Market segmentation – how to peel your customers from the total market

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Every product and every service serves a specific market. However, this market is not homogeneous, but consists of many different people with different needs.

That is why you should not focus your marketing strictly on the market as a whole, but rather take individual measures for individual customer groups. Market segmentation helps you to do this by identifying subgroups within the overall market that you can then target with your marketing.

What is market segmentation - and how is it different from customer segmentation?

Market segmentation aims to divide the entire heterogeneous market into homogeneous subgroups which can then be selectively targeted. The segments can be formed using different criteria, but should always be designed in a way that the customers within a segment show similar reactions to marketing measures.

The scientific definition of market segmentation comes from Hermann Freter:

“Market segmentation is […] the division of the overall market into sub-segments which are internally homogeneous but heterogeneous with respect to their market reaction, as well as the targeting of one or more of these market segments.”

(Source: Markt- und Kundensegmentierung: Kundenorientierte Markterfassung und -bearbeitung, Kohlhammer, 2008)

Just like market segmentation, customer segmentation also aims to classify customer groups. The difference is that customer segmentation uses only the company’s own customer base as a basis, whereas market segmentation considers the entire market, i.e., current and potential customers. Customer segmentation consequently helps to identify particularly high-revenue customers, while market segmentation also goes beyond this.

 

Why market segmentation? - It offers you these insights and possibilities

Market segmentation serves several purposes and can provide you with diverse information that will not only help you align your marketing strategy, but also optimize your products and services.

The following functions of market segmentation will be useful to you:

  • Narrowing down the relevant market for products and servicesMarket
  • Segmentation of the heterogeneous overall market into homogeneous segments
  • Identification of possibly neglected submarkets
  • Evaluation of submarket potentials
  • Assess your own market position in relation to competitors
  • Forecasting of future developments
  • Selective market strategies ensure better access to the target groups

Conditions for successful market segmentation

To conduct a productive segmentation, certain requirements should be met. These not only ensure that the results are utilizable, but also that the market segmentation does not end up costing more than it yields. Make sure you have the following basics in place before you start segmenting:

  • The overall market – has heterogeneous patterns of demand
  • Relevance to customer buying behavior – the segmentation criteria should be chosen to reflect differences in the buying behavior of your customers and their response to marketing activities.
  • Possibility of measurement – The criteria must be measurable and/or trackable. This is usually done using common methods from market research. For some types of segmentation, this can be more challenging, as personal attitudes and motives, for example, may not be so easy to measure.
  • Accessibility – Gathering data and information for segmentation should be possible without great expense, otherwise market segmentation will not be profitable. Existing resources such as (online) magazines and catalogs are useful for obtaining data cost-effectively. Topic-specific chat forums can also make it easier for you to exchange and gather information.
  • Profitability – The segmentation criteria and the resulting subgroups should be of a nature that makes it financially reasonable to market to these target segments. If obtaining information on a particular target group is very expensive or if the segments are made up of target groups that are too small and unprofitable, segmentation in this field does not make sense. Once the segmentation is complete, you should have identified target segments that you can specifically advertise to and that can afford your product. The individual segments should have sufficient sales volume.
  • Stability – Market segmentation is a fundamental approach on which your later marketing activities will be based. Therefore, your submarkets should be stable also over a longer period of time and not be subject to short-term fluctuations. The measurement criteria should also remain relevant over a longer period of time.
  • Connection to marketing measures – the criteria of your market segmentation should have a connection to your marketing tools.

Use the template for market segmentation

Market Segmentation

Criteria you can use for your market segmentation

Generally, you should keep in mind that the choice of the “right” criteria always depends on your individual situation. The question of the right characteristics can therefore not be answered in a general way. The following overview lists the various possible criteria and their advantages. Use them to peel the ideal customers out of the entire market. This helps you to find a suitable segmentation strategy to identify types of customers and consumers or buyer groups:

  • Sociodemographic characteristics – these criteria are the “classics” among the segmentation criteria. They include gender, age, marital status and occupation. These characteristics are easy to collect and are therefore a good starting point for market segmentation. However, it may happen that in the end there are no real behavioral differences between the segments.                                                                                                                                          
  • Geographic criteria – here, distinctions are made according to region, since factors such as population density, cultural influences, and consumer behavior can differ from region to region. Geographical criteria can be divided into macro-geographical features such as states or cities, and micro-geographical ones such as city districts.                                                     One example of a well-known geographic market segmentation is the division of Germany and Austria into so-called Nielsen areas. This was introduced in the 1950s by the market research company ACNielsen and is still used today by a wide variety of companies. Many newspapers, for example, indicate the size of their circulation in the various Nielsen areas in order to simplify the placement of advertisements. The breakdown of Germany looks as follows: 
    • Nielsen I: Hamburg, Bremen, Schleswig-Holstein, Lower Saxony.
    • Nielsen II: North Rhine-Westphalia
    • Nielsen IIIa: Hesse, Rhineland-Palatinate, Saarland
    • Nielsen IIIb: Baden Württemberg
    • Nielsen 4: Bavaria
    • Nielsen 5 + 6: Berlin, Mecklenburg-Western Pomerania, Brandenburg, Saxony-Anhalt
    • Nielsen 7: Thuringia, Saxony

 

  • Psychographic attributes – these include general personality traits such as lifestyle, interests, attitudes and activities. They further include product-specific criteria such as purchase intentions and utility perceptions.
      
  • Behavioral characteristics – in contrast to the other aspects, these are not determinants of purchasing behavior, but rather the result of purchasing decisions. This means that they are not only a segmentation criterion, but also an indicator of the influence of the other factors. Behavioral characteristics include, for example, brand choice, purchase volume, the choice of shopping location as well as media usage.
Market Segmentation overview
Types of Market Segmentation

These segmentation criteria apply specifically to B2B

Market segments can also be determined for the B2B sphere. Here, you should proceed in two steps by first segmenting the markets at the macro level and looking at characteristics at the international level. The second step is micro-segmentation, where you go down to the individual level and segment contact persons.

Here are the segmentation criteria at the macro level in B2B marketing:

  • Country market criteria – these include characteristics that depend on the country in which the company in question is located. These can be used to create country portfolios for international market development. They include, for example:
    • Economic policy
    • Purchasing power
    • climate
    • Industry culture
    • Level of technical development
    • Legal framework
    • Infrastructure
    • Competition
 
  • Organizational demographic factors – this category includes all influences that are company-specific. These can include the following:
    • Legal form and resulting general conditions
    • Form of operation
    • Location of the company
    • Number of employees
    • Branch
    • Turnover
    • Degree of innovation
    • Age
    • Size
 
  • Demand-based segmentation criteria – these are factors that play a role in business relationships with the relevant company. For example, these are:
    • Type of business (end-customer business, OEM business, component or system supply).
    • Procurement situation – is it an initial purchase or a repeat purchase?
    • Stage in the (potential) customer’s procurement process
    • Quality expectations
    • Possible profit margins
    • Payment behavior and creditworthiness
    • Order volumes
    • Order frequency
    • Delivery deadlines
    • Ordering policies of the customer – is it single sourcing or multiple sourcing?
 

At the micro level in B2B marketing, the following segment-specific criteria apply:

  • Individual criteria – these include characteristics that depend on the decision makers of the company under consideration. Among them are:
    • Subject matter expertise
    • State of knowledge
    • Decision-making behavior
    • Risk behavior
    • Motivation
    • Attitude
    • Function and position in the company
    • Education
 
  • Buying center factors – this is about the structures within the buying center. The following points may be considered:
    • Size and composition of the buying center
    • Process of decision making
    • Relationships and hierarchies
    • Roles

How many different segments make sense?

To find out which number of segments is optimal for you, first consider the two extremes. No segmentation would mean that the entire market would be approached in the same way. On the other hand, maximum segmentation would mean that every single customer would be targeted individually.

In order to find the sweet spot, i.e. the most efficient range, we consider the graphs for segmentation costs as well as for segmentation revenue with increasing number of segments. The point where these two curves are widest apart marks the point with the optimal number of segments.

Market segmentation graphs
Market segmentation: Optimal number of segments

Conclusion

Market segmentation is an important tool and forms the basis for your marketing activities. It helps you identify the different target groups in your market, how lucrative they are and how they differ in terms of their reactions to marketing activities.

When performing segmentation, you should keep in mind that this is a fundamental decision, so you should choose criteria that will remain stable and relevant in the long term. Also the segmentation itself should not cost more than it brings in.

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As a founder and entrepreneur, I experience every day how important customer focus is for companies.

Integrate the essential customer perspective into your product genesis and marketing processes. That puts PS on the street, that it runs.

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