How to Segment a Market

Defining Your Segmentation Categories

Use geographic segmentation to differentiate markets by location. The most obvious aspect of geographic segmentation is establishing rough geographic boundaries—a local business may limit its potential markets to within a 25 mi (40 km) radius, for instance, while a large online business may have expansive markets that span continents. In addition, though, consider geographic factors such as: Country. If your potential markets span multiple countries, or even multiple states or provinces within a single large country, strongly consider differentiating each as its own market due to factors like politics, culture, and law. Climate. If you manufacture sand shovels and snow shovels for kids, for example, it makes sense to differentiate your potential markets by climatic and seasonal characteristics.

Identify key customer and market characteristics with demographic segmentation. This type of market segmentation divides up your potential markets based on intrinsic customer characteristics such as age, gender, income level, and educational level. As such, demographic segmentation is both a powerful and problematic tool. Demographic segmentation requires you to make assumptions in ways that may strike you as inappropriate—for instance, assuming that all men over 65 and only men over 65 will want to read the magazine you’re launching. Keep in mind that segmentation deals in probabilities, not certainties, and is intended to help you prioritize probabilities, not exclude possibilities. Keep in mind that the people buying your product may not be the ones actually using it.

Utilize psychographic segmentation to highlight customer personality traits. This segmentation category requires you to “get into the heads” of customers within your potential markets, and once again you have to make some general assumptions. If you’re developing a line of humorous graphic T-shirts, for instance, you might analyze customers based on factors such as the following: Personality. For instance, are they likely to be more quiet and reserved, or more extroverted? Values. For example, are they more likely to have more conservative or more progressive social perspectives? Hobbies. Might they prefer golf or tennis, for instance, or mountain biking and rock climbing?

Turn to behavioral segmentation to emphasize market activity habits. Customers act within markets based upon various motivations and expectations. Therefore, for example, a startup sports drink company might choose to segment their potential markets by factors such as: Customer loyalty. Are they likely to stick to familiar brands, retailers, etc., or try something new? Motivation. Are they participating in the market out of necessity, with enthusiasm, or with indifference? Rate of use. How frequently are they buying, consuming, or otherwise participating in the market?

Creating Your Market Segments

Create a list of alternatives for each of your segmentation categories. If, for instance, you choose to segment your market using all 4 common categories—geographic, demographic, psychographic, and behavioral—break up each category into likely alternatives. Aim for 2-3 alternatives at minimum, and create more for a more in-depth segmentation process. As an electric scooter manufacturer, for example, your alternatives might include: Geographic: U.S., Canada, Mexico. Demographic: young adult, middle aged adult, older adult. Psychographic: socially conservative, socially progressive. Behavioral: high brand loyalty, low brand loyalty.

List every potential market segment based on your segmentation categories. Depending on the number of segmentation categories and alternatives you’ve chosen, the initial list may be very long. It may also include combinations that don’t seem relevant or useful. Worry about whittling down the list later, though—for now, just list every possible combination. A few of the combinations might include, for example: Young adults from the U.S. who are socially conservative and have high brand loyalty. Middle aged adults from Canada who are socially progressive and have low brand loyalty. Older adults from Mexico who are socially conservative and have low brand loyalty.

Revise or remove segments that are illogical or not viable. After you’ve created your long initial list of combinations, go ahead and weed out combinations that you are sure don’t describe a potential market. However, if you’re “on the fence” about some of the combinations, keep them for now and re-evaluate them again after you’ve done more research. You might, for example, be confident that the app you’re developing won’t appeal to older adults who are socially conservative. In this case, you can eliminate the combinations that include both of these attributes.

Conduct basic research on each potential market segment. The combinations that remain comprise your in-progress list of potential market segments. Now is the time to dig deeper into each through market research. Conduct your research using tools such as: Demographic data provided by government agencies. Market research conducted by trade or business associations in your field. Your own customer surveys or other previous market research. Research conducted by a consulting firm that you hired to do the job.

Evaluating the Segments

Create ranking criteria based on size, loyalty, and/or other market qualities. Once you’ve created a list of potential market segments and conducted research on them, you can start the evaluation process. Use the data you’ve collected and your own intuition about your business to develop your ranking criteria. For example, the sheer size (number of potential customers) of potential segments may be of vital importance to your business plan. Alternatively, shopping habits and brand loyalty may be even more important to you. If you’re numerically inclined, you can assign point values to the components of each market segment. For example: Young adults (+2) from the U.S. (+1) who are socially conservative (+0) and have high brand loyalty (+2). (=5 points) Middle aged adults (+1) from Canada (+2) who are socially progressive (+2) and have low brand loyalty (+1). (=6 points)

Rank the market segments based on your evaluation criteria. If you’ve assigned point values, start by simply adding everything up and putting the segments with the most points at the top of the list. In any case, though, feel free to make some adjustments based on intuition, experience, and “gut feelings.” Segmenting markets, like running a successful business, is both a science and an art! For instance, the data may tell you that customer age is a major factor in your market segmentation, but your experience in the business may tell you otherwise. In this case, try to combine insights from both sides into your final determination.

Select your target market(s) based on your segment rankings. Your rankings might tell you, for example, that young adults (+2) from Canada (+2) who are socially progressive (+2) and have high brand loyalty (+2) are your ideal target market. Therefore, you may determine that this is the primary target market for your unisex shaving supplies subscription service headquartered in Toronto. You might decide to focus on 1, 2, 3, or more target markets based on your findings and the nature of your business.

Set up a nesting model to help develop your approach toward a target market. A nesting model visualizes target market attributes by using a series of squares within squares (or circles within circles if you prefer). The larger, outer squares represent more visible, more permanent, and more specific attributes, while the smaller, inner squares represent less visible, less permanent, and more subtle attributes. Basically, the inner squares require you to know more about your customers based on market (or even personal) interaction. For instance, understanding how and why your target market develops brand loyalty towards personal grooming supplies might influence your advertising strategy.