It’s the process of classifying and grouping consumers (your current and potential customers) by a set of shared characteristics.

Ok, so why would one want to do this? Well, once you’ve grouped a section of consumers, you can generally predict their behaviour more accurately = greater personalisation = higher uptake or conversion rate of an activity = more effective marketing. And furthermore, there will be cost savings through the use of marketing metrics and greater management of your resources (ie: money, people and time) to generate better sales results.

So there’s some fairly compelling reasons for a business owner to strategically look at the greater marketplace and work out who are their customers and what are the common attitudes, perceptions and characteristics between them,

“This may seem simple, but you need to give customers what they want, not what you think they want. And, if you do this, people will keep coming back.”
John Ilhan - founder and frontman of the Crazy John's mobile phones chain of retail stores in Australia

The types of segmentation to use and how to define them

In consumer marketing (and there is a crossover of criteria when segmenting business markets) the most common approaches and criteria are:

•         Geo-demographic – age and life cycle stage, gender, social class, marital status, dependents, location, education,     religion, nationality

•         Socio-economic – occupation, social class, income, assets or net worth, buying power (need, want or demand driven?)

•         General behavioural – frequent user of your product/service (how loyal), not a user, buyer readiness, etc

•         Psychographic – more personality orientated but also including attitudes and interests, eg: extrovert/introvert, optimist/pessimist, apartment lifestyle/rural lifestyle

Now the process is to create criteria that will segment your markets into a relevant framework for what you’re trying to achieve. For example, if you’re looking to increase market share of an existing market (like Telco companies wanting new mobile customers), marital status and occupation aren’t necessarily relevant criteria to segment with. Obviously age, occupation, and need are.

Importantly the market segmentation criteria has to be

•         Measurable – most of the characteristics can be measured

•         Accessible – easily enough reached

•         Substantial –  the market size has to be large enough to be profitable to serve

•         Differentiable – distinctions in criteria sufficient to warrant different marketing
          activities

•         Actionable – effective programs will able to yield results will serving the segments

But how do I find out this information you ask? Well the best method (in my opinion) – in terms of speed and cost effectiveness – is simple primary market research. You can engage a market research firm (if you have the budget for it), but in my experience, there’s nothing like “getting up close and personal” and randomly sampling 20 – 30 customers as a minimum (it has to be a reasonable sample to use as an indicator) and non customers to establish the criteria. You should only ask relevant questions and thus each survey should only take a couple of minutes (at the most). A very cost effective way to gather some very powerful information.

“Every day, you'll have opportunities to take chances and to work outside your safety net. Sure, it's a lot easier to stay in your comfort zone... in my case, business suits and real estate... but sometimes you have to take risks. When the risks pay off, that's when you reap the biggest rewards.”
DonaldTrump – billionaire

Once you’ve completed the research, you’ll be able to group accordingly and establish a frame work. The key here is to use the M.A.S.D.A. criteria above to ensure the segmentation is appropriate and usable.

It’s so much easier (and will yield more effective marketing results) when you document your target market(s) to assist in strategically planning your marketing activities – do not underestimate the power of this process.

The days of effective mass marketing have long gone. Successful businesses need to point the arrow and hit every time.

Now you should have an analysis of all your market segments – some segments that you serve now and some that are unrealised opportunities. Finally, draw up a list of all the target markets based upon the above criteria. Ideally a matrix or grid format is best (as this will be elaborated further below) with the market segments down the left, vertical axis. 

In determining which market segments to pursue, two key factors come into the analysis:

1. the segment’s overall attractiveness and
2. the company’s objectives and (importantly) resources.

A good idea to start with and help determine the priority of the marketing activities is to estimate the potential size of the market (in sales value) and also the potential profitability level. These two criteria can be used along the horizontal axis be using a simple rating system – low, medium or highly profitable for example.  

“Plenty of people want to spend money, just get them to spend it with you”
Vaughan Stanley

Now there should be a structure in place of the segments with which you can correlate factors that determine the attractiveness of the opportunity. The other factor is the company’s resources and objectives - if you’re fairly small and have capacity limitations, it’s pretty obvious that you shouldn’t pitch for the big accounts just yet.

Grow strategically within your company’s resources. The segmentation process will have identified the best and most profitability markets to serve. Then a business must decide which markets to focus on, then penetrate and increase market share relative to the ability of the company to profitably serve those markets.

This then becomes a very effective market selection plan. It makes for smarter business planning, and more stable, profitable strategic growth.

“Statistics suggest that when customers complain, business owners and managers ought to get excited about it. The complaining customer represents a huge opportunity for more business.”
Zig Ziglar - Self Help Author