Market segmentation research: Real world application & tips

10-15% more revenue is created by brands tailoring their offerings to customer segments,  with a single segmented campaign able to increase revenue by up to 760%. 

The most innovative brands understand the importance of customer segments and choose to make market segmentation studies a core part of their business — using market segmentation research to guide their business decisions and strategy. 

In this post, I’ll explore segmentation in market research in more detail, walk you through a high-level definition of a segmentation study, cover key consumer segments, explore the benefits and limitations and explore best practices. 

A segmentation study is research businesses use to understand and divide their target market into segments. Consumers are grouped based on a variety of defining characteristics such as demographics, behaviors or geographical locations. 

Segmentation studies can give you essential insights into your customers, how they differ and help you create detailed customer profiles — showing you what drives them, how their pain points, wants, and opinions differ, how to market to them and what they each need from your products and services. 

Segmentation studies can help you uncover and understand the causes between different consumers’ purchasing behaviors, their personalities, as well as their biggest barriers to purchasing. 

You can use market segmentation research findings to target and personalize your marketing and advertising. 77% of marketing ROI comes from campaigns that have been segmented, targeted and triggered. 

Say you’re a popular coffee brand. Market segmentation studies can help you uncover what different customers want from your products and how you can successfully target different segments. Young professionals may be interested in exploring specialty flavors and easy-to-make coffees for their morning caffeine hit. In comparison, consumers in the 60+ age range may be looking for a simple, caffeine free, high-quality instant coffee. An extensive line of complex blends may be exciting to consumers in the first segment but overwhelming to consumers in the second segment. 

When you have this data, you can make sure you develop product lines and messaging that best target each type of consumer. 

Core concepts of segmentation studies

Needs-based segmentation is an essential part of any great segmentation study. 

Needs-based segmentation refers to the process of categorizing consumers based on their needs. To understand the importance of needs-based segmentation, we need to compare it to the two other main types of custer segmentation.

A-priori segmentation

In this form of segmentation, these essential categories are chosen by the researcher — with customers split into groups based on observable and pre-existing demographic, psychographic, customer or social data. 

For example, demographic data may cover information like gender, age, ethnicity or social-economic status. While preexisting customer data may include a customer’s level of loyalty to a brand.

Value-based segmentation 

This form of segmentation involves defining and categorizing consumers based on their economic worth to a company. Brands can assess this by looking at metrics like customer lifetime value, purchase frequency and volume and monthly recurring revenue.

"In my experience, a value-based segmentation process identifies customers willing to pay more for a particular service that they perceive has a greater value. It is similar to pricing segmentation, except that it usually happens earlier in the product's life cycle and may depend on primary or secondary research to identify the value criteria that influence customer buying habits. With value-based segmentation, CMOs' strategies can become more agile and responsive. Marketers can reduce the clutter within portfolios and maximize the ROI from new initiatives." - Yogesh Shah, CEO at iResearch Services. 

Needs-based segmentation 

As I briefly covered above, needs-based segmentation is when companies separate consumers into segments based on their needs, problems and pain points. 

For example, a cereal brand using needs-based segmentation may group consumers based on their need for different prices, nutritional profiles or taste taste preferences. 

Needs based market segmentation is necessary for uncovering consumers’ essential motivations. A needs-based consumer segmentation study shows us what consumers want from our brand and our products, provides in-depth insights into what drives consumers to buy from us and shows us their biggest barriers to buying. 

It’s easy to see how categorizing and targeting cereal consumers based on which flavor profiles they want or how much salt, fiber and sugar they want in their bowl of cereal will be much more effective than categorizing and targeting consumers based on demographic and economic value alone. 

Market segment research focused on needs-based segmentation is also an essential driver of business strategy and innovation. 

By building an in-depth understanding of consumers, needs-based segmentation is when consumers are separated into segments based on their benefits, motivations, needs, problems, and pain points.

Rocky Sharma, CEO at The Procurement School notes the importance of this type of segmentation: 

"Organizations should be centered around understanding the needs of customers and fulfilling them. If an organization does not have an in-depth understanding of its customers, then they are pretty much looking at each customer in the same way, and the business relationship with customers remains at a tactical level.

This could severely impact an organization’s metrics, including revenue, profit, customer churn, lifetime customer value, net promoter score and more. If an organization does not take the time to understand the needs of its customers, then customers may not bother to stick around."

"Segmentation transcends mere classification; it is a strategic imperative that harmonizes context, strategy, and customer needs."

- Ann Højbjerg Clarke, Per Vagn Freytag and Roberto Mora Cortez

Read on for a look at the main types of market segmentation research characteristics.

Demographics

Demographics refer to the basic characteristics of a group such as their age, gender, ethnicity, education and income. Demographics help you understand who your consumers are on a basic level — taking your consumers from faceless customers to people you can start to visualize. 

Geographics 

Geographic segmentation is also key to segment research. Geographic segmentation involves dividing your audience based on where they live or work. Think countries, regions, cities, neighborhoods and post codes. 

Geographic segmentation typically relies on six factors to create customer segments that brands can use to better understand and target consumers across specific geographical areas. These include: 

1. Location 

2. Timezone 

3. Climate or season 

4. Cultural preferences 

5. Language

6. Population type and density 

For example, you could segregate U.S. consumers by the state they live in or segment consumers based on the nine different timezones covered by the states and territories.

Psychographics 

Psychographics refer to any defining feature of your consumers’ internal worlds. Beliefs, opinions, values, personality traits, interests, wants, needs and aspirations all fall under this category. 

While demographics are the foundation of your customer segments — psychographics go beyond the basic attributes covered by demographics, enriching and deepening your profile of the consumers in each segment. 

From understanding consumers’ wants to their aspirations, psychographics are a necessity when it comes to helping shape your needs-based segments. In other words, you can use psychographics to help illuminate why consumers have particular needs. 

Take consumers that need to buy a new pair of running shoes: psychographics can help show you why different consumers need to make that particular purchase. 

Let’s look at how three different consumers’ needs differ: One is looking to take up running to lose weight and get more fit, another is a regular runner that is looking to buy a higher-quality running shoe for their upcoming marathon and another is looking to buy a comfortable pair of sneakers they can use for both running and boxing classes. Each of these needs will ultimately influence their purchasing decision.

Behavior 

In consumer research, there are a number of consumer-related behaviors that can help you define and refine your insights into different consumer segments. 

Some common behaviors brands segment customers by include: the benefits they’re looking for from a product or service, purchase behavior, brand interactions and wider consumption habits. For example, frequent shoppers, impulse shoppers or online shoppers are all examples of categories we can use to define and group consumers by. 

Like psychographics, consumers’ behavior adds another layer to our understanding of consumers’ needs. Observing consumers’ behavior, or surveying and interviewing them on their key behaviors, is an essential starting point for understanding what their needs are. 

By applying behavioral segmentation to shopper segments, you can bridge the gap between intent and purchase. 

Let’s look at shoppers that browse jeans from an online denim retailer without buying — showing an intent to purchase. The retailer could create a behavior-based segment by grouping these consumers based on their behavior: browsing without buying. They can then incorporate this into their wider marketing strategy by targeting these consumers with personalized, time sensitive discounts or using retargeting ads across other sites these consumers visit. 

Let’s take a look at how you can identify your key audience segments. 

1. Identify your audience

The first step is to identify the broader audience you'd like to draw your segments from by identifying your key demographics. For example, what ages, ethnicities, socioeconomic, and educational backgrounds do your target market typically come from? 

2. Choose your segmentation

Once you've assessed and identified your audience's key demographics, it's time to choose how you’d like to segment your audience. Remember our four core categories: demographic (deepening your exploration of the demographics you identified above), geographic, psychographic and behavioral. You can start with one of these categories or choose to collect data on all of them. 

3. Start to build

Once you’ve explored basic audience demographics, begin building your segment research out with primary research approaches. The majority of businesses begin with surveys — they're a brilliant research method for uncovering a range of consumer motivations, needs and pain points. They also allow you to quickly identify patterns and trends that you can use to group different consumers. 

While surveys are a great way to find out more about your customers and uncover potential segments for study, you can run into a number of issues with surveys that can undermine the quality of your survey data. 

The average survey has a dropout rate of 10-20%. Notably, long surveys, hard-to-understand questions (such as ambiguous or double-barreled questions) and a poor UX can leave respondents with survey fatigue and cause them to drop out before they finish the survey. In addition, researchers may ask leading questions that push respondents to answer questions in a particular way — biasing survey results. 

A great survey tool can help you overcome these limitations. Tools like Zappi incorporate research-backed best practices that help you avoid bias and support high response rates. You can use our consumer insights platform to help make sure the integrity of your survey responses are supported with clean design, optimal survey length and well-written questions that help avoid biasing your results.  

Emerging technologies in segmentation research, such as big data, AI and machine learning can also give you deeper insights into consumers’ behaviors and psychographics — automating much of the research process and enhancing your research findings. 

You can use data analytics tools to easily spot trends and patterns in your consumer data and quickly identify potential customer segments. 

Zappi also has an AI–based tool that automatically analyzes respondents’ answers to create summaries and segments your audience based on your market segmentation research:

“In the current digital landscape, the fusion of big data technologies and digital marketing approaches has revolutionized the way organizations design and implement their overall marketing strategies. Even more so, big data provide unparalleled opportunities regarding the analysis of consumer behavior and the interpretation of the customer’s buying journey and experience.” - Leonidas Theodorakopoulos and Alexandra Theodoropoulou, Academic Researchers 

You can further enhance your segments by incorporating big data and integrating consumer data from several third-party sources. 

Monitoring consumers’ behaviors across several channels can help you deepen your behavioral insights and enrich your survey data — helping you flesh out your segments. This can include browsing history, purchase history, sales and customer support interactions and engagements across your social media channels.

"The understanding of segmentation has transitioned from a model and technical understanding to a process that involves not only identifying market segments but also implementing them in the development of marketing strategies, plans, and daily operations.

Segmentation is an intriguing, continuous process that captures essential areas of a company's marketing efforts. Overall, the segmentation process and outcomes (the emerging segments) need to be aligned with the context and corporate strategy of the company." - Ann Højbjerg Clarke, Per Vagn Freytag and Roberto Mora Cortez, Academic Researchers 

Before you get started on your market segmentation study, let’s take a look at some best practices for undertaking a robust market segmentation study. 

Here are some best practices to keep in mind:

1. Always start with clarity: It’s essential to have a basic understanding of your audience and what you want to achieve by researching them. Are you looking to move into a new market, release a new product or are you an early-stage start up looking to get an overarching view of your core customer segments? Knowing the why behind your research is essential for guiding your research questions and helping you spot interesting and relevant data points as your research unfolds. 

2. Combine your data sources: As we note above, you can’t create rich customer segments from a single source of data. Bring in multiple data sources to help you study and understand your segments — make full use of big data capabilities, combine first and third-party sources and be open to new and unexpected sources of consumer insights. 

3. Prioritize qualitative research: While quantitative research like polls and surveys built around closed-ended questions is great for giving you the foundational building blocks of your segments with data that’s easy to group and analyze, qualitative research methods are key for helping you flesh out your segments. Methods like surveys focused on open-ended questions, focus groups and interviews are all essential tools for helping you get deeper insights into consumers’ needs and their underlying psychology.

It doesn’t matter how accurate your customer segments are if you can’t act on these insights and use them to inform your business and marketing strategies. To help identify and target actionable segments, make sure your segments are: 

1. Easy to measure: Can you clearly identify who you’re researching and why? 

2. Easy to differentiate: Do each of your segments have distinct characteristics or is there significant overlap that makes the differences negligible or hazy? 

3. Easy to market to: Is this group of consumers easy to reach? Can you easily find them through your marketing and advertising channels? Will they see the messages you want and need them to see? 

4. Easy to act on: Can you easily use this data to guide and inform your business decisions and strategy? 

5. Sizable: Is your segment large enough that if you targeted them then it would make a significant difference to your key marketing and business metrics? 

It’s important to integrate market segmentation research into your overall business and marketing strategies. Don’t let your market segmentation research be a one-off event. 

To build your business and marketing strategies company around what consumers actually need from your brand and products, integrate this research into your annual schedule and update your segments over time. See your segments as evolving profiles, rather than stagnant snapshots. 

By refining your marketing messages, choosing and optimizing your marketing channels and developing new products, you can make almost every area of your strategy more effective by integrating your segment research learnings.

For example, you can align shopper segments with retail channel strategies. If the data shows that frequent shoppers prefer to shop in your app rather than in store or on your website, you can target them in your app with personalized in-app deals and reengage them with notifications. 

Limitations in segmentation studies

To provide the best foundation for your segmentation studies, you need to make sure you’re aware of and address their limitations. 

Here are the most common mistakes in market research segmentation to watch out for:

1. Go beyond demographics: While basic demographic information is an important starting point for your segments, don't end there. As we cover above, personality traits, desires and pain points are what drive consumer behavior and need to be addressed in your strategy. 

2. Don’t rely on old data: As I cover above, it’s essential to make sure your data on your customers evolves as they do. Don’t use data that’s over a year old to inform the business and marketing decisions you make now. In the words of Mitch Markel over at Benenson Strategy Group in his article for MarketingProfs: "In the last 3-5 years, many industries have gone through dramatic changes—from television to retail to healthcare. What was a template for success years ago could very well be a recipe for failure today. Categories are changing quickly; consumer expectations, preferences, and wants follow suit. Yet many companies turn to their segmentation from years ago to inform their strategy."

3. Don't over or under segment: If you build your segments around small, obscure consumer characteristics, then you're misusing both your time and your research budget. While building out segments that are too broad can cause you to miss out on potential profitable niches and lead you to undermine the impact of your marketing with messages that fail to directly speak to different consumers.

4. Be aware of the complexity of needs-based market segmentation in dynamic markets: No matter your segment, consumers will have several different needs. To target them effectively, you’ll need to understand this hierarchy of needs and build your segments around their most important ones. Not only do you need to understand this hierarchy, but you also need to account for consumers’ constantly changing needs — what might be their most important need one year may drop down to a secondary need the following year. 

The rise of real-time segmentation with digital and shopper analytics is changing the way companies build out their customer segments. 

Real-time segmentation capabilities supported by digital and shopper analytics allow brands to get granular insights into small numbers of different types of consumers, allowing them to understand who consumers are across every brand and retail interaction. This real-time data collection and analysis gives you near-instant access to shifting consumer data moment by moment. Here’s TOPPAN: 

“These segments can be constantly tailored and updated using real-time data on how the consumer behaves. Where data is available, it’s possible to use big data technology to combine data from online and offline sources to really get a picture of the consumer across multiple retail encounters.

These complex analytics show not only who the customer is now but also how their needs and expectations might change over time. For brands that wish to retain customers as they mature, it’s a way to understand how the individual’s needs evolve.”

Market segment research will also continue to move segmentation from the “conceptual” to a core part of businesses’ everyday strategy. Academics are also calling for companies to integrate segment evaluation into their everyday metrics. Tying your segmentation research and customer segments into the core metrics you use throughout your business can give you immediate, ongoing insights into how effectively your segments are helping you impact business change. 

Ann Højbjerg Clarke, Per Vagn Freytag and Roberto Mora Cortez note the changes one researcher recommends: 

"Mora Cortez et al. (2021) suggest linking segment evaluation with measures often in place, such as customer satisfaction, sales performance, and financial firm-level performance, and developing a process model for better practical understanding."

Over the next several years, predictive analytics will become an even more essential tool for creating needs-based segments based on consumers’ potential future needs. With predictive analytics being able to pool and analyze dozens of data sources to help accurately predict consumers’ future needs, more companies will rely on AI to preempt and act on evolving consumer needs. 

Segmentation studies help businesses make smarter decisions that align with what different consumers actually want and need from products and brands. Segmentation studies can give you in-depth holistic insights into high-value consumer segments, allowing you to build out strategies that address their core needs and interests. 

It’s important to make this type of research a part of your annual process so you can make sure you’re targeting consumers based on their evolving needs.