Market segmentation is the practice of dividing a company’s total pool of potential buyers (that is, its market) into significant groups or segments, in order to appropriately tailor future marketing and advertising efforts to each group. The goal of targeting is to maximize your company’s return on your marketing investment by designing programs that target only those prospects who are most likely to respond to your outreach efforts.
Doing market segmentation right requires roughly three parts of science and one part of art. It is primarily science because conducting proper segmentation is a highly analytical, even mathematical, process. On the other hand, since there are many ways to approach segmentation, doing an effective job also relies on the refined judgment and deep marketing experience of the marketing analyst. This is where art comes in.
Steps for market segmentation
The basic steps to follow in any B2C (business-to-consumer) segmentation effort should include the following:
1. Determine the geographical area of trade: Are you targeting only homes in a small part of your city? A whole city? The whole country?
2. Estimate the size of the market: Perform an initial analysis to determine approximately how many homes there are in your business area.
3. Eliminate any obviously unqualified homes: Next, adjust your market size estimate by eliminating households that clearly fall outside of your target market. For example, if you sell swimming pools, you must eliminate all apartment dwellers from your market size calculation.
4. Find out who your current customers are: If your company already has a customer base, the next step is to conduct an analysis of those who have bought from you in the past, that is, your existing customers. This type of analysis can take into account a variety of household characteristics, including simple demographics (such as age and income), psychographics (including opinions and lifestyles), and typical shopping behaviors.
5. Compare your customers to the average household in your business area: Now you need to establish a baseline of the homes in your area in each category so that you can compare your existing customers to that baseline. For example, it may be the case that 10% of households in your business area earn an annual income of $ 150,000 or more, while 20% of your existing customers have the same income level. If so, you can say that your clients “over-index” income levels in the $ 150,000 or more category.
6. Identify the highly indexed segments in your market: Now for the fun part: identify the segments that have the highest index scores on the dimensions you identified. These are your best prospects.
Measurement results
Now that you know who your best prospects are, you can use the tagline for marketing and advertising campaigns that directly reach those prospects. You can apply the results of your market segmentation campaign in two main ways:
1. Choosing advertising media that directly or indirectly target households that meet the best criteria in their segment, while “outperforming” households least likely to buy.
2. Tailoring your messaging and branding efforts to “speak” directly to your best customers.
Perfecting your campaign over time
Once you’ve launched your hyper-targeted marketing campaign, continue to monitor its results. You can do this by continuing to run a market segmentation analysis after each campaign. Remember to adjust your baseline by campaign; Your baseline should only reflect those to whom your campaign has targeted.
Market segmentation is a necessary step if you want to get the maximum return on investment (ROI) from your marketing and advertising efforts.