Market Segmentation to Find the Right Customers
At its core, market segmentation involves dividing potential customers into smaller groups based on some common characteristics. It is an exercise that helps entrepreneurs understand the market better and optimise their offerings to meet customer needs.
Without segmenting the market, you may offer the same range of products and services to different groups who may or may not be your ideal customers. So, you might be moving down in your sales funnel, but your conversion rates will be low.
For example, you may have a customer segment that is willing to pay a premium price for a more durable product while another one that would rather have a cheaper product without any guarantee of durability. If you develop a mid-level product, it will not satisfy either of these segments, and you will lose out on sales. But if you do segment the market and understand their specific needs, you can create the right range of products and market them to the right groups to ensure that they buy from you.
The different ways of segmenting a market
There are generally four types of segmentation methods that are used by businesses, which are as follows:
Geographical Segmentation: As the name suggests, here, the customers are divided based on a certain geographical boundary. It can be as big as an entire country or as small as particular zip codes. Other points of differentiation may be the climate, urbanness, population density etc.
For example, suppose you are an AgriTech business which is helping farmers with their soil quality. Here, by virtue of geographical segmentation, you will look to target only those areas where there are plenty of farmlands (states such as Punjab and Maharashtra in India).
Demographic Segmentation: This is the most commonly used method of segmentation. In this case, the focus lies on aspects such as gender, income, family size, education, ethnicity etc. The reason behind the frequent use of this segmentation is that the information is relatively easy to gather and understand.
Taking forward the AgriTech example, you may want to target only those farmers that have a certain income level and basic knowledge of technology. That is the only way to ensure that the farmers can afford your product and also make full use of it.
Behavioural Segmentation: This kind of segmentation focuses on the actions of the customer. By understanding their reactions and thought process, you can cater better to their needs and expectations. The things to check here include spending habits, loyalty to brands, frequency of use etc.
For example, if you are a brand that has monthly subscription boxes of different cosmetic products, the ideal behavioural aspects to focus on in your consumer include frequent spending tendencies and repeated use of various products.
Psychographic Segmentation: The psychographic segmentation focuses on some less tangible concepts such as beliefs, emotions, attitudes, lifestyle, interests etc. A deeper dive into the psychographic elements also helps entrepreneurs understand the right way to market their product.
A good example, in this case, can be of a company that is selling upcycled leather products. Their right segment would include those people that are environmentally conscious and believe in a sustainable lifestyle.
A critical point to note here is that you must utilise all these different ways of segmenting and then choose the kind that works best for you. Don’t rely on just one of them. Taking a cue from the above example, you may have two individuals residing in the same society and having the same level of income. But, only the more environmentally conscious person will look forward to buying from the brand rather than the other who is indifferent to the sustainability aspect.
Going about market segmentation
As is often stated, the best way to carry out any research is by directly interacting with customers. They give an unbiased opinion about what works for them and what does not. Your discussion with the customers should include questions related to all these different methods of segmentation because that is the only way to find the right target audience.
However, such interviews are tedious to conduct and take time. An alternative way is to go over other sources available in articles/publications/surveys that can help you narrow down to your choice of a market segment. Some characteristics are typical to specific age-groups and generations that you can use to your advantage. But it is always best to substantiate them with actual customer feedback.
You can also analyse the characteristics of any existing customers and use data from your website pertaining to your leads.
Once you have all the required inputs, analyse them carefully and identify the right audience for your startup. This is the perfect time to build your customer persona, i.e., a representation of your ideal customer. It will help you build the right set of products and services and identify the exact problems faced by your target segment. However, you may need to continue experimenting for some time before you are absolutely satisfied.
Advantages of market segmentation
Market segmentation has excellent benefits for a startup, and the rewards can be reaped over a long period. Here are some distinct advantages:
Improved Conversion Rates: The most prominent advantage is the improvement in conversion rates. The ratio of leads that turn into paying customers will gradually increase because the startup will be focussing on those people that genuinely want what they are offering.
Tailoring Products to Customer Needs: It is much easier for an entrepreneur to adapt his/her offerings as per customer needs after going through the market segmentation process. This is because the process reveals a lot more about what a customer expects from a brand and the real issues they face. Incentives and promotions can be offered in line with the same.
Customer Loyalty: Customer loyalty is the best by-product of attracting the right segment. If you are catering to the needs of the customer and focusing efforts on the right set of people, they will be able to build a long-lasting relationship with the brand and may even advocate for it. This results in recurring revenues for the company and onboarding new clients that come through word-of-mouth marketing.
Finding Complementary Markets: Market segmentation is a great way to find some complementary markets that you can enter into. For example, if you are a maternity clothing brand, expansion into baby products will be relatively smooth. It will require less effort because you are already in touch with the customers.
Staying Ahead of the Market: Market segmentation can be leveraged to stay ahead of competitors and move towards capturing a larger share of the market. You will have the upper hand in your marketing efforts and will be able to get a lot more than you put in. Additionally, your unit economics will also improve over time.
Bottomline
Market segmentation can be a handy tool if carried out correctly. A Bain & Company survey with top executives revealed that a whopping 81% of respondents felt that market segmentation is critical to improving profits. However, less than 25% believed that their companies were able to use segmentation effectively.
Companies that can connect the dots after carrying out their research can see annual profit growth of almost 15% over a five year period. As an entrepreneur, it is only fair for you to know of untapped market opportunities and strategise appropriately. Market segmentation is your tool to do that.
