Why is Market Segmentation Important? [+ Methods]

Research from Epsilon shows that 80% of customers are more likely to do business with a company that offers personalized marketing campaigns. This statistic highlights why market segmentation is important: it allows tailored product marketing customized to the needs of distinct market segments.

Otherwise, without an effective market segmentation strategy, aim too broadly, and you won’t successfully attract your target audience. Aim too narrowly, and you’ll barely attract anyone.

This article will help you find that market segmentation sweet spot while explaining the various segmentation types and methods to consider as well.

TL;DR

• Each customer is unique, and market segmentation lets you cater to these customer differences. But segmentation offers many more benefits as well, such as:

1. Better-informed product development: This lets you focus on high-value customer requests to ensure new features address real needs and add value.
2. Maximize marketing strategy effectiveness: You can tailor campaigns to specific market segments, thereby driving greater engagement and return on investment.
3. Uncovers valuable insights: Analyzing customer behavior across segments unlocks insights you can use to refine product strategies and improve brand loyalty.

• There are four commonly used forms of market segmentation, each targeting different customer attributes:

1. Demographic segmentation: Focuses on characteristics like company size, industry, location, and revenue.
2. Behavioral segmentation: Centers on how customers use products, including behavioral data like usage rate and buying behavior.
3. Geographic segmentation: Customer segmentation is based on location factors such as region, urban vs. rural settings, and climate.
4. Psychographic segmentation: Segments customers by lifestyle, values, personality traits, and interests.

• Apart from popular segmentation types, you can also explore these lesser-used alternative methods:

1. Value segmentation: Categorizes customers based on their potential revenue and worth.
2. Firmographic segmentation: Suited for B2B contexts, it classifies businesses by characteristics like size, industry, and location.
3. Generational segmentation: Groups customers by generational cohorts, such as Millennials or Gen Z.
4. Lifestage segmentation: Segments customers based on significant life stages or milestones.
5. Seasonal segmentation: Targets customers based on purchasing behavior tied to seasons and holidays.

• Ready to customize your marketing strategies based on each customer segment’s needs and preferences? Schedule a Userpilot demo to see how you can get started.

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Benefits of market segmentation

All customers are not alike, so there can’t be a one-size-fits-all marketing strategy that works for all your customer segments. Instead, you need to tailor your marketing efforts for each market segment to better meet their needs.

Doing so not only keeps customers happy but also helps you unlock several benefits, too. Let’s go over what these are.

Inform your product development efforts

Market segmentation helps better guide product development efforts to address specific customer needs. It removes the guesswork of developing features you think customers need and helps you avoid adding unnecessary features.

Instead, you can examine feature requests from each segment and see what common feature your high-value customers request. To simplify analyzing the answer distributions, you can use data visualizations like pie or bar charts.

By prioritizing feature development based on those requests, you focus on addressing your customers’ jobs-to-be-done (JTBD), providing them with greater value.

You can sign up for our talk, “You Don’t Have a Prioritization Problem, You Have a Strategy Problem,” in the upcoming Product Drive to learn more about the role product strategy plays in prioritization.

Improve the impact of your marketing strategies

Instead of sending a generic message to your entire target market, segmentation enables you to develop targeted marketing campaigns for each segment. So, you can create personalized campaigns that target customers’ specific needs, resulting in greater engagement and return on investment.

Market segmentation also helps you utilize data-driven insights to craft personalized marketing messages that resonate deeply with each target audience. For instance, you could customize the in-app training for new features based on different customer use cases and jobs-to-be-done (JTBD).

Gain insights into your target market

Market segmentation helps unlock greater customer insights. For example, segment users based on their subscription plans and compare feature adoption rates across different groups.

Once you identify which segment has higher adoption, you can dive into their usage patterns to understand what drives their engagement. Considering analyzing user activity patterns, customer stickiness, navigation paths, etc.

By learning from the experiences of your most engaged segments, you can refine your product strategies to boost overall adoption and improve customer satisfaction across market segments.

Common types of market segmentation

To effectively target your customer segments, focus on these four main types of marketing segmentation: demographic, geographic, psychographic, and behavioral. Let’s explore these in greater detail so you can pick the appropriate one to implement.

Demographic segmentation

Demographic segmentation divides your target audience into segments based on statistical characteristics used to describe individuals.

Apart from the obvious data points like age and gender, the criteria for demographic segmentation includes characteristics like:

• Income: Segments customers according to their income level, from low-income to high-income brackets.
• Education level: Categorizes customers based on their highest level of education attained, such as high school, college, or advanced degrees.
• Occupation: Classifies customers by their job type or industry, such as professionals, skilled workers, or executives.

If you’re wondering how demographic segmentation works in the B2B context, that’s what firmographic segmentation is for. It’s basically like demographic targeting, except for businesses, as we discuss later.

Behavioral segmentation

Behavioral segmentation divides the market based on how customers interact with your products and services. As such, it focuses on studying product usage patterns and purchasing behaviors to tailor solutions more effectively.

Here’s a list of segmentation criteria appropriate for SaaS companies:

• Usage rate: Categorizes customers by how frequently they use your product, such as disengaged, engaged, or power users.
• Buying behavior: Segments based on how and why customers make purchasing decisions.
• Customer loyalty: Identifies customers who consistently use or prefer a particular solution.
• Occasion: Considers special events or needs that drive product usage, such as seasonal or project-based requirements.

Geographic segmentation

Geographic segmentation divides the entire market based on location. This includes physical location and climate since both can influence customer behavior and preferences. As such, it allows companies to tailor marketing strategies to regional needs and conditions.

Here’s the list of segmentation criteria for geographic market segmentation:

• Region: Segments by regions or states to adapt solutions to local requirements.
• Country: Differentiates based on national needs and regulatory environments.
• Urban vs. rural: Considers urban or rural settings to address specific challenges and opportunities.
• Climate: Takes into account climatic conditions that may affect product use or customer needs.

Psychographic segmentation

Lastly, there’s psychographic segmentation that segments the market based on lifestyle, values, and personality traits. Psychographic segmentation helps ensure that products resonate with the deeper motivations of customers, leading to more meaningful engagement.

The criteria for psychographic segmentation include characteristics like:

• Lifestyle: Categorizes businesses based on their operational style and practices, such as innovative or traditional approaches.
• Values and beliefs: Segments according to the core values or mission of a business, such as sustainability or growth.
• Personality traits: Identifies customers with specific characteristics, such as risk-takers or cautious planners, to tailor solutions accordingly.
• Interests: Considers the focus areas or interests of a business, such as technology adoption or market expansion.

Other less common types of market segmentation

Apart from traditional market segmentation forms, you can also leverage less common methods. Exploring these methods provides a more nuanced analysis of customer needs that you can utilize to better tailor offerings and messaging.

Value segmentation

Value segmentation categorizes customers into segments based on their “transactional worth”. In other words, you gauge how much possible revenue a customer might generate and use that as the basis of segmentation.

Companies often use this segmentation to create a high-value market segment of customers typically subscribed to the highest pricing plan.

The criteria for this customer segmentation include:

• Price sensitivity: Segments customers based on their reaction to price changes, from highly price-sensitive to those focused on other factors.
• Service expectations: Classifies customers based on their expectations of service levels, such as basic versus premium or dedicated support.
• Usage frequency: Differentiates customers on how often they use your product or service, distinguishing between disengaged and engaged users.

Firmographic segmentation

Firmographic segmentation classifies companies based on characteristics instead of individual users. This segmentation is essentially like demographic segmenting but specifically for B2B contexts.

Let’s go over the criteria for this segmentation type, and it’ll make more sense:

• Company size: Differentiates businesses by employee count or revenue, identifying different needs and purchasing power across small, medium, and large enterprises.
• Industry: Groups companies by the sector they operate in, allowing for targeted campaigns that cater to industry-specific needs.
• Business model: Classifies based on the type of business operations, such as B2B, B2C, or hybrid, to tailor offerings and messaging accordingly.

Generational segmentation

Generational user segmentation groups together customers based on generational cohorts, like Baby Boomers, Generation X, Millennials, and Gen Z. Since each generation exhibits distinct behaviors, such segmentation helps uncover deeper customer insights.

Some common criteria for such marketing segmentation include:

• Age range: Segments customers into groups based on their birth years.
• Technological adoption: Classifies customers by their comfort and engagement with technology, distinguishing between tech-savvy and less tech-oriented generations.
• Communication preferences: Groups customers by their preferred communication channels, such as in-app, social media, email, or traditional media.

Lifestage segmentation

Lifestage segmentation divides customers based on their life stage, which is always accompanied by some milestone or major life event.

Applying this approach to the SaaS context, customers can be segmented based on where they are in the customer lifecycle. This segmentation type recognizes that customer needs and wants continuously evolve over time.

Here are the typical criteria for this customer segmentation:

• Parental status: Segments customers into groups based on whether they have children, which directly affects their purchasing needs.
• Career stage: Categorizes customers by their career stage, such as early-career, mid-career, or nearing retirement.
• Lifestyle changes: Groups customers based on significant life events, such as buying a home, starting a family, or retirement.

Seasonal segmentation

Seasonal segmentation classifies customers based on their purchasing habits during certain periods. This typically includes the four seasons, popular events like the Super Bowl, and holidays like Christmas or Valentine’s.

Let’s go over the criteria for seasonal segmentation:

• Seasonal & cultural events: Categorizes customers by their engagement with cultural or seasonal festivities that impact their purchasing behavior.
• Weather patterns: Differentiates customer needs according to changes in weather, such as demand for winter clothing or summer accessories.
• Retail cycles: Groups customers based on shopping patterns tied to specific retail cycles, such as back-to-school or holiday shopping.

Conclusion

While there are technically different types of segmentation—like demographic or firmographic—these are not hard-and-fast rules. What matters most is defining who you want to target.

With modern tools that offer rich segmentation properties, you can take a more granular approach and target precisely, ensuring better results with minimal wasted effort.

Looking to refine your market segmentation strategy with deeper customer insights? Get a Userpilot Demo and see how we can help you create more personalized campaigns.

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