What are the benefits of market segmentation?

Image of the post author Jodie Shaw

Market segmentations studies are powerful tools for businesses. They help organisations divide up the market into distinct segments that share specific attributes. The business can then focus on the most lucrative of these market segments. Segmentations can guide everything from marketing to product development right through to identifying new market opportunities. In this article we outline the key benefits of this approach.

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 down into groups of customers than 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 organisation 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 alumni. Securing donations from alumni is a core revenue stream for universities. You might assume that targeting all alumni equally would be sure-fire way to elicit donations. But in reality, it’s a small proportion of alumni that 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 those in particular professions. But actually 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 up into distinct segments based on different 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 down versus consumer needs and how it can be improved to pull ahead of the competition.

Design more effective marketing

Segmentation studies can also provide valuable input to your marketing strategies. Not only do they indicate who to target, but they can also reveal where to market to these people and how to speak to them. The result? You’re able to spend your marketing dollars more wisely and achieve greater cut through with your comms.

Your firm 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 in actual fact, the people you want to target are Instagram addicts or avid readers of a particular publication. These people could be reached on these channels at a much cheaper price. In a world where we’re able to 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 a segmentation to marketing strategy development is in 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 spanning all ages and levels of tech proficiency. 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 the tech spec of your new devices front and centre. 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 maximise conversion.

Deliver better customer service

Segmentation studies are often mistakenly seen as being something that belongs to the marketing department. But in actual fact, to get real value out of a segmentation, the segments should be shared with and understood by everyone in a business – from the CEO right through to the cashiers on the tills.

We worked with an online dating service to identify key segments based on usage patterns and other behaviours. We then assigned all existing customers in the company’s database into one of these segments. This information popped up wherever the customer interacted with the firm. This was a powerful tool for the company’s call centre 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 recognised 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 that knows just what service to offer you based on your viewing history? These are all based on powerful segmentations designed to empower those working in customer service. Armed with the right knowledge, customer service agents are able to up-sell or aid customer retention.

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Use your resources more efficiently

As the examples above demonstrate segmentation studies can be really useful in helping businesses understand where to focus. This can allow for more efficient use of resources – be they human resources (e.g. getting a sales team to focus on a specific market segment for their outbound activities), or budget (e.g. 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 useful for the businesses that are least likely to consider them: SMEs. The most effective market segmentations do require some investment as they rely on market research to understand behaviours, attitudes, values and needs. But until you’re able to invest, our advice is to start small. Take a more basic approach to segmentation. This could be a geographic segmentation. You could also segment on demographic factors or on behavioural data if you’re lucky enough to have this to hand. This can cut through the noise and provide some much needed focus for your business.

Develop a more customer centric culture

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

But it’s important to recognise that developing a segmentation alone will not automatically result in a shift in company culture. This needs to be actively managed, and there are a number of things you can do 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 make them sure they are involved and engaged in the process. Segmentations can be disruptive. Ensuring that the people that will using it feel a degree of ownership of the customer segments is critical if they are to be embraced and adopted in the long-term.

The second is to make sure that segments themselves are clearly communicated across the organisation. Segments should be easy to understand and to 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 have 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 model of car to the sales team at the dealership – should be able to visualise 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 strategy. We often work closely with individual teams to help them understand what the segments mean for their department and their role.

Create a superior experience for customers

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

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