Market segmentation is something that every marketer needs to be familiar with, even if they don’t ever undertake it themselves.
Basically it is:
A common type of market research that breaks a large target market down into smaller parts, called segments, in order to target each segment more effectively.
Done right, market segmentation can give you the opportunity for bigger market share, higher profit margins, and more impactful relationships with your customers.
That sounds good, and pretty straightforward. But then you dig a little deeper and things get very complicated very fast. From conjoint analysis to qualitative/quantitative studies, from to attitudinal clusters to pareto analysis, the terms alone can seem overwhelming.
And that’s where we come in.
We’ve created this layperson’s guide to market segmentation, complete with new, fun names for the most yawn-inducing parts.
It covers not only the what and how of market segmentation, but also the why. Remember, research alone is never enough. You need to be able to apply your findings directly to your marketing efforts.
Segmentation Research Explained in Regular English
There are four typical kinds of market research that produce useful segments: a priori research, usage research, attitudinal research and cluster analysis, and needs-based segmentation.
We’ll describe what each of these research types means in good old fashioned English, with some more entertaining names. Each section also addresses pros and cons for the various options.
Because honestly, it doesn’t really matter what they’re called as long as they produce good results.
Their “official” names are in the footnotes if you’re interested, but here’s what we call them:
- Miss Cleo: This research creates groups based on pre-existing characteristics of your market, such as race, age.1
- Moose-age: You can do this two ways, either by a customer’s weight of use of your product or service, or based on time and place of usage. 2
- Bad Eggs and Nut Cases: Here you break your market down based on what customers believe or think, then create groups based on what opinions they hold in common.3
- Need for Speed: Questions for this type of research focus on what drives the decision making process for your market, or the core of what they need.4
Let’s investigate each of these types in more detail, so you can determine which methods will work best for your particular market and goals.
Miss Cleo: Segments Based on Pre-Existing Characteristics
We call this one “Miss Cleo” because you are using your psychic abilities to segment based on things that already exist, like gender, education level, or age. (Disclaimer: It doesn’t really require you to be psychic.)
Pros of Miss Cleo:
- Segments are easy to define (age, employment status, etc.).
- Segments are easy to target with common advertising and media options.
- Simplest of all segmentation options to create and apply (you’ve probably got most of this information in your psychic database now).
Cons of Miss Cleo:
- Even the most in-depth versions of these segments are basic. They’re just one step above mass marketing.
- Because they don’t go into depth about your customer’s internal lives or behavior, it can be hard to create well-targeted marketing messages based on Miss Cleo alone.
Moose-age: Segments Based on How Customers Use Your Product/Service
The name “usage segmentation” isn’t nearly as confounding as some of the other market segmentation terms, but it also isn’t fun at all. So we changed it to “Moose-age.”
You can create these segments based on two types of usage: weight of use, and time/place of use.
“Weight of use” refers to how much people use and buy your product. So if there is a segment that buys your product and then consistently upgrades to a higher level, you want to focus your efforts on them.
Almost universally, heavy users are more valuable than light users.
“Time and place use” means how use of your product/service varies based on the time or place it’s being consumed.
For example, jewelers understand that men in a relationship, undoubtedly one of their high-level segments, are more likely to purchase at particular times of the year (e.g. Valentine’s Day, Christmas). They adjust their marketing message and budget accordingly.
Pros of Moose-age:
- By understanding current usage patterns, you can work your marketing message within them, or opt to try and change them, whichever is more valuable.
- Regardless of how useful your segments ultimately turn out to be, knowing more about how people use your product never hurts.
- Many businesses can use their own existing consumer data to create moose-age segments.
Cons of Moose-age:
- If it turns out that use of your product is almost entirely seasonal, it may be challenging to change this perception.
- It can be hard to know whether you’ll see the most gains by targeting light users and trying to convert them to heavy ones, or addressing other segments that share traits with the heavy users.
Bad Eggs and Nut Cases: Finding Attitudes and Grouping Them Together
These two kinds of research often go hand in hand with Moose-age research. Finding out how customers use your product usually involves learning what they think about it in certain situations (Bad Egg Research), and then grouping them based on those attitudes (Nut Case Analysis).
Asking customers whether they agree or disagree with particular statements allows you to readily identify their opinions or attitudes.
You then combine those who have similar opinions in what are called “attitudinal clusters,” but which we refer to as “Bad Nut Clusters.”
Pros of Bad Nut Clusters:
- The ability to target customers based on internal attitudes and feelings is far more impactful than simply marketing based on demographic facts.
- As with Moose-age research, creating Bad Nut Clusters will give you considerable insight in your customer base at the time, even if those attitudes shift regularly.
Cons of Bad Nut Clusters:
- It’s very challenging to extract opinion data from an existing database. It almost always involves direct surveys or interviews of customers to get an accurate picture.
- Bad Nut Clusters require some fancy statistical magic after all the data has been collected to apply scoring systems. This makes them hard to replicate, as well as very time consuming and expensive.
Need for Speed: Meet Your Customers at the Heart of Their Problem
When you know what customers really need, you can create products and services that they will be eager to engage with.
Need for Speed segmentation is a powerful tool that should make it possible for you to access the decision making process and impact it. These segments also let you know what trade offs people are willing to make when buying your product.
For example, if you can determine that customers feel that your product is high quality but aren’t willing to pay more for this quality, you know that it’s time to either change your value proposition or your prices (possibly both!).
Pros of Need for Speed:
- Because they get to the basis of purchase decisions, Need for Speed segments are some of the most actionable varieties.
- The factors that influence purchases aren’t as likely to shift regularly as the attitudes that create Bad Nut Clusters.
Cons of Need for Speed:
- To create segments you’ll still need to employ Nut Clusters (a.k.a. cluster analysis), which means you may have considerable segment overlap. This can make accurate targeting of particular segments difficult.
Goals of Market Segmentation
At the end of a round of market segmentation you should be able to more accurately match your products and services to groups of customers.
The data you get should be gathered in such a way as to allow you to develop tailored products, customized pricing scales, or specialized services for each segment.
When you’re setting up a research project, keep in mind that without the proper resources and planning a segment will do you no good. You need to be prepared to allocate time, budget, and employee hours to your segments, so don’t create more than your marketing department can address.
It’s also important to know that sometimes market segmentation research reveals that what you anticipated would be a big opportunity segment might actually be too small to be worth your time and budget.
In that case you wouldn’t want to continue creating customized pricing or new products for that segment, but could instead reallocate your resources to a more robust group.
Market Segmentation Methods: 5 Segment Types
The way that you decide how to divvy up your market is based largely on what kinds of information you’d find useful in marketing to them.
- Geography: Location of your customer, your location, or where you product or service will be used.
- Demographics: General characteristics of the customer, such as level of education, age, gender, number of children, etc.
- Psychographics: Emotional or psychological traits that are based on common personality types, emotional traits, and/or belief systems.
- Lifestyle: Based on behavior, and focuses on typical activities that customers engage in, including leisure activities, hobbies and travel.
- Life Stage: Combines both demographic and psychographic traits to determine what stage customers are. Can include recent graduates, newlyweds, empty nesters, single parents, and more.
For example, if you already know that men under 50 make up the bulk of your customer base, it might be useful to create segments based on lifestyle, psychographics, or life stage.
However if you marketing team hasn’t yet established very much broad customer data through initial market research, you may choose geographic or demographic traits for your segments.
Keep in mind that you want to identify and segment customers in such a way that you can track them in a database or otherwise keep tabs on them.
How to Act on Your Market Segments
The ultimate goal of creating these segments is to establish high-value groups that you can effectively market to.
Ideally, you’ll arrive at just a few large segments, so you have minimal splintering of your core marketing message, along with sizeable groups that will reward your efforts.
But the best, most clearly targeted segments based on flawless research methods will not avail you if you aren’t prepared to make adjustments to reach those segments.
Example: Single Dads and Swingin’ Bachelors Buying Electronics
Let’s say you create Need for Speed segments based on your customers’ life stages, and discovered that men 35-44 who are single parents evaluate their purchase of household electronics based on whether or not they would work for both them and their kids.
So they’re looking for something that meets the needs of their whole family, not just themselves. Their segment makes up 36% of your market.
Then you find the segment you’ve been assuming was your most valuable — young, single, professional men from 26-25 — is basing their purchase decision heavily on aesthetics.
This was, you figured, the highest value segment because they would be more likely to have disposable income. Most of your marketing has been toward this group; they are 42% of the market.
But then your research reveals that the Single Dad Segment doesn’t buy more, but they do buy higher priced items than the Swingin’ Bachelors. This price difference is enough to make them more profitable for your company.
Think Before You Segment
What you should do is a quick pivot, rebranding your electronics as the single dad’s lifesaver with new social media profiles, different email messaging, alternative ads in different print publications, etc. etc.
If you didn’t start out your market segmentation research ready to do something along those lines, it’s probably better not to undertake it all.
Market segmentation is expensive and time-consuming; don’t do the research if you can’t act on it.
1. Miss Cleo = a priori Segmentation
2. Moose-age = Usage Segmentation
3. Bad Nut Clusters = Attitudinal Research and Cluster Analysis
4. Need for Speed = Needs-based Segmentation
5. Much of the basis for this article comes from Dobney.com’s overview of Market Segmentation