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The Art of Segmenting a Market: How Customer Segmentation Works in 6 Steps

main visual for market segmentation

As its rough explanation market segmentation is dividing your customer base into smaller, easier to manage groups by their profiles. This can be personal traits like gender, age as well as past activities like spending habits.

This technique has been used in commerce since centuries. Spice traders in Istanbul sold their goods for different prices to palace than a soldier guild knowing they would have different priorities. However, the concept of segmenting the market in e-commerce is comparable younger but used by majority.

So, no need to feel like Christopher Columbus but if you are new to the concept here is the art of segmenting a market in 6 easy steps.

1. How to start? Define your market and your company

Before splitting it to its sub-groups defining the market you are in is crucial. Keeping it too broad will make market segmentation sometimes harder but usually misleading or inapprehensible. Knowing your company’s position in the market and its aims will prevent meaningless effort. Stating your intentions beforehand will make it easier to select targets while segmenting your market.

2. What to care in collecting data?

Only thing you want from your customers is not their money. Collecting data about your customers will benefit both the company and the customers. Knowing not only their e-mail addresses but also the demographics and past activities will help.

Amazon is among the best in collecting customer data. They are the one if you read an e-mail and think that’s exactly what I wanted. As you can directly ask your customers directly –do not overwhelm your customers-, there are also tools that can do it for you.

The thing to be careful about is protecting the collected data. Although most of the companies sell this data protecting them or presenting them in a way to help your customers will gain the company credibility and create a safe zone to stay out of legal measures.

3. How to split into sub-groups?

Segmenting the market should be done in a systematic way. Carrying this part out well will ease your further work. Most common ways are below:

Geographic segmentation

As the name suggests, this method divides your customer database considering their location such as nation, state, region, city or zip codes. This method will enable you to adjust your campaigns on easy-to detect geographic changes. For instance, you may promote your candy sales before a nation’s holiday or sell swimwear if there is an upcoming summer holiday in that region.

Increase accuracy by targetting better!
Increase accuracy by targetting better!

Demographic Segmentation

This one is the most popular way of market segmentation. In this technique, wide range of data like can be collected from customers. Basic ones are: age, gender, family size, income, occupation, marital status, religion, race and nationality.

Splitting your customer to such groups gives you opportunity to select a set such as Italian male customers who earns roughly €100,000 a year. Suggesting to buy good fabric suits to this group will yield better results than suggesting it to all customers which includes women, students, elderly all together.

Psychographic Segmentation

Psychographic segmentation divides the customer into groups considering their lifestyle, values and social classes. Collecting this data is harder than the previous two since it is usually cannot be collected but rather derived or concluded from other parameters.

Behavioral Segmentation

Segmenting your customers up to their knowledge and attitude to the product is behavioral knowledge. Suggestions to first-time customers the same products and prices as a longtime customer is a faulty strategy. Customer loyalty is something worth rewarding but usually neglected by firms.

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Usage Rate

Segmenting your business market to high and light users will help you to come up with different strategies to increase sales.

4. Is it a segment?

So you have come so far and have some segments in hand. Next thing to do is to check whether these clusters qualify to be a segment by themselves. It not a segment if it fails to carry following criteria:
It is something measurable. A segment should be as solid as possible. Something that has certain bounds and is possible measure.
It is viable. A segment should be stable enough in order not to disappear after a while.
It must be intra-homogenous. Members of a segment must show similar porperties.
Different form other segments. Instead of a continuous spectrum of segments try to have as different as possible segments.
Large enough to profit. A segment should be large enough invest time and money.

5. Evaluate segments and choose targets

There is no golden strategy to advised here, but the common ones usually are good initial points in evaluating segments. Choosing correct target and focusing on them will save time and increase profits and conversion rates.
One of the easiest systems is 2X2 box system. This method divides the segments into 4 groups. As, Bs, Cs, and Ds.

2x2-box

As-unrivalled: This group contains your favorite customers. There is a mutual like relationship. However, this group is usually taken for granted and not payed enough attention. Consider rewarding customer loyalty.

Bs-unproductive: This group is made of easy customer, customers you can easily reach and sell but have low profit margins. This group is a selection to remove and lighten workload.

Cs-unreachable: For this group you cannot sleep at nights. If you can they are in your dreams. This group has great potential to increase your profits but they do not see your product as an option. Try to come up with ways to be seen by them. If they still look far away, letting them go should be considered.

Ds-undesirable: This group doesn’t like you as you don’t like them either. Do not invest time on this group but also be careful, competition may rise from a company successfully aiming this population then expanding. To see more details of this model visit here.

6. Advanced techniques in market segmentation

As mentioned before market segmentation is not a new strategy and has some advanced techniques. These techniques try to hyperpersonalize, as if there are numerous little market segments consisting of 1 customer. Here you can find an example.
Whether you are new or experienced in market segmentation find where you stand and follow these steps.

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