What Is a Market Segment? Definition, Benefits, and Steps

By Indeed Editorial Team

Updated September 29, 2022

Published November 5, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

There are various ways to identify and group customers for the best return on investment in marketing. One way to do this is through market segmentation. Learning the purpose and function of a market segment can help you develop an effective marketing strategy. In this article, we discuss the definition and benefits of market segments, identify the four primary types of segmentation, and highlight six steps of identifying your target audience.

What is a market segment?

A market segment is a grouping of people used to market a company's products or services. Depending on the company's business activities, a market segment can comprise individuals, families, businesses, organizations, or a blend of types. The individuals in the group or market segment share similar characteristics in specific areas identified by the company and are a subset of the company's larger overall market.

The marketing team then uses this information to understand the market segment's needs, demographics, personality, shopping habits, and lifestyle. This information is incredibly helpful in developing effective marketing campaigns for specific markets.

Related: What is Market Positioning? How to Develop a Strategy

4 benefits of market segmentation

There are several essential benefits of market segmentation, including:

1. Increased marketing effectiveness

Market segmentation allows a company to fine-tune its marketing efforts to be as effective as possible while targeting its marketing activities to specific groups. For example, when you can identify the needs and preferences of your customers, you can create and implement a marketing plan targeted at the market segment. Then, you can focus marketing efforts on reaching those specific customers within the target market segment, knowing what they need and want from the products or services you sell. This has the added benefit of increased sales and revenue for the company.

Related: Top 10 Skills of a Marketing Manager

2. Improved marketing budget

When you can focus your marketing efforts on specific segments, you can be more efficient with your marketing budget. Instead of publishing advertisements for every potential consumer, you can be more strategic and selective. This promotes the best return on your investment in marketing costs. By understanding where your market segment spends its time, such as online platforms, magazines, television, or radio, you can target those specific areas. You can customize your marketing message to address your targeted segment.

3. Enhanced customer experience

Market segmentation allows you to understand your customer intimately. When you gain a deep knowledge of your customer, you can create an enhanced customer experience for them. You can produce company and product or service messaging that makes them feel you know what they're thinking. When you can create this level of connection with a customer, you create an exceptional experience that improves client retention, encourages repeat business, and promotes positive brand recognition.

Related: Customer Service Skills: Definition and Examples

4. Identified new areas of business

Segmenting your customers can also lead to identifying new areas of business you haven't considered before. This often occurs during the process of researching segmentation criteria. You may recognize a new market to serve with a specific product or service. Alternatively, you can consider creating a product specifically for a niche market.

Types of market segmentation

There are four common types of market segmentation, although other sub-markets can exist. The four primary types include:

Behavioural segmentation

Behavioural segmentation identifies specific activities or behaviours of a customer to segment them into particular categories. This type of market segmentation is beneficial for e-commerce businesses, as you can gather much of the required information from a customer's interaction with the website. For example, you can use the following data to segment your customers:

  • how they interact with the company, like which social media platforms they use most

  • browsing habits on a website, such as the pages they visit most or what terms they search

  • spending habits, for example, what method of payment they use

  • purchasing habits, such as what time of day they're most likely to buy something

  • brand loyalty, which you can determine from customer surveys

  • previous product ratings and reviews

An example of behavioural segmentation is a company that wants to target returning customers to its website. Part of the company's marketing campaign is offering to return customers a 20% off discount code to use on their next purchase.

Related: What Is Behavioural Segmentation? (With Benefits and Types)

Demographic segmentation

Demographic segmentation is the most common thing when people hear the term market segments. Demographics are the non-character traits that are identifiable within a market group. Many companies use demographics as a more significant market segment and then create a better definition within a single demographic by using another segmentation option. Some examples of characteristics in demographics include:

  • age

  • gender

  • income level

  • education level

  • ethnicity or cultural identification

  • profession or career level

An example of demographic segmentation is a company that focuses its product line specifically on young women. The company creates all messaging with a young vibe that speaks to the desires of youthful ladies by using current language and idioms, fresh and colourful images, and female models.

Related: What Is Demographic Segmentation? (Definition and Examples)

Geographic segmentation

Geographic segmentation is the easiest way to target your ideal customer. Using the geographic location of your customer allows you to market specifically to them based on location. Several ways to segment based on geography include:

  • country

  • province or region

  • city

  • postal code

An example of geographic segmentation is a restaurant that wants to target its marketing towards local customers. They decide to focus on offering farm-fresh, local ingredients in their menu items. The restaurant also sells locally made products such as jams and fruit syrups to continue with the theme of fresh-to-table produce.

Psychographic segmentation

Psychographic segmentation is the most difficult to identify in customers, as it relates to their personality, personal preferences, and interests. Therefore, having solid research for psychographic segmenting is critical, but when done well, it's highly effective at creating a connection with your target audience. Several areas to consider for psychological segmentation include:

  • core values and beliefs

  • lifestyle

  • hobbies

  • passions and interests

  • life goals

  • personality traits

An example of psychographic segmentation is a company that recognizes a large amount of customers value packaging that is recyclable. These customers also identify sustainably sourced ingredients as necessary to their buying decisions. Therefore, the company can focus its marketing on identifying its ethical and sustainable manufacturing practices and promoting fully recyclable or reusable packaging.

Related: 6 Psychographics Examples for Marketing Segmentation

How to identify market segments

To receive the maximum impact of market segmentation in your marketing efforts, you first can identify and define the most relevant segments. You can locate the business's market segments by following these six steps:

1. Define your larger market

Unless you sell an extremely niche product or service, you can first define your more extensive market. Typically, the larger market you serve will be relatively broad and contain several market segments. You can define your larger market through geographic location or demographic criteria. Your market includes people who want or need what the business offers.

2. Define the objectives for your market segmentation

The next step is to determine what you want to achieve with your market segments. The goals you set can help you evaluate your marketing success to these segments. For example, you may identify objectives such as increasing brand awareness, improving customer engagement, enhancing sales, or boosting customer experience.

Related: What Is the Difference Between Goals vs. Objectives?

3. Identify critical variables

Once you've identified the objectives for segmenting your market customers, you want to identify critical variables. To do this, you can evaluate the products and services and determine which variables are most important within your more extensive market. It's best to select at least three variables to define your market segments effectively. For example, if a company sells athletic shoes, it can identify age, gender, and its audience's hobbies as critical variables. Another example is a company that sells local bookkeeping services. The essential variables can be geographic location, company size, and the customer's role in the business.

4. Assign variables to unique market segments

After identifying the critical variables, you can assign these variables to unique market segments, being aware that some variables can overlap in multiple groups. For example, a company may decide to choose three market segments. One segment may target small business owners, another targets larger companies without an accounting department, and the third segment targets larger companies with an accounting department. The same company may develop different campaigns for each of these markets, focusing on each segment's specific pain points and needs.

5. Evaluate each segment for viability

After you've determined the segment criteria, you want to evaluate each segment to ensure it's a viable option. You can ask several questions, such as:

  • Can you use market research to help identify customers with these characteristics?

  • Is the segment broad enough to represent a significant portion of your customers?

  • Is the segment accessible using your marketing techniques?

  • Will the segment respond better to specific marketing than a generic message?

If you can answer yes to the above questions, you have a viable market segment. If you answered no, you could go back to steps three and four to re-evaluate your variables and criteria.

Related: How to Do Market Research With 6 Guided Steps (With Types)

6. Create a detailed customer profile for each segment

The last step is creating a detailed customer profile for each segment. This detailed profile will help you create targeted messaging and marketing for your specific customer markets. A segment profile may include:

  • size of the segment

  • customer needs

  • price sensitivity

  • brand loyalty

  • key competitors

Related: What Is Customer Profiling? (With Methods and Benefits)

Now that you have learned how to answer the question, "What is a market segment?" by understanding the definition, benefits, types, and steps of market segmentation commonly used, you can utilize market segmentation to further grow your marketing reach.

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