Market segmentation: a complete guide

How well do you know your customers?   

Are they virtual strangers to you? Do you know them on a first name basis? Or are you at a point where you can finish each other’s sentences?   

You don’t need to be BFFs with your target audience, but you should have a very clear picture of what they expect from you, and vice versa.   

This is why it’s so important to get the basics of market segmentation down. 

From identifying target segments with demographic data to pricing strategy to marketing automation, your market segmentation process will be the back bone of your entire marketing strategy. 

Everything you could possibly want to know about market segmentation will be covered in this guide (and then some).   

What is market segmentation?  

Market segmentation is the process of dividing a broad target market into smaller, more manageable subgroups of consumers who share similar affinities, needs, and behaviors.   

By bunching customers together into subcategories, you can deliver tailored messages and marketing strategies that are more likely to resonate with each segment. This will only improve marketing efficiency and effectiveness.   

By segmenting your market, you can:  

• Develop products and services that better meet the specific needs of different customer groups  
• Create a more unique customer experience by building out a personalization strategy 
• Allocate marketing resources more efficiently  
• Identify new market opportunities  
• Enhance customer satisfaction and loyalty  

Types of market segmentation  

These are the who, the what, the where, and the why, with each offering unique insights into your target market:  

1. Demographic segmentation  

Demographic segmentation is widely used due to its simplicity and the relative ease of collecting this data. For example, a luxury car brand might target individuals aged 40-60 with high incomes and executive-level jobs. Some examples of demographic segmentation include:   

• Age  
• Gender  
• Income  
• Education level  
• Occupation  
• Family size  
• Marital status  
• Religion  
• Nationality  

2. Geographic Segmentation  

Geographic segmentation divides the market based on physical location, including:  

• Country  
• Region  
• City  
• Climate  
• Population density (urban, suburban, rural)  

This type of segmentation is pretty standard for any business, even if you’re serving international markets. For instance, a clothing retailer will tailor its inventory to different geographic locales based on seasonality, trends, and local cultures and styles.   

3. Psychographic Segmentation  

Psychographic segmentation speaks directly into customer affinities and it really attempts to understand the customer on a deeper level. Some examples include  

• Lifestyle  
• Personality traits  
• Values  
• Attitudes  
• Interests  
• Opinions  

This type of segmentation is more difficult to refine, but yields stronger brand relationships since you’re getting to know your customers on a more personal level. For example, a fitness brand might target health-conscious individuals with active lifestyles and a strong interest in personal wellness.  

4. Behavioral Segmentation  

Behavioral segmentation analyzes consumer behavior and customer interactions and groups them together with other customers who act similarly. Some examples include:   

• Purchase history  
• Brand loyalty  
• Usage rate  
• Benefits sought  
• Decision-making patterns  
• Readiness to purchase  
• Purchasing habits 

This one should be the most obvious to any marketer. By analyzing previous and current behavior, you can accurately group potential customers together who made similar purchases.   

Odds are, that customer who bought all that cat food probably would be interested in seeing other items for the cat they probably own (and if they don’t, well, that’s okay too. We’re not here to judge).   

5. Firmographic segmentation  

Firmographic segmentation refers to segmentation on a company or firm level. ABM campaigns, B2B marketers, and digital marketing teams in a variety of verticals can especially benefit from a thorough understanding of firmographic segmentation, especially when dealing with niche markets. Some examples include 

• Company size 
• Company location 
• Number of employees 
• Business offering 
• Company needs 
• Specific market served 
• Relevant personas 

Benefits of market segmentation  

In an era where consumers are bombarded with countless marketing messages daily, generic, one-size-fits-all approaches are increasingly ineffective. Marketing segmentation allows businesses to cut through the noise and deliver messages that truly resonate with their target audience.  

TL:DR it’s preeettyyyyy important.   

Customers today are accustomed to being marketed to every second of every day. Which is fine. But if you’re going to be pushy, you need to provide a relevant experience, which means your marketing messages have to align with what your market segments expect to see.   

Here are some ways market segmentation benefits any type of company: 

Marketing campaigns become way more efficient  

• Improved return on investment (ROI): Allocating resources towards the most relevant segments allows companies to optimize their marketing spend and improve ROI.  

• Better targeting and resource optimization: By focusing efforts on what you know are the most relevant segments, you’ll achieve better results without wasting resources.   

• Channel optimization: Understanding which channels different segments prefer allows for more effective media planning.  

• Messaging hits harder: Tailored communication will resonate much more effectively than generic messaging applied broadly.  

The customer experience becomes more memorable and valuable

• Personalization at scale: The goal of personalization is 1:1 marketing. Segmentation allows for a degree of personalization that significantly enhances customer experience.  

• Relevant products and content: Dynamic segmentation better equips companies to surface relevant product and content recommendations that are more likely to boost time on site.   

• Streamlined customer journey: Understanding segment-specific customer journeys allows for the removal of friction points that interrupt the user experience.  

• Brand consistency: When you have an effective segmentation framework, you can ensure potential customers are getting the same brand experience through any channel on any device.  

• Increased satisfaction: Tailored products and marketing messages can increase customer satisfaction by meeting specific needs and preferences.  

• Stronger relationships and loyalty: Personalized communication increases customer satisfaction and brand loyalty by building stronger connections.  

Sales and conversion rates go UP  

• Improved ad performance: Here’s a shocker. When you target your ads to the right audiences, you’ll likely see a higher click-through rate (CTR) and lower cost per acquisition (CPA).   

• Optimized sales funnel: Understanding segment-specific buyer journeys allows for more effective nurturing and conversion strategies.  

• Cross-selling and upselling: Customer segmentation helps identify the best candidates for cross-selling and upselling based on attributes like purchases made and overall customer satisfaction.   

Decisions are made quicker with data-driven insights 

• Objective insights: Instead of relying on pure intuition, or “trust me, bro”, segmentation provides a data-driven foundation for strategic decisions across organizations.  

• Measurable results: Not everything in marketing needs to be measured, but effective segmentation means you’re better able to set benchmarks for marketing effectiveness.   

• Continuous improvement: Once you’ve measured your results, you can refine and retool so you can see what went right and what went wrong.   

• Predictive power: By analyzing segment behavior and leveraging AI, businesses can better predict future trends and customer needs.   

Product development is accelerated 

• Deliver what your target customers want: When you have a clear understanding of your customers, there’s a better chance you’ll have a clear understanding of what they want.  

• Unique features: Products can be designed or modified to meet the specific requirements of high-value segments.  

• Differentiation: Find out what really sets you apart from your competitors by analyzing who your customers are. Do you have a ton of customers who fit neatly into one specific segment? Chances are, you’re doing something right that’s drawing in a very specific subset of customers.   

Here’s another shocker: it’s impossible to run successful marketing campaigns, provide meaningful customer experiences, boost sales and conversions, make better decisions, and develop new products without knowing who your ideal customers are and what they want.    

Challenges in marketing segmentation  

Marketing is all about problem solving and segmentation is no exception. Here are just some of the challenges marketing organizations will need to overcome in order to implement an effective market segmentation strategy:   

Data collection & privacy concerns  

Difficulty in data gathering: Collecting comprehensive, accurate data is tough. We don’t mean tough like trying to solve a Saturday New York Times crossword puzzle without looking up the answers.   

It’s more like trying to solve the Saturday New York Times crossword while blindfolded and chewing peanut brittle.   

This is especially true for small businesses or companies who aren’t investing in an effective customer data platform (CDP).  

Privacy regulations: Strict data protection laws like GDPR and CCPA limit how companies can collect, store, and use customer data. And they often come with harsh penalties if you decide to violate them.   

Ethical considerations: If your pockets are deep enough to absorb penalties incurred from breaking privacy regulation laws, then consider the ethical dilemma. There's a fine line between personalization and invasion of privacy, which businesses should navigate carefully.  

Data quality issues: Does your data suck? Then your marketing segmentation is going to suck, too.   

Poor segmentation  

Yes, one of the challenges of market segmentation is... poor market segmentation.   

The reason is because it’s not something you can get wrong and then just fix and everything will be alright. If your segmentation is off, it’s going to impact almost every facet of your business beyond just marketing and outreach. Here’s how:  

Too many segments: Unless you have endless resources, if you have too many segments, you’re going to spread yourself thin and render yourself ineffective across the board.   

Missed opportunities: Conversely, hyper-segmentation might cause you to overlook potential opportunities that slip between the cracks because they don’t slot neatly into one of your pre-build segments.   

Complexity: In addition to your CDP, you need to ensure your segmentation infrastructure is balanced and easy to operate. Over-segmentation will make it difficult to manage.   

Diminishing returns: You need to decide when enough is enough. Geolocation, previous purchases, and content interacted with are all valuable data points for segmentation.   

What your customers ate for breakfast? Probably not (unless you’re in the business of providing breakfast in some way. Which, in that case, disregard).   

Changing customer behavior  

Dynamic nature of segments: Customer needs, preferences, and behaviors evolve over time, which means you also need to evolve your data management system and analysis on an ongoing basis.   

Rapid market changes: The world is constantly changing and sometimes it happens really fast (as if we needed a reminder). External factors like technological advancements or economic shifts can quickly alter the relevance of existing segments. Be sure to adjust accordingly to rapidly changing segments.   

Life stage evolution: For many lifestyle brands, customer acquisition and brand loyalty start at an early age. You’ll need to take into account if a natural part of the customer lifecycle for your brand involves accompanying your customers on their life journey.   

Implementation complexity  

Odds are, your market segmentation efforts will encompass multiple organizational layers, including cross functional collaboration and a whole mess of marketing tools that overcomplicate every process.   

Resource intensity: Executing tailored strategies for multiple segments can be resource-intensive in terms of time, money, and human capital.  

Cross-functional coordination: You’ll need to make sure that your cross functional teams are all aligned on strategy, workflows, and operating out of a unified system of data and operational management.  

Technology integration: Using one tool is hard enough, but trying to integrate that tool with a whole slew of other tools and trying to make them work together is a whole separate issue. Prioritize tools and solutions that easily integrate with one another and are agile enough to be implemented with minimal disruption.   

Balancing personalization and scale  

One of the primary use cases for market segmentation is personalization. Being able to provide your customers a 1:1 personalized experience will lead to higher customer retention, better brand recall, and substantial ROI (buzzwords galore, we know).   

Personalization has its own set of challenges that will interfere with your marketing segmentation efforts.  

Defining personalization: Most companies don’t even have a unified understanding of what personalization means, let along how they’re supposed to implement it.   

Cost of personalization: Personalization isn’t cheap, but it’s a worthwhile investment for most companies with any kind of diverse customer profiles.   

Consistency across channels: Providing symmetric experiences can be pretty challenging. When you implement your personalization solution, ensure it has the capabilities to provide a consistent experience across all channels.  

Measuring segmentation effectiveness:  

Attribution: Many companies struggle with attribution across the board and segmentation is no exception. If you don’t have a proper CDP, it can be challenging to accurately attribute business outcomes to specific segments.  

Long-term impact: Many companies prioritize short-term results over long-term. The full benefits of segmentation may only become apparent over time, making it difficult to justify short-term investments.  

Selecting appropriate metrics: Choosing the right KPIs to measure the success of segmentation efforts can be complex, as different segments require different success metrics.  

Control group challenges: Establishing proper control groups to measure the effectiveness of segmented vs. non-segmented approaches can be difficult.  

Data integration and management  

Siloed data sources: Many organizations struggle with integrating data from various sources (CRM, website analytics, social media, etc.) to create a unified customer view. If only there was a CDP solution that could do that for you...  

Data consistency: Odds are, if your data is siloed and you don’t have a unified platform to bring it all together, it’s going to be inconsistent and actually work against you.   

Real-time data processing: Working with clunky personalization, CDP, and experimentation solutions will slow you down drastically. Customers don’t have time for that. As your customers embark on the customer journey, your data processing should evolve to reflect customer behavior.   

Data storage costs: Managing large volumes of customer data for segmentation purposes can be expensive in terms of storage and processing power.  

Segmentation Fatigue  

Over-segmentation: Customers may become frustrated if they feel they're being excessively categorized or if they receive too many targeted messages.  

Privacy backlash: As customers become more aware of data usage, there may be a backlash against perceived over-personalization.  

Message consistency: Maintaining a consistent brand message while tailoring content to different segments can be challenging.  

Segment mobility: Customers may resent being "locked" into a particular segment if it prevents them from seeing offers or content they're interested in.  

Addressing these challenges requires a combination of strategic thinking, technological solutions, and organizational adaptability. Effective marketing segmentation is an ongoing process of refinement and adjustment, continuously balancing the benefits of targeted marketing with the complexities and costs involved. By anticipating and proactively addressing these challenges, businesses can maximize the effectiveness of their segmentation strategies and reap the substantial benefits that well-executed segmentation can offer.  

Market segmentation strategy  

Let’s get right down to basics. Here are 10 steps you can follow right now to ensure your market segmentation strategy gets off on the right foot.   

1. Plan: Start with clear objectives and realistic targets.   
2. Get your data house in order: Combine first-party data, third-party insights, and market research. If you’re doing this all manually, then you’re out of your mind. Make sure you have a CDP in place first before moving on to step 3.   
3. Let’s get actionable: Focus on segments you can actually use right now that matter the most to your business.  
4. Simplicity is key: Don't overcomplicate things. If your segments aren’t abundantly obvious to you, start with a handful of segments and build from there.   
5. Stay fresh: Don’t be the company that peaked in high school. Your customers are evolving and they expect you to grow with them. Ensure you’re segmentation is up-to-date to reflect your changing customer base.   
6. Embrace your inner scientist: Test, analyze, refine. Rinse and repeat until you've got it just right.  
7. Spread the word: Your segmentation should inform more than just marketing. Product, sales, engineering, leadership, and even finance will stand to benefit from effective segmentation.  
8. Rely on your martech: Let marketing automation, AI, and CRM tools do the heavy lifting for you.  
9. Find the sweet spot: Balance precision with reach. Don’t try to hit everyone all at once. Your segments should be focused, but not microscopic.  
10. Think long-term: Focus on segments that promise lasting value, not just quick wins. 

Wrapping up 

Marketing segmentation is the backbone behind any marketing strategy. Without properly segmenting your customers or your audience, you’re just going to be pushing out one-note, one-size fits all marketing.  

For some companies, this might be fine. But most customers today are, at a bare minimum, expecting a personalized experience.  

Effective segmentation isn’t a one-time exercise, but an ongoing process of refinement and adjustment. As customer needs evolve and new data becomes available, your segmentation strategy should evolve too. 

So, put aside ROI and bottom line (it’s why we’re all here, doing what we do). Marketing segmentation humanizes and personalizes the customer experience. Which is what should always come first.