What it means
Segmentation can be built on several kinds of variable. Demographic segmentation uses age, income or company size, geographic segmentation uses location, behavioural segmentation uses purchase patterns and usage, and needs-based segmentation groups customers by the job they are trying to get done.
Business-to-business work usually adds firmographics such as industry, headcount and buying process. A segment is not simply any slice of data you can cut.
To be commercially useful it must be distinct in what it wants, reachable through some channel you can actually buy, large enough to repay the effort, and stable enough to still exist next year. Plenty of published segmentations fail the reachability test and become interesting analysis that nobody can act on.
Segments matter because they drive resource allocation. Once you know that one group buys three times as often at twice the margin, sales coverage, product roadmaps and marketing spend can be tilted towards it deliberately rather than by accident.
Segment-level profitability is often the analysis that changes a strategy meeting. The practical output is usually a small number of segments, typically three to six, each with a name, a size, a value and a description of what it wants.
More than that and the organisation cannot remember or act on them; fewer and you are back to treating the market as one undifferentiated block. The nuance to hold onto is that segments describe tendencies, not rules.
Real customers straddle boundaries and move between segments over time, so a segmentation is a working model for allocating effort rather than a permanent classification of individual people.
In practice
Real-world examples.
Example
A gym chain finds that its members fall into three behavioural groups: early-morning regulars, evening class attenders and occasional users who visit fewer than four times a month. It builds separate retention offers for each, and directs its class investment at the evening segment, which shows the highest renewal rate.
Example
A payments provider segments merchants by annual card volume rather than industry, and discovers that merchants processing between $500,000 and $2,000,000 a year are underserved by both the self-service tools aimed at micro-businesses and the account-managed service aimed at large chains. It builds a mid-tier package specifically for that gap.
Example
A publisher of professional training courses segments by buying process instead of job title, separating individuals paying with a personal card from managers spending a team budget. The two groups need different price points, different invoicing and completely different messaging, even when the course content is identical.
Formula
Calculation
Segment value = number of buyers in the segment x average annual spend per buyer
A commercial cleaning company divides its market by customer type and looks at the mid-sized office segment. There are 18,000 such offices in its region and each spends an average of $2,400 a year on contracted cleaning.
Segment value = 18,000 x $2,400 = $43,200,000
The company currently holds 6% of that segment.
Its revenue from the segment = $43,200,000 x 0.06 = $2,592,000
If a focused plan lifts share from 6% to 12%, revenue from the segment becomes:
$43,200,000 x 0.12 = $5,184,000
The gain is $5,184,000 - $2,592,000 = $2,592,000 of additional annual revenue. Because contribution margin in this segment runs at 30%, the extra revenue is worth $2,592,000 x 0.30 = $777,600 of additional contribution before the cost of winning it, which is the number the marketing budget has to be judged against.Case study
Seen in the real world.
This is an illustrative and fictional example. Camden Row Interiors sold furniture to offices and treated its market as a single block, sending the same catalogue and the same discount schedule to every prospect regardless of size or sector.
An analysis of two years of orders identified three genuine segments: fast-growing technology firms fitting out new space, established professional services firms replacing furniture on a cycle, and public sector bodies buying through tender. Average order values were $34,000, $18,000 and $95,000 respectively, and the sales effort required per order was almost identical in the first two cases.
Camden Row assigned a dedicated bid specialist to the tender segment, moved the professional services segment to a lower-touch online ordering route, and kept its field sales team on the growth companies. Revenue rose 19% in the following year on a slightly smaller sales team, because effort finally matched the value of what each group actually bought.
Watch out
Common mistakes.
- Building segments from whatever fields happen to exist in the customer database rather than from differences in what customers actually need or how they buy.
- Creating so many segments that no one in sales or marketing can remember them, which guarantees the segmentation is quietly ignored.
- Assuming that a large segment is automatically an attractive one, without checking margin, competitive intensity and the cost of reaching it.
Questions
People also ask.
How many segments should a business have?
Usually three to six for practical purposes, because that is the number a commercial team can genuinely act on and hold in mind.
What is the difference between a segment and a target market?
A segment is any coherent group within the market; the target market is the segment or segments you have deliberately chosen to serve.
Should segments be reviewed regularly?
Yes, at least annually, because customer behaviour, competitors and the economics of serving each group all shift over time.
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