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How to conduct market segmentation

Article discussing how to conduct market segmentation.

As we unpack the process for conducting market segmentation, let’s use the example of a start-up called Gaming Heroes. This start-up has identified an opportunity for gaming accessories in the market after the global lockdowns increased the number of gamers globally.

In each step of the process, we’ll show you how Gaming Heroes can uncover their target market audience.

1. Define market segments

Start by considering what insights will be useful according to the stage of the product management process being considered. For example, having a broader, shallower view of the market may be more useful when considering a new market in its entirety. The insights you uncover are likely to be general in nature, such as:

  • Who are the customers?
  • How reachable are they?
  • How do they typically behave?

A narrower but deeper analysis may be more valuable in a more advanced, mature market context where a product manager is trying to better understand why particular customer groups are performing better than others.

Begin to build a framework for segmentation using individual variables of the various segmentation bases. Continue to add variables until you have at least one variable from at least four separate bases to ensure that each variable will provide some useful insight.

For example, Gaming Heroes may define its market segment like this:

Base Variable
Demographics Age
Geographics Where customers live
Demographics Income
Behavioural Frequency of use
Technographic Software capabilities

2. Populate the relevant segments

Once you have developed your framework, begin to populate it by looking for commonalities in users. This will of course require a variety of research activities.

Start with your first variable, and populate it with a useful result based on the research you’ve completed. For example, let’s start with age. If the research uncovered that all gaming accessory customers are aged between 20 and 30, then creating a segment of 20- to 30-year-olds would not be necessarily useful as you would only have one segment. However, if all customers were aged between 20 and 80, then perhaps breaking each segment up into 10-year increments would be useful.

As you continue to complete the framework variable by variable, it will become clear whether you are uncovering useful insights. Continue to try various frameworks and various approaches within the framework until you can draw the most meaningful insights.

For example, Gaming Heroes may populate its market segment like this:

Base Variable
Demographics: Age 21–30
  31–40
  41–50
Geographics: Where customers live Asia
  Europe
  North America
Demographics: Income Low
  Medium
  High
Behavioural: Frequency of use High
  Medium
  Low
Technographic: Software capabilities High
  High
  Medium

3. Analyse and compare segments

Once you have articulated a useful framework and filled it out, you can analyse each segment. Consider the following questions:

  • Which segment can we most easily serve?
  • Which segment is most likely to benefit from our idea or product?
  • Which segment can most afford to pay for our product?
  • Which segment is likely to become loyal customers?

By considering each of the segments in totality, product managers can then start to decide a prioritised order of focus and attention to achieve product and business goals.

In some cases, the product determines which segment would be more or less attractive. For example, during customer research, Gaming Heros realised there is a distinct need for connection during global lockdowns. Suppose Gaming Heroes wants to focus on a gaming app that encourages social connection among customers living on their own without family. In that case, the most attractive segment in this particular framework is likely to be those in the 21–30 age group.

Common mistakes and risks when segmenting

Market segmentation may seem like an easy task to start your digital marketing strategy process, but it’s easy to fall prey to some common mistakes. Make sure to avoid the following when implementing a marketing segmentation strategy:

  • Your segments aren’t in line with your business goals – Whether your business goals are expanding on your existing customer base by attracting new customers or introducing new products, your marketing strategy should align with these business goals.
  • The market segment is too narrow/broad – This can either limit you or cause you to miss out to competitors who understand their customers more deeply by segmenting more granularly.
  • You don’t have enough data – The more data you have, the deeper your understanding of customer behaviour becomes.
  • Ignoring new markets – Markets change over time. You may be missing out on potential customers if you ignore new markets.
  • Only identifying past behaviours – Your customers’ habits are vulnerable to change over time, as seen in the COVID-19 global crisis. Build a strategy that reflects on the values of your target customers, not just their past behaviours.

Now that you know more about market segmentation and the steps to follow, you are ready to conduct your own market segmentation in the next activity. Let’s go!

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