Market segmentation: what it is and why it matters for marketing

Market segmentation is the process of dividing a broad consumer or business market into smaller groups that share characteristics. It matters because no company can reach and serve every buyer well. Segmentation shows you which groups are worth targeting and how to talk to each one, so your budget goes to people who are likely to buy.

What is market segmentation?

The OpenStax textbook Principles of Marketing defines it as dividing a broad consumer or business market into subgroups based on shared characteristics. Segmentation is the first step of a three-part process:

1. Segmentation: split the market into groups.
2. Targeting: choose the groups you will pursue. See how to determine your target market.
3. Positioning: decide how you want each target group to think and feel about your product.

Different groups often need a different product, price, message or channel. That is why segmentation feeds directly into your marketing mix.

What are the types of market segmentation for consumers?

Geographic segmentation

Geographic segmentation groups people by where they live or shop: country, region, city, postcode, or the type of area, such as urban, suburban or rural. It is useful when needs, language, climate, regulation or buying habits differ by place. In digital advertising, it is the basis of geo-targeting.

Demographic segmentation

Demographic segmentation groups people by traits such as age, gender, income, occupation and family status. It is popular because the data is easy to collect and measure. A premium product, for example, may focus on higher-income groups. Read more about demographics.

Psychographic segmentation

Psychographic segmentation groups people by shared psychological characteristics: beliefs, motivations, values, interests and lifestyle. It explains why two people with the same demographics buy different things. Our guide to psychographic segmentation goes deeper.

Behavioral segmentation

Behavioral segmentation groups customers by their behaviour or interactions with a brand: how often they buy, what they buy, how loyal they are, which benefits they look for and what triggered the purchase. Post-purchase surveys, product usage data and reviews help you find these patterns. See what behavioral segmentation is.

How is B2B market segmentation different?

Business buyers are companies, so B2B segmentation looks at the organisation as well as the people in it. OpenStax lists five common methods:

• Firmographic: company attributes such as industry, location, size, legal structure and performance. A CRM vendor might treat agencies of under 50 people as a separate segment from enterprise software companies.
• Technographic: the hardware and software a company owns and uses. A tool that integrates with one CRM can target companies already running that CRM.
• Needs-based: the features or benefits customers look for, focusing on buyers who need the product and can afford it.
• Value-based: the revenue a customer brings compared with the cost of winning and serving them, often judged from past purchase size and frequency.
• Behavioral: how prospects interact with you, such as website visits and email engagement, and whether that interest is rising or falling.

In B2B, segmentation often becomes an ideal customer profile: a description of the companies most likely to buy, succeed and stay.

How do you know if a segment is worth targeting?

OpenStax uses the ADAMS test. A useful segment is:

• Accessible: you can reach it through channels you can use.
• Differentiable: it responds differently from other segments.
• Actionable: you can design a product and message that serves it.
• Measurable: you can estimate its size and buying power.
• Substantial: it is large or valuable enough to be profitable.

A segment that fails one of these tests may still be interesting, but it is rarely the place to start.

Why is market segmentation important?

• More relevant marketing. A message written for one group's problems and language lands better than a generic one.
• Less wasted budget. You stop paying to reach people who will never buy, which matters most when budgets are tight.
• Better products. Seeing what each segment needs shows gaps in your product and ideas for new ones.
• Niche opportunities. Segmentation can reveal smaller groups that competitors ignore. See niche marketing.
• Clearer differentiation. When you know exactly who you serve, it is easier to explain why you are the better choice for them. Read about differentiated marketing.
• Sales and marketing alignment. Shared segments give sales and marketing the same definition of a good lead.

How do you segment your market?

1. Start with your best customers. Look at who buys, stays and pays the most, and what they have in common.
2. Choose your variables. For consumers, mix demographic and behavioral data. For B2B, start with firmographics and add technographics and needs.
3. Collect the data. Use your CRM, analytics, customer interviews and surveys.
4. Define and size each segment. Run the ADAMS test.
5. Pick your targets and write a message, offer and channel plan for each one.
6. Measure and revisit. Segments drift as markets change. Track results by segment and update them at least once a year.

In email marketing, the same idea is called list segmentation. For a step-by-step approach, see how to create a successful customer segmentation strategy.

What are the limits of segmentation?

Segmentation can cross ethical and legal lines when it relies on sensitive traits. OpenStax gives target marketing ethics its own section, and ad platforms set hard rules. Google Ads, for example, restricts personalised ad targeting around sensitive categories such as race and ethnicity, religious beliefs, sexual orientation and health. In the US and Canada, ads for housing, employment and consumer finance cannot be targeted by gender, age, parental status, marital status or ZIP code. Avoid stereotypes, collect only the data you need, and check your privacy obligations before you build segments on personal data.