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There has been much debate over the past few years about the benefits of market segmentation, with many — including some particularly well-known leaders like IBM’s former CEO, Ginni Rometty — believing that segmentation is an antiquated exercise, a task better relegated to AI, Big Data and other digital technologies that can deliver data-driven and individualized solutions at near warp speed. And although there’s truth to the value of Big Data in today’s segmentation game, especially when it comes to advertising via digital media formats, companies shouldn’t blindly dismiss the benefits of traditional market segmentation efforts.
Market segmentation is the process by which consumers are divided into groups based on their shared characteristics, as well as their shared response to a marketing action. There are four main types of market segmentation: demographic, psychographic, geographic and behavioral. By arranging a market into smaller subsets of like-minded and like-behaved people according to one (or more!) of these types of market segments, companies are able to construct a specific message and deliver it in a way that resonates with the majority of them. Instead of trying to reach an entire population using one generic message, businesses use market segmentation to create a personalized approach that has much more potential for success, devising multiple messages, distributing them more strategically and, ultimately, reaching more people in a more meaningful way.
There are multiple benefits of market segmentation. First — and maybe foremost —market segmentation provides focus for a company. Rather than waste time, energy and money on providing too much (products, branding messages, etc.) to too few, businesses can use market segmentation to more clearly define their purpose, narrowing their interests and allocating funds in ways that speak to the largest number of consumers at any point in time. The results include:
It takes less money to advertise in the right way than it does to throw a wide net and not know if you’ll catch anything at all! Having a firm grasp on the type of people buying a particular product or service enables a company to better allocate resources for making, marketing and distributing it. A luxury car manufacturer, for example, might choose to advertise in a car enthusiast magazine rather than one devoted to childrearing, knowing that the majority of its customers are over 50 and long past the parenting stage of life and, thus, more interested in and capable of making a luxury car purchase.
The customer journey is one of the most important factors in a company’s profitability; businesses that foster positive experiences with customers have happier and more loyal customers, gaining repeat business that puts money in the bank. Now, think about your friends. You probably like spending time with the ones who listen to you, the ones who are aware of your likes and your dislikes and respond to your needs. You’re probably less inclined to seek out those who don’t understand you, who don’t know or care about your interests. Market segmentation helps companies identify what is and is not important to their customers so that they are able to build lasting relationships with them. By taking the time to discover the characteristics of certain populations, companies are not just able to build better branding messages, they are able to tailor engagement opportunities that showcase their interest and concern for the individuals they serve. In this way, market segmentation improves customer engagement, building a loyal bond that similarly improves profits.
Of course, the benefits of market segmentation really boil down to increased market growth. Focusing on a specific segment of the market enables a company to more fully understand a specific group’s needs and allows it to create products and services that more fully address those needs. Furthermore, it makes it easier for businesses to identify new market opportunities, highlighting missing portions of the population that might be targeted in the future. With clearly established focus at hand, companies can reduce their costs, improve engagement with customers, identify missed opportunities and, hopefully, increase their market growth!
Big data will never fully replace the need for market segmentation. To learn more about the benefits of market segmentation and how to use market research to effectively target market segments, please contact our team at Research America.