What is Market Segmentation?

When you first envision a product or service it is easy to fall into the trap of thinking everyone is your customer. That is rarely true. In fact thinking that way is often a death sentence for early stage companies because you run out of money trying to talk to people who simply do not care.

Market segmentation is the discipline of breaking down a massive audience into smaller and more manageable pieces. It is the process of dividing a broad consumer or business market into sub-groups of consumers based on some type of shared characteristics.

This is not just about organizing data. It is about survival. It allows a startup with limited resources to ignore the majority of the market to focus intensely on the minority that actually needs what is being built.

There are standard ways to slice up a market. You will often see these four categories referenced in business literature.

• Demographic: This covers who the customer is. It includes age, gender, income, education, and job title.
• Geographic: This covers where the customer is. It looks at country, region, city, or climate.
• Psychographic: This covers why the customer buys. It involves personality, values, interests, and lifestyles.
• Behavioral: This covers how the customer acts. It looks at purchasing habits, brand interactions, and product usage.

For a startup founder the psychographic and behavioral segments are often the most critical. You are looking for people who feel a specific pain point acutely enough to pay for a solution from an unproven company.

It is common to confuse market segmentation with market targeting. They are related but distinct steps in a sequence.

Segmentation is the analysis phase. You look at the entire map of potential customers and draw lines around different groups. You are simply identifying who exists.

Targeting is the strategic decision phase. Once you have identified the segments you must decide which one to pursue. You might identify five distinct segments but only have the resources to target one.

If you skip segmentation you are targeting blindly. If you only segment but never target you are just staring at data without taking action.

Why do we go through this trouble? It comes down to resource allocation.

A large corporation can afford to launch a marketing campaign that appeals to a general audience. A startup cannot. You need your messaging to resonate immediately with the person reading it.

By segmenting the market you can tailor your product features and your messaging to a specific group. If you are building productivity software you might segment the market into enterprise executives and freelance creatives.

The features required by the executive are totally different from the freelancer. If you try to build for both simultaneously you will likely build a product that satisfies neither.

While segmentation provides clarity it also introduces questions we have to answer honestly.

• Is the segment we chose actually large enough to support a business?
• Are the characteristics we used to define the segment stable or will they change next year?
• Did we create a segment that exists on paper but is impossible to reach through standard marketing channels?

We must approach this scientifically. We form a hypothesis about who the segments are. We test that hypothesis. If we are wrong we simply regroup and look at the data again.