What are the benefits of market segmentation?

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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.