Marketing to the right people, at the right time, and in the right way can elevate the campaigns of any company. Market segmentation—which allows businesses to tailor sales campaigns and marketing plans to target, engage, and appeal to niche groups—can help you reach that marketing utopia.

At first, narrowing down your target market can feel restrictive. The more people you can target, the more chance you have at making money online, right? Yet the opposite can often be true.

This guide is an indispensable resource on the topic of market segmentation: ahead, figure out which type of market segmentation is best for your business, discover the benefits of doing it, and take away the market segmentation strategies to achieve your marketing goals.

What is market segmentation?

Market segmentation is the process of dividing a target market into groups or subgroups. These smaller segments of consumers will share similar needs, interests, and characteristics.By targeting a smaller group of a large market, you can tap into customers who are more likely to pay for products that appeal directly to them.

Market segmentation vs. customer segmentation

Both types of segmentation divide people based on their shared traits—be that their age, interest, or purchasing habits. The key difference between the two is that market segmentation divides the entire market, whereas customer segmentation only divides a brand’s existing customer base.

Types of market segmentation

Demographic segmentation
Geographic segmentation
Behavioral segmentation
Psychographic segmentation
Firmographic segmentation

Demographic segmentation

Demographic segmentation is the process of dividing a market based on shared demographic data, such as:

Age
Gender
Income
Education
Occupation
Marital status

Demographic segmentation is effective because people who share each trait have things in common. If you’re a sneaker retailer, for example, targeting the market segment of people who work as medical professionals can help you better speak to the level of comfort your sneakers provide. 

Geographic segmentation

Geographic segmentation involves dividing consumers based on their physical location, such as their:

Country
Region
City
ZIP code

Ecommerce brands can use geographic segmentation to promote local events or physical retail stores. It’s also a smart way to promote products when linked with the weather. An ecommerce-only brand that sells coats, for example, could promote raincoats to customers in a city that has high levels of rainfall.

Behavioral segmentation

Behavioral segmentation categorizes consumers based on their behaviors, such as their:

Browsing history
Purchasing habits
Product usage
Email engagement 
Loyalty

“We’ve opted for behavioral segmentation as it allows us to comprehend and address customers’ desires based on their online activities, such as browsing habits, purchasing history, and product preferences,” says Kevin Wang, co-owner of Inyouths. “By adopting behavioral segmentation, Inyouths has witnessed impressive growth in conversion rates, customer satisfaction, and long-term customer allegiance.” 

Psychographic segmentation

Psychographic segmentation brings consumers together based on personality traits, such as their:

Social status
Values
Attitudes
Interests
Beliefs and opinions

Segmenting your audience based on their personality traits can help you craft campaigns that speak to your target customer. If you’re a clothing retailer, for example, segment the market based on people who care about sustainability. Promote your ethically sourced materials, resale program, and carbon-neutral shipping options to maximize revenue.

Firmographic segmentation

Firmographic segmentation is used by ecommerce brands that sell to other businesses. These B2B companies segment the market based on:

Industry
Company size
Job role
Location 
Annual revenue

Imagine you’re a corporate gifting company. Businesses with a turnover of $2 million each year will likely spend much more money on gifting than an enterprise that generates $250,000. Segmenting your market based on this variable allows you to zone-in on selling high value gifts to companies most likely to purchase them. 

Benefits of market segmentation

Market segmentation can help improve marketing campaign performance, build customer loyalty, and make better business decisions.

Here’s an overview of how market segmentation improves businesses:

Improves campaign performance. By understanding the different needs and wants of individual segments, businesses can create targeted advertising and promotions that resonate with those consumers. This can save time and money, and minimize waste by avoiding mass marketing methods that may not be effective for certain groups.

Informs product development. Segmentation is the ideal way to break the market down and know what will sell the best. Collect feedback from a market segment and hone in on the products they can’t find elsewhere.

Reveals areas to expand. Market segmentation can unveil segments previously not served. For example, you might discover there is a large population, possibly outside the immediate area, of retired middle-income males. Opening a retail store or pop-up shop in this area can monetize this underserved segment.

Improves business focus. The more you know about the people you’re trying to serve, the better business decisions you can make. This applies to inventory, location, and hiring-based decisions. 

Builds customer loyalty. People are loyal to the brands that best appeal to them. Niche businesses—those who focus on a small customer segment—often have higher customer loyalty and retention rates. 

Cesar Cruz, co-founder of Sebastian Cruz Couture, adds, “Everyone has a different style and product interest. Instead of funneling your entire audience into the same bucket, recommend products and industry information via email that directly resonates with their browsing history. Directed email efforts can result in higher ROI and loyal customer relationships.” 

Example of market segmentation

The global jewelry market is a saturated industry, valued at $40.7 billion. But when John Ruggiero and Michelle Luchese went shopping for a wedding band, they struggled to find one that matched John’s personality and budget. 

John and Michelle founded Manly Bands—a men’s wedding ring company with a strong unique selling proposition—out of this small market segment. 

“Once we knew what problem we wanted to solve, we had to develop a product that was different from everybody else’s. That was our goal from the beginning,” said John in an interview with Shopify Masters. “We tried to find other competitors in the space. We tried to look and see what they were doing. It gave us a lot of insight and information as to what people were interested in and how we could do things differently.”

Manly Bands segmented the market to reach male customers who wanted modern, stylish wedding rings.

Aside from men who wanted modern rings, Manly Bands’ founders began further segmenting the market based on popular styles. “If you’re an outdoorsy person, we made sure we had  some wood and other materials like that,” John added. “If you were more of a city person or a corporate person, we had really cool metals or carbon fiber, cobalt, and chrome.”

Market segmentation strategy

Research the market
Identify segmentation criteria
Conduct market segmentation
Develop targeted marketing strategies
Evaluate how well the segmentation strategy worked

Here are some different market segmentation strategies to define, reach, and evaluate your target market.

Research the market

The first step in segmenting your market is to understand how it currently operates. This includes:

Collating existing research. Publications like Pew Research Center and Gartner regularly publish research studies about different market segments. Scan these websites to analyze market size, consumer sentiment, and annual spend. 

Gathering customer feedback. Instead of guessing how your potential customers’ minds work, ask them directly. Find out the pain points they face, the issues they still have unresolved (despite purchasing products from a competitor), and the things they’d look for when switching vendors. 

Competitive analysis. Which ecommerce brands already operate in the industry? Do they appeal to a specific segment of customers? Analyzing the competitive landscape can highlight underserved segments of an otherwise saturated market. 

Mitchell Stern, owner of Side Hustle Tips, says, “In marketing my Shopify store, Dead Sea Trading Co., I looked at my biggest competitor and used Alexa.com to determine that their target market was women ages 35 to 65+ who earn more than $100,000 per year.”

Identify segmentation criteria

Once you have the big picture of the market you’re trying to target, define the segmentation variables you’ll use to separate them. This can be demographic, psychographic, geographic, behavioral, or firmographic (if you’re a B2B company).

Imagine you’re segmenting the skin care industry. Competitive analysis shows women segmented by age are already well served by other brands, but there is no skin care brand that specifically targets women going through menopause. 

In that case, your segmentation criteria would be:

Age: 40–60
Gender: Female
Purchasing habits: Gets skin care advice from friends
Interests: Currently exploring hormone replacement therapy 

Conduct market segmentation

Now that your segmentation criteria is outlined, it’s time to find the people who fit within each segment. You can collect the relevant market data from your business tools—but if you’re a Shopify user and segmenting using customer data, look no further than Shopify’s segmentation tools.

Eric Mills, owner and founder of Lightning Card Collection, says, “We mostly rely on Shopify’s segmentation features to collect, analyze, and segment data that we need to pull this off effectively. For each of our customer personas, the messaging and products are displayed differently so as to best present our products to them. 

“For example, collectors focus on card rarity, parents want the coolest cards and best offers for their kids, and enthusiasts are looking for what they can’t get anywhere else.”

Develop targeted marketing strategies

Once you’ve segmented the market you want to go after, it’s time to create a marketing plan that speaks to your target audience.

Simple ways to do this include:

Running advertising campaigns. Platforms like Google Shopping, Facebook, and Instagram allow marketers to get specific with the people who see their ad. Use behavioral, demographic, and geographic targeting to increase website traffic and avoid wasting money on targeting people outside of your segment. 

Getting involved in communities. People with shared interests often congregate in online communities on platforms like Facebook Groups or Reddit. Get involved in these communities and prove to them why you’re the best solution for that specific segment’s problem. 

Create referral programs. Once you’ve identified communities of people who share the same traits as your target segment, pinpoint the leaders—the social media users who are most trusted within the community. Invite those people to your referral program to incentivize them to promote your products.

Ricky Allen, marketing director at Ever Wallpaper, says, “We analyze customer data points such as age, location, lifestyle preferences, and purchasing habits. This helps us determine which marketing strategies to use for each segment to make the messaging more relevant to the customer. 

“We tailor our emails, ads campaigns, and content to target each customer segment. This ensures the messaging resonates with them, and they are more likely to respond favorably.”

Evaluate how well the segmentation strategy worked

Much like any new marketing strategy, the most important step is evaluating whether your segmentation strategy worked.

A few weeks or months into your strategy, evaluate whether key business metrics—such as new customers, customer acquisition costs, and retention rate—improved as a result of market segmentation.

Combine your data with customer segments, which Shopify users can create using built-in segmentation tools. Divide your customer base into the same variables you used to define the niche market. What traits do your highest value customers have in common? Which segmentation variables do your one-time customers (those who only purchase once) share? Answers can help tighten the parameters around your segmentation strategy. 

Characteristics of good segmentation

Not all market segments are worth targeting. Characteristics of a good market segment include:

Having clear and identifiable cohorts. The more confusing your customer segments are, the harder it will be to not only reach them, but also to produce marketing campaigns that appeal to them. Set clear parameters around your market segment and be as specific as possible. 

Being actionable and accessible. Not all customer segments are easy to reach. If you want to build an online-only DTC brand, for example, people who primarily connect with brands offline might not be an accessible market segment. 

Having proven to be a profitable segment. Some niche segments are more lucrative than others, especially if that group of people have an important but underserved need. Look for evidence that this segment will pay for your products, be that a handful of profitable competing companies or market research. 

Disadvantages of market segmentation 

While market segmentation does have its advantages, the downsides associated with targeting a niche group include:

It can be expensive to reach a small market segment. Tight-knit communities sometimes reject brands that try to advertise in their online space. This, combined with ever-increasing advertising costs, drive up customer acquisition costs for niche businesses. 

Production can be complex. Because niche markets have specific requirements from the products they buy, there’s a chance that you’d need to start the production process from scratch—rather than taking an existing product and making it better.

Segments can be too small to turn a profit. If you’re selling products that customers only need to buy once, you can quickly exhaust a small segment of the market. 

Define your own market segmentation strategy

It’s easier to reach, target, and engage customers with a niche business that specifically appeals to a segment of the market. Use this strategy to identify the most profitable segments for your business.

Remember, market segmentation isn’t a one-off activity, as consumer preferences change and new competitors emerge. Repeat this market segmentation process for customer segmentation using Shopify’s segmentation tools to stay ahead of the curve.

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Market segmentation FAQ

What is market segmentation in simple words?

Market segmentation is the process of dividing up a market into different groups of customers who have similar needs and wants. It is used to help companies better target their products and services to the right people.

What are the different ways to segment a market?

Demographic segmentation
Geographic segmentation
Behavioral segmentation
Psychographic segmentation
Firmographic segmentation

What are market segmentation examples?

A luxury car manufacturer that targets high-income consumers with premium features and a personalized service.
A health food store that targets health-conscious consumers with organic, gluten-free, and non-GMO products.
A travel agency that targets adventure seekers with customized adventure packages to exotic destinations.
A clothing retailer that targets young, trendy consumers with fast-changing fashion collections and social media influencers.

Why is market segmentation important?

Market segmentation allows companies to develop products that cater to the specific needs and wants of each segment, resulting in higher sales, better customer engagements, increased brand loyalty, and higher customer retention.