Do me a favour. Close your eyes, picture your business’ average customer. Were they all looking for exactly the same thing? Probably not. Some might have been price-conscious, others quality-focused. Some might have needed extensive support, while others knew exactly what they wanted. This variety in your customer base is why market segmentation matters. So what is market segmentation?
It’s the process of dividing your customers into groups with similar needs and characteristics. This way, you can serve them better with targeted products, services, and marketing messages.
What is Market Segmentation and Why Should You Care?
You’ve probably felt overwhelmed trying to market to “everyone.” Most small business owners in Australia face this exact challenge. That’s why you need to know what is market segmentation.
Market segmentation means splitting your broad customer base into smaller, more manageable groups of people who share similar traits. Each of these groups is called a segment.
To understand what is market segmentation better, pretend you are an owner of a café in Sydney. You might notice that your morning customers are busy professionals grabbing coffee on their way to work. These people want something very different from your afternoon crowd who may be parents with kids looking for a relaxed space. This means you have two very unique segments that won’t respond to the same marketing messages.
Small business owners who use market segmentation typically see a massive boost in sales compared to those who don’t. One study found that 81% of executives think segmentation was important for growing profits, with solid market segmentation strategies delivering a 10% higher profit compared to those whose segmentation wasn’t as effective over a 5-year period.
When you know exactly who you’re talking to, you can create assets that feel like they were made just for them.
The Four Types of Market Segmentation That Actually Work
1. Geographic Segmentation: Location Matters
Geographic segmentation divides your market based on where people live or work. This matters more than you might think.
If you run a lawn care service, the needs of your customers in flood-prone areas will differ from those in drought-prone areas. If you sell beachwear, your Sydney customers might shop year-round, while your Melbourne customers might only buy seasonally.
For many small businesses that are curious about what is market segmentation, particularly those with a physical shopfront or service area, geography is the first and most obvious way to segment as it helps you figure out where to open your next location or how to adjust your offerings based on local needs.
2. Demographic Segmentation
Demographic segmentation looks at measurable facts about your customers: age, gender, income, education, occupation, family structure, and cultural background.
Let’s say you sell baby products. Parents of newborns need different items than parents of toddlers. A single parent might be more price-sensitive than a dual-income household. A first-time parent will typically buy more than experienced parents who’ve learned what’s necessary and what’s not.
3. Psychographic Segmentation
While demographics tell you who your customers are, psychographics tell you why they buy. This includes their lifestyles, values, personality traits, hobbies, and aspirations.
Take two 15-year-old boys from the same neighbourhood, Person A and Person B. Both attend the same acting class. Person A dreams of becoming a movie star and takes every opportunity to improve his skills. Person B couldn’t care less about acting as a career; he’s there because he enjoys meeting new people. Same demographic, entirely different motivations.
For a small business owner, these insights are gold. A gym owner might find that some members come for health reasons, others for social connections, and still others because they enjoy competing. Each group responds to different messages.
4. Behavioural Segmentation
Behavioural segmentation looks at how people interact with your business. This includes:
- How often they buy
- When they buy (seasonal patterns, time of day)
- How loyal they are to your brand
- What benefits they’re looking for
- Why they use your product or service
- Where they are in their buying journey
A customer who buys from you weekly has different needs than someone who stops by once a year. Someone who values quality will respond differently to your marketing (digital or non-digital) than someone hunting for the lowest price.
How to Do Market Segmentation in Your Small Business
Step 1: Collect Relevant Information
Don’t make this step in what is market segmentation harder than it needs to be. Start with what you already know. You can talk to your current or potential customers. Look at your sales data, even check your website analytics. You probably have more information than you realise.
Your advantage as a business owner is that you likely speak directly with customers. Pay attention to patterns in what they tell you. What problems are they trying to solve? What questions do they ask repeatedly?
Step 2: Spot the Natural Groupings
In your pursuit of gathering information for what is market segmentation, you’ll start to notice patterns. Good segments have these qualities:
- They’re big enough to be worth your time
- You can actually reach them through your marketing
- They respond differently to different marketing messages
- You can take specific actions to serve them better
A bookshop owner might notice they have three main types of customers: avid fiction readers who come in weekly, parents buying for children, and gift-buyers who only visit for special occasions. Each group has different needs and shopping habits.
Step 3: Pick Your Battles
You need to choose the segment that makes the most sense for your business. After all, most small businesses can’t serve every possible segment well.
- What you’re good at
- What resources you have available
- Which segments match your business goals
- Which segments offer the best profit potential
Step 4: Create Plans for Each Segment
You already know what is market segmentation, but now is the time to create specific plans for each target segment. This might include:
- Tweaking your products or services to better meet their needs
- Setting prices that make sense for what each segment values
- Making sure your products are available where your chosen segments expect to find them
- Creating marketing messages that speak directly to what motivates each segment
What Comes After Market Segmentation?
Understanding what is market segmentation is just the first step. The next part of the puzzle is targeting which means choosing which segments you’ll actively pursue with your marketing efforts. After that, positioning involves creating a clear image in your customers’ minds about what makes your business different from competitors.
These ideas work together to help you make the most of your marketing budget by guaranteeing you’re talking to the right people with messages that matter to them.
Making Market Segmentation Work for Businesses
Many small business owners are shocked to discover that a relatively small segment of their customers drives the majority of their profits. When you know which customer groups bring in most of your revenue, you can focus your time and money where it counts most. We help small business owners understand their customers inside and out. Ready to make market segmentation work for your business? Let’s talk about what is market segmentation and how we can help you identify the customers who will drive your growth.
