Market segmentation is dividing your target market into smaller groups of people who share something that matters to how they buy, such as their age, their industry, their needs or their behaviour. Qualtrics describes it as creating approachable subsets of your market, so you can speak to each group in a way that lands.
Done well, it's how a small marketing budget starts behaving like a bigger one. Qualtrics lists the benefits as stronger marketing messages, more targeted digital advertising, better response rates, lower acquisition costs, spotting niche markets and more focused product development.
The five types of market segmentation
Qualtrics names four primary categories, plus geographic, which it treats either as part of demographic or as a type of its own. It rates demographic and firmographic as the simpler two, suited to a smaller business or a first project, and psychographic and behavioural as more advanced.
| Type | Based on | Best for | Where to get the data |
|---|---|---|---|
| Demographic | Age, income, education, occupation | B2C, the simplest start | Customer surveys, census data |
| Geographic | Region, climate, location | Deciding where to sell or advertise | Surveys, market research, visitor IP data |
| Firmographic | Industry, company size, revenue | B2B | Public company listings, trade publications, surveys |
| Behavioural | Purchases, usage, loyalty | Anyone with customer history | Your own sales and usage data |
| Psychographic | Values, lifestyle, opinions | Brands selling an identity | Open-ended survey questions to customers |
Where the data for each segment comes from
This is the practical question most explainers skip. According to Qualtrics, demographic data comes from customer surveys or third-party sources such as census data. Geographic data comes from surveys, market research or operational data such as visitors' IP addresses. Firmographic data comes from public company listings, trade publications and surveys. Behavioural segmentation is best started from your existing customers' purchase and usage data. Psychographic data has to come from the customers themselves, for example through open-ended survey questions.
Corporate Finance Institute frames the same idea as who, what and why. Who (income, education, family size, age) is the easiest, because the data is readily available. Why, using past purchases to predict future ones, is the hardest. For behavioural data, CFI suggests recency, frequency and monetary value: when a customer last bought, how often they buy and how much they spend.
Segmentation is only step one of STP
Here's the catch. Corporate Finance Institute treats segmentation as the first of three steps in the STP process: segmentation, targeting and positioning. Segmentation groups customers with similar needs. Targeting picks the segment you'll focus on. Positioning creates a value proposition for that segment. Plenty of businesses do the first step, end up with a tidy list of segments, then try to market to all of them at once.
CFI gives three factors for choosing which segment to target:
- The segment itself: how fast it's growing and how much profit it makes.
- Your own competencies and resources: a big segment is tempting, but you may not be able to serve all of it.
- Competition: who's there now, and who's likely to arrive.
And the warning that surprises people: CFI says a large, growing segment may be profitable, but it attracts competition, which effectively reduces margins. The biggest group isn't always the best one to chase. Once you've chosen, positioning is the next job, and how to choose your brand position picks up from there.
CFI adds that segmentation and targeting shape more than your ads. They decide your pricing (price-sensitive groups versus price-insensitive ones), your communication (the right ads and media for each group) and how you manage customers.
How to segment your market in six steps
Qualtrics sets out five steps: define your target market, segment it (most brands combine criteria), understand it through surveys, focus groups and polls, create your segments from the responses, then test your marketing with conversion tracking and keep testing. Here's that process with CFI's targeting step added:
- Define the market you serve and who else serves it.
- Pick one or two criteria, not all five.
- Survey customers or dig into your own customer data to find the groups.
- Choose the one or two segments worth chasing, judged on size, profit and competition.
- Write a different message for each and test it with conversion tracking.
- Revisit the segments when your customers change, and at least once a year.
When to redo your segments
Segments go stale. Qualtrics suggests revisiting them in times of rapid change, whenever your customers change, yearly because behaviour shifts, and seasonally if the same group behaves differently at different times of year. If uptake on a campaign is disappointing, that's another sign to look again.
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If email is your main channel, the same thinking works at list level. I've written about why email list segmentation matters for a small business and the best way to segment your audience once you've found your groups.
Where I come in
Segmentation is where marketing strategy gets real, because choosing one group means saying no to others, and that's the part most owners find hardest to do on their own. After 23 years in marketing, I help businesses pick the segment that's worth chasing and then write the message for it, so the targeting and the copy pull in the same direction. You can find out more on my work with me page.
My verdict
If you're a small business, don't start by paying for research. Start with the segment that already buys from you. Your own sales and usage data is behavioural segmentation, Qualtrics says it's the best place to begin, and you already own it. Look at who buys most often and most recently, write one message for them and test it. Once that's working, add the next segment, not before.
Once a segment responds, signs of product-market fit shows how to tell whether the fit is real.
Frequently asked questions
What are the 5 types of market segmentation?
Demographic, geographic, firmographic, psychographic and behavioural. Qualtrics treats geographic as part of demographic or as a type of its own.
What is the STP process?
Segmentation, targeting and positioning. You group customers with similar needs, choose the segment to focus on, then create a value proposition for it.
Which type of segmentation is easiest for a small business?
Qualtrics rates demographic and firmographic as the simpler starting points. Behavioural is a good start too if you have your own customer purchase data.
How often should you review market segments?
Qualtrics suggests yearly, plus whenever your customers change, in times of rapid change, and seasonally where behaviour shifts.
Is the biggest segment always the best?
No. CFI warns that a large, growing segment attracts competition, which effectively reduces margins.
