One of the mantras small business owners hear these days is the need for market segmentation. Marketing effectiveness and efficiency, we are told, requires increasingly sophisticated market segmentation. Yet, without some training in marketing, the business owner might be frustrated or, worse, investing a great deal of time segmenting customers and prospects in ways that will be unproductive. If you own a small business and you feel lost or frustrated by the need to segment your customers and prospects, this quick overview of the principles of market segmentation is for you.

Romeo, the little black dog social media, market segments

Romeo, the little black dog, segmented the market for us in this visual

Markets tend to fit one of three categories:

  1. Homogeneous – all of the customers/prospects are essentially alike in important ways relative to your business, product, or service.
  2. Diffused – customers/prospects are essentially different in important ways relative to your business, product, or service.
  3. Clustered – there are discernible clusters of customers/prospects around important opinions, needs, or characteristics relative to your business, product, or service.

B2C (business to consumer) companies segment customers/prospects based on individual characteristics.

People typically make a purchase decision based on one of three factors first: price, product type, or brand. For example, a computer customer might choose to purchase a computer based on price first: the least expensive, most expensive, or perceived to offer the best value for the money. Another customer might choose the computer s/he chooses based on product type: desktop, laptop, or notebook; PC or Mac. The customer might base his/her choice on brand: HP, Dell, Lenovo, etc. Today, some consumers might add a fourth factor in the decision: where the product was manufactured.

Customer segments may be based on several factors or on different combinations of factors. The most common segmentation factors or characteristics are:

  1. Geography — Customers might cluster by continent, nation, region, city, city size, rural area, population, climate, etc. The nature of your product or service should help you define the geographic factors. For example, a surfboard manufacturer might divide the customer base by proximity to water suitable for surfing.
  2. Demographics – Your customers might be logically organized based on age, gender, marital status, whether they have children, income, occupation, education, religion, race or ethnicity, nationality, etc.
  3. Psychographic factors – Dividing and grouping customers/prospects based on psychographic factors can be dangerous. These factors typically include social class, personality, and lifestyle. People who share psychographic factors may be very much alike relative to your business, product, or service or they may be vastly different.
  4. Behavior – Traditionally, behavior has been evaluated in terms of the customer/prospect’s behavior relative to your company, product, or service. For example, a customer buys only for specific occasions, the customer buys based on one of four benefits delivered by your product or service, the customer’s use of the product or service and rate of use, loyalty to the product or the brand, attitude toward the product or service, and readiness to buy.

In today’s marketing, business owners also might segment customers/prospects based on preference for learning about the product (online or face-to-face), preference to shop online or in a brick-and-mortar store, payment preferences, demand for special offers before buying, and reliance upon recommendations of friends before deciding.

Your business must make decisions about the most relevant customer or market segmentation factors relative to the nature of the product or service you provide. Geography might not matter as a segmentation basis, but occupation and psychographic factors might be critical to a designer clothing company.

By asking questions of customers, you will gather the information that is important for your particular business. As you discover similarities and commonalities, customers will cluster around certain segmentation factors. As they do so, you will create a profile of your best customers. The particular convergence of factors will define your ideal customer and will enable you to go into the market and find others like your best customers.

Happy segmenting!

This post is the first of two discussing market segmentation. The second article will appear next week, and it will discuss segmentation in B2B markets.