What is Segmentation?
Market segmentation is like eating cake: Instead of trying to eat the whole cake at once and possibly creating mess or choking on it, we cut out a neat slice. Segmenting the market and dividing it into distinct groups allows you to create focused products with a compelling value proposition and a great user experience. Your segments should be clear-cut so that they do not overlap. What’s more, each segment should be homogenous and the people within it should respond to your product in the same way.
Let’s say that I wanted to create an app that helps people eat more healthily. The product could benefit a diverse group including individuals who want to lose weight as well as people who live with a medical condition such as diabetes. Trying to please everyone at once is not only challenging. It carries the risk of not satisfying anyone. Instead, I should focus on a specific market subset or segment.
How you segment the market is important: The segments define who the customers and the users are. While there are different ways to divide the market, you face two basic choices: You can primarily use customer properties such as age or gender or the benefit that your product provides.
Segmentation by Customer
Customer properties that are commonly used to divide the market include:
- Demographics such as age, gender, marital status, occupation, education, and income.
- Psychographics including lifestyle, social class, and personality.
- Behavioural attributes like usage patterns, attitudes, and brand loyalty.
- Regions such as Europe, Middle East and Africa (EMEA) and Asia-Pacific (APAC).
- Industries or verticals, for instance, automotive, education, finance, and healthcare for business markets (B2B).
- Company size such as small and medium-sized enterprises (SME) for B2B products.
Let’s take my healthy eating app as an example. To segment the market, I could choose demo- and psychographic attributes and define my target segment as men, aged 20-30, who are single, work long hours, and eat out frequently.
While the attributes listed above differ, they have something important in common: They all focus on the customer, be it a consumer or a business.
Segmentation by Benefit
An alternative approach is to segment the market using the benefit the product provides or the problem it addresses. This suggests that you first and foremost consider people’s needs and the job they need to get done.
For instance, if the main benefit of my healthy eating app is to help people understand better how much they eat, then there are two groups that may benefit form it: people who would like to lose weight; and people who want a more precise way of determining their calories intake such as athletes and people with diabetes. The first group could contain single men aged 20-30 with poor eating habits. But it could equally include married women with small kids who want to lose weight but don’t have the time or energy to follow a strict diet or to exercise regularly.
Which Approach should you Choose?
With different market segmentation approaches available to you, how can you tell which ones is right? My answer is simple: Whenever you do something new – be it creating a new product or taking it to a new market, then segment by benefit first. Once you have created the initial benefit-based segments, refine them by using demographics and other customer properties.
This approach reduces the risk of overlooking people who are likely to benefit from your product and of creating misaligned segments that don’t correspond to reality. Take my healthy eating app. If I had created segments primarily based on demo- and psychographics, I probably would have overlooked athletes and women with children as target customers.
Avoid these Two Common Mistakes
Whichever way you segment the market, avoid the following two mistakes: First, don’t blindly follow predefined segments. I have seen product managers clinging to existing customer-based segments while trying to create breakthrough products. Unsurprisingly, the outcomes were rather poor.
Second, don’t discard an idea because it does not fit into predefined market segments. Otherwise you may miss out on opportunities to create new products and new markets. Take the first iPhone, which launched in 2007, as an example. Apple disregarded the traditional distinction between consumer and business smartphones. Instead the company created a product that offered “the Internet in your pocket” and appealed to consumers and business users alike.
You can learn more about market segmentation by attending my Product Strategy and Product Roadmap training course and by reading my book Strategize: Product Strategy and Product Roadmap Practices for the Digital Age.
Clayton Christensen’s and Michael Raynor’s book The Innovator’s Solution provides great advice on benefit-based segmentation and has inspired this post.