Market Segmentation for Small Business

What is market segmentation and how your business can use it

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Market segmentationis the process of dividing your target market into distinct groups of buyers that require different products or a different marketing mix. It is one of the steps that go into defining and targeting specific markets.

Businesses that target specialty markets will promote their products and services more effectively than a business aiming at the "average" customer. By using market segmentation to communicate more effectively with your customers, you can give your business the marketing edge over competitors.

Your business must analyze the needs and wants of different market segments before determining your own niche.

How to Divide a Market Into Segments

Your opportunities to effectively market your business increase when you recognize the different needs and wants of segmented customer groups. To be effective in market segmentation:

  • Segments or target markets should be accessible to your business.
  • Groups must be large enough to provide a solid customer base.
  • Each segmented group requires a separate marketing plan.

You can divide your target market into segments using a variety of factors. The bases for segmenting consumer markets include: 

  • Demographic traits such as age, family size, life cycle, and occupation.
  • Geographic location, including city, state, region, or country.
  • Behavior, such as knowledge, product usage, or consumer attitudes.
  • Psychographic traits, including lifestyle, values, and personality.

Once you've identified your target market, you can break that audience down into smaller groups based on these factors.

How to Determine Your Segmentation Groups 

When you create a detailed description of your ideal customer, you are likely to find that you need more than one persona to really identify the segments you are targeting. The following questions can give you a starting point for defining your customer segments and learning how to reach them.  

  • Who are your highest and lowest value customers in terms of revenue and profitability?
  • What commonalities do you see in the consumers you are targeting?
  • What groups can you divide customers into based on demographic information, income, or location?
  • What interests do your customers have in common?
  • What values do your customers have in common?
  • Are there patterns in your customers' behavior?
  • Do they make their purchases online or in stores?
  • How knowledgable are customers about your industry, products, or services?
  • Do they require a consultation before purchase or is the purchase strictly transactional?
  • Are customers more likely to be satisfied with a purchase or want to exchange/return products?

The more you understand both your current and prospective customers, the better you can segment. Similarities can be broad factors like customers' age or income; they can also be as granular as where customers shop, where they research information, and how they found out about your business.

Does Market Segmentation Require Research?

Large companies often segment their markets by conducting extensive market research. This research can be too expensive for small businesses to invest in, but there are alternative ways for a small business to practice market segmentation.

To effectively segment your market without investing in private market research, you can learn about your customers through:

  • Data from trade and association publications.
  • Consumer behavior reports from research firms.
  • Publicly published research and qualitative studies.
  • External measurement services.
  • Watching and imitating your competitors' marketing.
  • Talking to key trade buyers about new product introductions.

There are many reasons for dividing a market into smaller segments. Any time you suspect there are significant, measurable differences in your market, you should consider market segmentation. Segmentation will make your marketing easier, reveal new niche markets to reach, and help you use your marketing resources as efficiently as possible.