Each year, an average of 30,000 new products enter the marketplace (that’s enough to fill the average grocery store!), and 70% will fail to sustain or grow sales in the first two years.
How does a brand ensure that a new product stands out in the sea of competition? How does it increase the odds of success?
The key is to avoid a one-size-fits-all approach and instead get the correct product in front of the right customers at the proper time.
To achieve this level of specificity, brands must use proper market segmentation. This practice allows a company to focus its product development and marketing efforts narrowly.
What is market segmentation?
At its most basic, market segmenting is breaking a broad swath of potential customers into smaller customer groups with similar characteristics. A company can then design products and marketing campaigns tailored to the needs and interests of a particular target market.
Few companies have the resources to sell to a mass market. Most must focus their efforts to meet more limited budget constraints.
Market segmentation identifies the many different reasons people purchase products to help companies make smaller investments with more significant returns.
The more that a brand can narrow the audience for a new product, the more likely it can successfully sell to them. Rather than trying to persuade a generic customer base to buy a product they may or may not want, you can place the product in front of people who need it.
Benefits of market segmentation
Market segmentation provides valuable customer insights that can be used to create many positive business outcomes.
● Product development: By identifying narrow market segments and researching their specific needs, brands can create products that satisfy those exact pain points. These specialized offers will have little to no competition.
● Business growth: The more a company understands various market segments, the more it can expand by moving into new geographic areas, offering complementary products to existing customers, or creating new products to appeal to a previously uninterested audience.
● Optimized marketing: Using the insights from segmentation research, marketing teams can create highly targeted messages on the most relevant platforms. Even
better, they can make calculated decisions about media spend to reduce costs.
● Better distribution strategies: Knowing where and when your customers shop can help you change or tweak your distribution strategies to streamline and save money while improving customer satisfaction.
● Customer retention: Done well, market segmentation can create brand loyalty. When you’re able to anticipate and address a customer’s needs at every turn, they are far more likely to become repeat buyers and brand advocates.
A company that takes the time and energy to cultivate a deep understanding of its customers is almost guaranteed to have a competitive advantage. It’s far more likely to expand its market share and profits.
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Types of market segmentation
There are four main types of market segmentation, each of which offers a different method for identifying clear attributes unique to a particular group of customers.
It can be helpful to group customers by a specific area—from a country down to a neighborhood.
This approach is particularly effective for products and services that address localized concerns. This may include items affected by the weather (lawn care, clothing) or regional preferences (cuisine, sports, or other recreational activities).
To use geographic segmentation, break down potential customers by identifying characteristics such as state, county, zip code, climate, primary language, or population density.
It’s helpful to group customers by quantifiable factors like age, income level, family size, religion, race, nationality, language, educational level, marital status, occupation, home ownership, political party affiliation, or income.
Demographic information is generally easy and affordable to access, which makes this type of segmentation one of the simplest to use.
A product may use demographic segmentation to position itself as the best solution for a specific type of person (for example, married men, 30 to 40 years old, who have a full-time job earning $100,000 or more and own a home).
Demographic segmentation may not be detailed enough to create distinct product differentiation. That’s why it’s often combined with another type of segmentation to narrow the customer group further.
One of the most detailed forms of market segmentation divides customers based on qualitative traits. These details can’t be easily measured like demographics and include things like values, habits, attitudes or opinions, personality, lifestyle or social status, and hobbies or activities.
Gathering psychographic information requires more effort and can be achieved using surveys, focus groups, interviews, and social media monitoring.
Once you’ve identified shared psychographics for a particular market segment, turn it into a statement. For example, “we help busy moms who want to serve their young children a home-cooked meal in 30 minutes or less.” Then, ask your target audience whether the statement resonates with them.
Very often, marketers like to combine psychographic segmentation with demographic segmentation to create very distinct customer groups.
Finally, another popular method of market segmentation is based on customer behavior during the buying journey.
Behavioral segmentation considers actions like when shoppers become customers (acquisition), how customers use the product or service (user journey), how frequently they use it (engagement), how long they continue to use it (retention), and how often they make new purchases (loyalty).
This method can be complicated to execute but is likely to generate beneficial insights. It’s often the best way to identify opportunities for new products or markets and for improving existing offerings.
How to validate a segment
To be worthwhile, a segment must be clearly defined and unique. To test whether your potential market segment makes the grade, ask yourself these questions:
- What does this segment value most about a product like ours?
- What is the number one reason this segment chooses to buy a product like ours?
- What is the buying journey for this segment (what content, platform, features are crucial)?
The answers to these questions must be based on data from actual research, not just your intuition or anecdotal experiences.
If you can easily and with great detail answer each of these questions, then your segment has great potential to be actionable and profitable.
If you don’t have clear answers, however, then you likely need to do more research or further refine the segment.
How to segment the market for a new product
The market segmentation process isn’t complicated. There are two major components—creating segments and executing a go-to-market plan—and a few significant considerations at each stage:
- Set an objective for what you hope to achieve through market segmentation (create a new product, better serve existing clients, find more profitable customers, etc.).
- Identify which segmentation type or combination of types you’ll use, and assess the viability of your proposed market (Is it too large? Is it large enough?)
- Conduct research by collecting hard data and anecdotal evidence related to your preferred segment. Avoid rushing this stage because it is the most crucial component of quality segmentation.
- Compile your research and use it to determine which new products or marketing approaches you’ll use to target this segment.
- Validate the offer or messaging with a representative sample of the segment using surveys, focus groups, and polls.
- Develop a launch plan using marketing and sales strategies relevant to the target segment.
- Test the effectiveness of your strategy by implementing conversion tracking early.
- Continue to execute the plan and monitor the results over time, adjusting as necessary.
To ensure the best results, companies may want to invest in marketing software. Many products will automatically segment customers into relevant groups, analyze the segments using interactive charts, and provide third-party data to improve results.
Market segmentation best practices
As you execute a market segmentation plan, watch out for these common mistakes that can negatively affect your results:
● Unaligned segments: The markets you target must harmonize with your company’s strategy and structure, rather than trying to conform your brand and offer to suit the segment.
● Segments that are too broad: Failing to make the segment narrow enough will allow the competition to gain an advantage by targeting a more clearly defined and like-minded portion of your segment.
● Segments that are too narrow: Focusing on too small of a segment will significantly limit the return on investment of your time and money.
● Too many segments: It’s tempting to pursue all of the potentially profitable segments you identify, but this can dilute resources and negatively affect revenues.
● Targeting people, not money: A perfectly aligned and well-sized segment is useless if its members don’t possess sufficient buying power. Focus on market segments that will create a positive ROI, even if they aren’t the largest or most glamorous.
● Never updating segments: People change, and those changes can come quickly in today’s global, tech-savvy world. Frequently revisit your segments and adjust as needed to remain relevant and competitive.
Market segmentation is a highly effective strategy, and it isn’t complicated. It can be time-consuming, however, and may be challenging if it’s a new approach for you and your marketing team. Expect mistakes as you execute this new approach.
Stick with it, though, because segmentation is an incredibly valuable process that shows customers that you genuinely understand them. Providing tailored products and messages that resonate with your customers’ specific needs will help your brand grow exponentially.