How to Segment a Market

Co-authored by Archana Ramamoorthy, MS and Christopher M. Osborne, PhD

Last Updated: May 4, 2023 Approved

It may be tempting to think that the target market for your business is “anyone and everyone,” but trying to be all things to all people is a good way to put yourself out of business. Instead, use data, experience, and a bit of intuition to segment the overall market into one or more primary target markets. Start by defining your segmentation categories—the most common options are geographic, demographic, psychographic, and behavioral. Then, list several alternatives within each category and create a list of potential combinations of attributes—in other words, potential market segments. Finally, research, evaluate, and rank the segments to identify one or more target markets for your business.

Method 1

Method 1 of 3:

Defining Your Segmentation Categories

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Use geographic segmentation to differentiate markets by location. The most obvious aspect of geographic segmentation is establishing rough geographic boundaries—a local business may limit its potential markets to within a 25 mi (40 km) radius, for instance, while a large online business may have expansive markets that span continents. In addition, though, consider geographic factors such as:^{[1]
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- Country. If your potential markets span multiple countries, or even multiple states or provinces within a single large country, strongly consider differentiating each as its own market due to factors like politics, culture, and law.^{[2]
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- Climate. If you manufacture sand shovels and snow shovels for kids, for example, it makes sense to differentiate your potential markets by climatic and seasonal characteristics.
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Identify key customer and market characteristics with demographic segmentation. This type of market segmentation divides up your potential markets based on intrinsic customer characteristics such as age, gender, income level, and educational level. As such, demographic segmentation is both a powerful and problematic tool.^{[3]
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- Demographic segmentation requires you to make assumptions in ways that may strike you as inappropriate—for instance, assuming that all men over 65 and only men over 65 will want to read the magazine you’re launching. Keep in mind that segmentation deals in probabilities, not certainties, and is intended to help you prioritize probabilities, not exclude possibilities.
- Keep in mind that the people buying your product may not be the ones actually using it.^{[4]
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Utilize psychographic segmentation to highlight customer personality traits. This segmentation category requires you to “get into the heads” of customers within your potential markets, and once again you have to make some general assumptions. If you’re developing a line of humorous graphic T-shirts, for instance, you might analyze customers based on factors such as the following:^{[5]
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- Personality. For instance, are they likely to be more quiet and reserved, or more extroverted?
- Values. For example, are they more likely to have more conservative or more progressive social perspectives?
- Hobbies. Might they prefer golf or tennis, for instance, or mountain biking and rock climbing?
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Turn to behavioral segmentation to emphasize market activity habits. Customers act within markets based upon various motivations and expectations. Therefore, for example, a startup sports drink company might choose to segment their potential markets by factors such as:^{[6]
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- Customer loyalty. Are they likely to stick to familiar brands, retailers, etc., or try something new?
- Motivation. Are they participating in the market out of necessity, with enthusiasm, or with indifference?
- Rate of use. How frequently are they buying, consuming, or otherwise participating in the market?
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Method 2

Method 2 of 3:

Creating Your Market Segments

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Create a list of alternatives for each of your segmentation categories. If, for instance, you choose to segment your market using all 4 common categories—geographic, demographic, psychographic, and behavioral—break up each category into likely alternatives. Aim for 2-3 alternatives at minimum, and create more for a more in-depth segmentation process. As an electric scooter manufacturer, for example, your alternatives might include:^{[7]
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- Geographic: U.S., Canada, Mexico.
- Demographic: young adult, middle aged adult, older adult.
- Psychographic: socially conservative, socially progressive.
- Behavioral: high brand loyalty, low brand loyalty.
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List every potential market segment based on your segmentation categories. Depending on the number of segmentation categories and alternatives you’ve chosen, the initial list may be very long. It may also include combinations that don’t seem relevant or useful. Worry about whittling down the list later, though—for now, just list every possible combination. A few of the combinations might include, for example:^{[8]
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- Young adults from the U.S. who are socially conservative and have high brand loyalty.
- Middle aged adults from Canada who are socially progressive and have low brand loyalty.
- Older adults from Mexico who are socially conservative and have low brand loyalty.
3
Revise or remove segments that are illogical or not viable. After you’ve created your long initial list of combinations, go ahead and weed out combinations that you are sure don’t describe a potential market. However, if you’re “on the fence” about some of the combinations, keep them for now and re-evaluate them again after you’ve done more research.^{[9]
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- You might, for example, be confident that the app you’re developing won’t appeal to older adults who are socially conservative. In this case, you can eliminate the combinations that include both of these attributes.
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Conduct basic research on each potential market segment. The combinations that remain comprise your in-progress list of potential market segments. Now is the time to dig deeper into each through market research. Conduct your research using tools such as:^{[10]
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- Demographic data provided by government agencies.
- Market research conducted by trade or business associations in your field.
- Your own customer surveys or other previous market research.
- Research conducted by a consulting firm that you hired to do the job.
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Method 3

Method 3 of 3:

Evaluating the Segments

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Create ranking criteria based on size, loyalty, and/or other market qualities. Once you’ve created a list of potential market segments and conducted research on them, you can start the evaluation process. Use the data you’ve collected and your own intuition about your business to develop your ranking criteria.^{[11]
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- For example, the sheer size (number of potential customers) of potential segments may be of vital importance to your business plan. Alternatively, shopping habits and brand loyalty may be even more important to you.
- If you’re numerically inclined, you can assign point values to the components of each market segment. For example:
  - Young adults (+2) from the U.S. (+1) who are socially conservative (+0) and have high brand loyalty (+2). (=5 points)
  - Middle aged adults (+1) from Canada (+2) who are socially progressive (+2) and have low brand loyalty (+1). (=6 points)
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Rank the market segments based on your evaluation criteria. If you’ve assigned point values, start by simply adding everything up and putting the segments with the most points at the top of the list. In any case, though, feel free to make some adjustments based on intuition, experience, and “gut feelings.” Segmenting markets, like running a successful business, is both a science and an art!^{[12]
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- For instance, the data may tell you that customer age is a major factor in your market segmentation, but your experience in the business may tell you otherwise. In this case, try to combine insights from both sides into your final determination.
3
Select your target market(s) based on your segment rankings. Your rankings might tell you, for example, that young adults (+2) from Canada (+2) who are socially progressive (+2) and have high brand loyalty (+2) are your ideal target market. Therefore, you may determine that this is the primary target market for your unisex shaving supplies subscription service headquartered in Toronto.^{[13]
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- You might decide to focus on 1, 2, 3, or more target markets based on your findings and the nature of your business.
4
Set up a nesting model to help develop your approach toward a target market. A nesting model visualizes target market attributes by using a series of squares within squares (or circles within circles if you prefer). The larger, outer squares represent more visible, more permanent, and more specific attributes, while the smaller, inner squares represent less visible, less permanent, and more subtle attributes.^{[14]
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- Basically, the inner squares require you to know more about your customers based on market (or even personal) interaction.
- For instance, understanding how and why your target market develops brand loyalty towards personal grooming supplies might influence your advertising strategy.
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Expert Q&A

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Question

How do you brainstorm for customer segmentation?

Archana Ramamoorthy, MS
Tech Executive
Archana Ramamoorthy is a Tech Executive based in Sunnyvale, California. She currently serves as Senior Director of Google’s Cloud Security Product Management division. Prior to her current role, Archana held leadership roles at multiple technology companies and has over 15 years of experience in the industry. Prior to her role at Google, she was at Workday for 8 years, culminating her time there in the role of Chief Technology Officer, North America. She is a product ninja and online security advocate. She also actively works to enable more diversity and inclusion in the tech industry. In 2021, she was a founder partner in Neythri Futures Fund, the first fund with a mission to increase the diversity quotient in the venture capital ecosystem. In particular, Neythri Futures Fund positions South Asian women to be key investors and stakeholders in the industry. Archana received a BS in Electronics and Communication Engineering from SRM University and an MS in Electrical and Computer Engineering from Duke University.

Archana Ramamoorthy, MS

Tech Executive

Expert Answer

While it's common for people to immediately focus on who will be buying the product, it's helpful to drill down lower and consider who will actually be using the product. So instead of focusing on who you're going to sell your product to, think about the problems that the actual users of your product might have and cater to them.

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What are market segments?

Community Answer

Market segmentation is a marketing strategy which involves dividing a broad target market into subsets of consumers, businesses, or countries that have, or are perceived to have, common needs, interests, and priorities, and then designing and implementing strategies to target them.

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How do I break into an already existing market?

Community Answer

Come out with unique products and services that are different from what is commonly done in the Market, and this can be better achieved when properly segmenting target markets (Clients or Customers) to understand their needs and find ways of satisfying them better than your competitors in the market.

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