. If comprehensive data is readily available, a top-down approach can provide a quick estimate. On the other hand, if you have access to internal data, customer insights, or primary research capabilities, a bottom-up approach using your own data can yield more accurate results.
  4. Granularity and specificity: Depending on your business objectives, you may need a more detailed understanding of your target market. In such cases, a bottom-up approach allows for a more granular analysis, enabling you to assess market segments, customer behaviors, and potential adoption rates on a more specific level.
  5. Time and resource constraints: Consider the time and resources you have available for market sizing. Top-down approaches are generally faster, as they rely on existing data and industry research. Bottom-up approaches require more in-depth analysis and data collection, which may be time-consuming. Evaluate the trade-offs between accuracy and the resources you can allocate to the market sizing process.

Ultimately, the choice between top-down and bottom-up approaches depends on your business context, market characteristics, and the level of precision required for decision-making. In some cases, using a combination of both approaches can provide a more comprehensive view of the market size and potential opportunities.

Remember, market sizing is an iterative process, and as your business evolves and gathers more data, you can refine and update your estimates using the most suitable approach for each stage of growth.

The top-down and bottom-up approaches — which one is best?

So, which approach is better? The reality is that each method has its pros and cons. What works extremely well for one business might not work well for yours, and vice versa. Let’s take a look at the advantages and drawbacks of each method.

Top-down market sizing: the pros

  • It tends to be faster than a bottom-up approach..  The process of gathering existing data to estimate your market size isn’t enormously time-consuming, making it .  the best option to get a quick estimate of the serviceable obtainable market, which you can supplement with primary data at a later date to reach a more accurate forecast. .
  • It tends to work well for big, established markets, where there is already plenty of data and existing analysis

Top-down market sizing: the cons

  • It doesn’t work as well for new, smaller markets and disruptive products. If there’s a good chance your product could have a disruptive effect on its market, this could significantly affect serviceable obtainable market and render your top-down analysis largely meaningless.
  • The initial research relies on general information collected by others, so the data isn’t specific to your business and situation. It’s a good general guide, but does need to be supported by primary research that’s specific to your particular market for greater accuracy. 

Bottom-up market sizing: the pros

  • It’s tailored to your specific circumstances and uses your own data 
  • It’s especially useful for new markets and markets where your product is likely to make a big, disruptive impact
  • It tends to result in better forecasting and more accurate data on amore granular level, helping you better understand how your individual projects will make an impact

Bottom-up market sizing: the cons

  • It can take longer and require more resources than a top-down approach, as a bottom-down approach requires much more in-depth analysis of your own business.
  • It has a tendency to assume there will be more customers than there actually will. This is important to look out for.
  • Any errors you make early on at the micro-level become compounded as you work up to the macro-level. It’s important to ensure you’re doing everything the right way, or these mistakes and misunderstandings will carry through your entire analysis.

Examples of Top-down and Bottom-up Market Sizing

To provide a clearer understanding of top-down and bottom-up market sizing, let’s explore some real-world scenarios:

  1. Top-down market sizing example: Imagine you are launching a new line of organic skincare products. To calculate your serviceable obtainable market (SAM) using a top-down approach, you would start with a macro view of the market and narrow it down. Here’s a step-by-step breakdown:
  • Step 1: Begin with industry size estimates: Research industry reports and studies to determine the total skin care market size.
  • Step 2: Identify your target segment: Narrow down the market to a specific segment that aligns with your organic skincare products, such as “organic skincare for sensitive skin.”
  • Step 3: Calculate potential customers: Determine the number of potential customers within your target segment. For instance, you might find that there are 5 million people in your target market based on demographics and consumer behavior analysis.
  • Step 4: Refine the SAM further: Consider factors like geographical location, purchasing power, and competition to determine the portion of the target market that you can realistically capture.

By following this top-down approach, you can estimate the SAM for your organic skincare products and make informed decisions about market entry and potential revenue.

  1. Bottom-up market sizing example: Let’s say you’re a software startup developing a productivity app for freelancers. To perform bottom-up market sizing, you would start with your own product and gradually build up:
  • Step 1: Identify your target audience: Determine the specific segment of freelancers you are targeting, such as graphic designers or copywriters.
  • Step 2: Determine the basic units: Calculate the number of potential customers within your target segment, considering factors like industry reports, freelance platforms, and online communities.
  • Step 3: Assess market penetration: Estimate what percentage of the target market you can realistically capture based on your value proposition, pricing, and competition.
  • Step 4: Calculate revenue potential: Multiply the estimated number of customers by the average revenue per customer to determine your potential revenue within the target market.

By employing a bottom-up approach, you can analyze the granular details of your specific market segment and tailor your strategy accordingly. This approach allows you to make projections based on your own data and assumptions.

These examples showcase how top-down and bottom-up market sizing approaches can be applied in different scenarios. Remember, the choice of approach depends on factors such as market maturity, product uniqueness, available data, and the goals of your business.

Ultimately, it can be useful to use both models in your market sizing. If they both roughly agree, then you can probably assume you have a fairly accurate estimate of your market size. The approach you opt for will also depend to some extent on the type of business you’re building and the product you’re selling.

Regardless of which approach you go with, it’s important to do it right. At Kadence, we have many years of experience helping businesses with their market research, and in sizing the market and we can help you do the same. To find out more, get in touch.

In today’s globally connected world, every product has a potentially vast market. Trying to target everyone in this market with the same materials, approaches, and techniques would be crazy — people are too varied and different to respond to the same marketing message.

So how do you ensure your marketing connects effectively with as many people as possible in your target market? The only real solution is to use market segmentation.

In simple terms, market segmentation is the process of taking a diverse and varied market and dividing it into more homogeneous segments.

Typically you’ll split your market into sub-groups based on criteria like their needs, behaviors and attitudes. . Market segmentation is nothing new, but it delivers a wide range of benefits to businesses if you do it the right way.

In this guide, we’ll take a look at why market segmentation is so important, the benefits it delivers, and how you can do it effectively.

Why do we need it?

Targeting everyone in a broad market with the same message is a fast route to poor response rates and low conversion rates.

Imagine you’re selling a new smartphone. The kind of message that will resonate with a 19-year-old customer is likelyto be very different from the message that resonates with a 74-year-old. Whichever you opt for, you’ll end up alienating a segment of your market.

It’s crucial to split your market into different groups so you can use a more tailored marketing message for each one. This works across all channels, from social media ads to email and direct mail.

What are the benefits of market segmentation?

There are many good reasons to segment your market, such as:

  • Better conversion rates. The ultimate reason to use segmentation is to improve your conversion rates and increase your revenue. By targeting groups with an offering more relevant to them,  you boost your chances of a positive response.
  • It helps you lower acquisition costs by focusing on the most profitable customers. By targeting customers who are easier to sell to and bring on board, you’ll be able to focus your efforts more efficiently and avoid spending lots of resources on tricky customers. This is the approach MetLife took with their segmentation efforts, and it’s strategy we’ve used to great effect with a university looking to secure donations from its alumni. 
  • Create more tailored marketing content. By creating content and ads that are specifically targeted to a certain sub-group of your market, you’ll be able to build a closer relationship with customers. This ensures better retention and stronger connections that, over time, leads to more sales.
  • Better response to marketing campaigns. Email is one area where segmentation can work extremely well. Research by Mailchimp found that segmented campaigns had open rates 14.31% higher than those that didn’t use segmentation.
  • It saves cost. By increasing the accuracy of your marketing, you’ll get more for your money and ensure less is wasted on poorly targeted marketing campaigns
  • Greater personalization. In one report by SmarterHQ, 80% of people who classify themselves as frequent shoppers said they only shop with brands who personalize their experience. By segmenting your market, it’s possible to personalize your messaging and connect more deeply with your target audience.
  • Better service. A good segmentation can help you to provide more effective customer service. Some businesses empower their front of house or call center staff with information as to what segment a customer falls into so that they can tailor their interactions accordingly. 
  • It provides a focus for further market research so that you spend your budget and time on getting to know your most valuable customers

How to do market segmentation

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Before you start segmenting your market, it’s important to know what to aim for. A good market segment should have the following attributes:

  • It’s big enough to be profitable. If your segment is too small, there simply won’t be enough demand for your product or service and you’ll fail to reach your goals.
  • The members of your market are similar enough to respond to one message. This is the main reason to segment — is your sub-group homogenous enough for the same marketing strategies to be relevant and effective?
  • It’s future-proofed. Will your segment stand the test of  time?
  • It’s distinct. The segment is memorable and easy to distinguish from other segments.

What categories should you segment your market into?

When it comes to deciding on the criteria for your segments, there are a number of options. Let’s take a look at some of the main types of market segmentation and the benefits and drawbacks of each.

  • Demographic segmentation. This involves using criteria like age, gender or income level to segment your customer base.. It’s one of the easiest ways to quickly start dividing up your market, but it is a very simplistic and outdated approach to segmentation. As Mark Ritson rightly argues “millenials are not a segment”. Assuming that everyone of a certain age has the same needs and attitudes and behaves in the same way is misguided and has resulted in some well-known marketing fails. Take Joon, Air France’s sub-brand for millennial travelers. Rooted in stereotypes, the brand alienated its target customers and crashed and burned. 
  • Geographic segmentation. Similar to demographic segmentation, segmenting your customers based on where they live can leave you in hot water. Assuming that all consumers are the same just because they live in the same place is reductionist and is unlikely to be effective as a segmentation strategy.
  • Behavioral segmentation. This type of segmentation is based on how customers have responded or behaved in the past in their interactions with your brand. It’ll help you understand your most profitable customers and what to sell to them but the drawback is in the name. This type of segmentation only tells you how customers have behaved in the past. As such, it’s a poor predictor of future behavior, and it doesn’t provide any insights around motivations, values or needs which can help you connect with consumers on a deeper level. 
  • Psychographic segmentation. This segments customers based on their views, values and lifestyles. s . It makes it easier to create a more resonant and relatable marketing message and avoid alienating your market with views they won’t agree with.
  • Needs-based segmentation. This is by far and away the most effective approach to segmentation. Segmenting people with similar needs allows you to be more targeted in product and service design or marketing campaign development, as you can focus on addressing customer needs and pain points. What’s more needs-based segmentations tend to be more long lasting and future-proofed than other approaches. 

Market segmentation is a great way to ensure you’re targeting the right customers  and tailoring your interactions for maximum success.

It allows you to forge a deeper bond with your audience. and whilst, it requires more work than a one-size-fits-all message, it’s well worth it in terms of the results.

At Kadence International, we help our clients design effective market segmentation studies and do it in a way that maximizes revenue. To find out how we can do this for you, get in touch.

Looking ahead to the trends that will shape the coming year is a critical exercise for any business. But in 2021, this is perhaps more significant than ever. Consumer behavior has been transformed as a result of Covid-19, as many shifts in behavior have accelerated.

To understand the key trends to watch in Asia, we spoke to trend watching experts across our 8 offices in the region. Watch the video to hear their thoughts, or download the full report.

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Consumer Trends in Asia: 2021

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In the world of market research, we can only get so far by relying on hard, numerical data.

Hard metrics (generated from quantitative research) are extremely useful and should form a core part of any business strategy. But they only tell part of the overall story.

To dig deeper and gain a fuller picture of why our customers behave the way they do, it’s important to consider supplementing quantitative research with a more qualitative approach. Qualitative research is based on conversational and open-ended communication and aims to dive a little deeper than quantitative metrics and explore the why behind customers’ actions.

If you want to get the most out of your research, you should be using both approaches. In this guide, we’ll take a look at what qualitative research is, what makes it so useful, and how you can employ it in your own work.

How is qualitative research different from quantitative research?

Quantitative research:

  • It is more data-based, relying on hard data points and objective measurements.
  • It uses statistics and numerical data to identify trends and patterns.
  • It allows you to quickly establish what’s happening and look at possible causes. 

Quantitative studies are extremely valuable. They allow us to gain a reliable, accurate understanding of what’s happening in our market and amongst our customers and make clear-headed decisions that influence the bigger picture. But quantitative data alone isn’t enough.

Qualitative research is more human-focused. It’s less concerned with numbers and figures and more focused on what customers have to say. It can take the form of interviews, focus groups or online communities, and its goal is to dig into the more intangible and subjective reasons why customers behave the way they do.

Why is qualitative research useful?

Qualitative research is useful because it helps us dive into the human factors driving our customers’ actions. People are complex and often unpredictable, and our behavior can’t really be boiled down into a series of metrics.

For example, we might know that sales for one product are outperforming another. But why is this happening? Our hard metrics can show us the overall trend and might allow us to pinpoint certain glaring patterns, but they don’t tell us what’s going on in our customers’ minds.

For this, we need qualitative studies. We need to gain insight into the microtrends that lie beneath bigger patterns. 

The benefits don’t end there, though. Qualitative research means getting to know your customers and their motivations better. Here’s how that helps:

  • It can help you to understand customer needs, generating new ideas for products and services. 
  • It can provide valuable feedback on your existing offering. Using qualitative research, you can explore pain points and barriers to use, helping you understand how to improve your current products and services.
  • It can be a useful input to your marketing. By truly understanding your audience, you can take a more personalized approach, speaking their language and talking to your customers in a way they can really relate to. It can also provide useful input to campaign or content development. By understanding customer needs, you can create marketing content that solves specific problems for your audience and delivers real value in response to the challenges they face and the pain points they grapple with.
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Qualitative research methods 

Qualitative research is made up of a range of different methods and techniques. Each has its own use cases, and the best approaches will combine several methodologies based on your customers and your goals. Here are some of the main methods:

Qualitative research methods are approaches and techniques used to gather and analyze non-numerical data to understand human behavior, experiences, and social phenomena deeply. Unlike quantitative research, which focuses on numerical data and statistical analysis, the qualitative study seeks to explore and interpret the meanings, patterns, and complexities of human experiences.

Qualitative research methods are characterized by their flexibility, contextuality, and emphasis on subjective interpretations. They are suitable for studying social and cultural phenomena and individual perspectives and exploring new or complex research areas. Here are some commonly used qualitative research methods:

  • Focus groups. This is where you bring a small number of customers (usually less than 15) together in a group to discuss a particular issue. By tapping into the power of group dynamics, we’re able to uncover rich insights around attitudes and behaviors, and explore underlying motivations, need states and perceptions.
  • One-to-one, in-depth interviews. Here, researchers speak to customers directly in a one-to-one setting. It’s a good way to get truly in-depth on a topic, delving into the participant’s opinions and gaining valuable feedback and insight. In-depth interviews can be carried in person, on the phone or online. 
  • Expert interviews. Like in-depth interviews, expert interviews involve speaking to industry experts to build a rich understanding of the market and its direction. This approach can help you explore the impact of emerging trends to help future-proof your business.
  • Ethnography. This is where researchers immerse themselves in customers’ worlds to understand more about their day-to-day lives and the role of brands and products. Ethnography can take different forms, from visiting consumers and accompanying them as they go about their day to mobile self-ethnography, where consumers complete video tasks to show us how they live. 
  • Online communities. This is where groups of consumers are brought together over a series of days on an online platform to explore specific issues. Consumers then complete individual or group tasks, enabling the researcher to uncover rich insights. Like mobile self-ethnography, online communities can involve photo and video tasks and are a great way of bringing an audience to life for key stakeholders. What’s more, as online communities consumers over a longer time period than an in-depth interview or a focus group, they allow you to explore complex or sensitive issues and uncover deep insights into attitudes and values to inform your decision-making.

Traditionally qualitative research was done according to the grounded theory method. This is a framework for research that involves collecting qualitative data through the above methods and then using that data to form a theory or hypothesis. However, it’s easy to underestimate the sheer amount of data you can collect through qualitative research and this is particularly true of online methods such as online communities. As such, using the grounded theory method is often not feasible. At Kadence we take a different and more structured approach, exploring hypotheses with key stakeholders and designing the research so that we can test these. This means that the research is tightly focused on the areas that matter most to stakeholders, ensuring that the insights we uncover are actionable.  

These methods often employ thematic analysis, constant comparative analysis, and coding to organize and interpret data. The data collected in qualitative research can be rich, nuanced, and context-specific, providing deep insights into human behavior, motivations, and social phenomena. Qualitative research is frequently used in disciplines such as sociology, anthropology, psychology, education, and marketing, where understanding the subjective experiences and meanings attributed to phenomena is essential.

Some examples of qualitative research questions you might ask:

  • How important is corporate responsibility to our customers?
  • What are the main reasons people use social media?
  • Why do people want to work for our organization?
  • How do adult males feel about hair loss?
  • What are the key motivations for undertaking a weight loss program?

Qualitative research is essential if you want to truly understand your customers and improve your product or service to deliver what they want and need. It goes hand in hand with more quantitative methods of research and helps add context, explanation, and depth to the more numerical and data-based metrics.

At Kadence, we can help you get the most out of qualitative research better to understand your customers and market on all levels. To find out how to get in touch with us.