Market segmentation

Definition, Types, Benefits, and Examples

Market segmentation refers to defining prospective customers into groups based on key attributes in order to market products and services to them. Four common types of customer segments are demographic, psychographic, geographic, and behavioral.

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What is market segmentation?

Market segmentation is a strategy defined as the organization of various types of audiences, to reach them with your ads and campaigns. By dividing your customers into audience segments, it becomes easier to reach them with relevant ads.

In contrast, creating ads with a broad or generic statement can make them less likely to appeal to customers. Narrowing down the focus of ads and campaigns can help differentiate between your focus points and priorities as a brand.

The “market segmentation theory” or hypothesis states that there can be unique benefits of different segments of customers, and of varying lengths or formats of ad campaigns. This can be exemplified with audience segmentation, which can provide different ads to different customers, at different times. Simply put, there is no such thing as the perfect ad; it depends on your audience.

Why is market segmentation important?

By starting your marketing strategy with audience segmentation at the forefront, your brand can create more relevant ad campaigns. These audiences could then turn into dedicated customers who are likely to make return purchases. Another benefit is that it can also be used as a tool to help pinpoint the pain points in your customer journey map, or the areas where you may see drop-off in engagement or purchases.

Market Segmentation

The 4 types of market segmentation

There are four commonly used types of customer segments: demographic, psychographic, geographic, and behavioral. The types of market segmentation originated from Wendell R. Smith, in Product Differentiation and Market Segmentation as Alternative Marketing Strategies, published in 1956.1 Advertisers divide their audiences into the four audiences segments or in various combinations based on what will best support their marketing campaigns.

Demographic segmentation

What is demographic segmentation?

Demographic segmentation is reaching audiences based on their demographic information. This segmentation process includes identifying characteristics such as age, gender, nationality, occupation, family size, or education level.

This is one of the most common forms of audience segmentation, and it helps to make sure your products are in front of the right audiences. One of the easiest examples for getting started with demographic segmentation is to ask your customers to share information. Considering characteristics such as age, gender, and income can be beneficial for ensuring your brand’s ads get in front of the right demographic audiences.

Geographic segmentation

What is geographic segmentation?

Geographic segmentation organizes audiences based on geographic characteristics. It’s another fairly simple method that helps ensure the ads or new products that reach potential customers are relevant to their localities.

It doesn’t refer to purely physical locations, either: geographic segmentation can also be used for various climates or cultural preferences. Geographic segmentation can ensure you’re considering the preferences of your customers for ads for sports, for example. If you’re reaching a US-based audience, football and baseball may be the more popular options. Whereas if you’re advertising in the UK, rugby or cricket may need a higher-priority positioning.

Psychographic segmentation

What is psychographic segmentation?

Psychographic segmentation is marketing based on the needs or wants of your customers. It is more detailed than the prior two options, and considers niche preferences for specific audiences.

A great way to get these details is with market research, such as asking your customers in surveys or conducting interviews that ask if your marketing efforts are meeting their needs. For an example of psychographic segmentation, athletic brands would consider advertisements that differentiate between brand-new athletes vs. more expert athletes. Different factors, such as the lifestyles of customers, can make a big difference in whether they find ads relevant or not.

Behavioral segmentation

What is behavioral segmentation?

Behavioral segmentation is marketing to audiences based on their shopping behaviors. It can be trickier to define than the other different audience segments, since it’s not based on easily measurable qualities.

It could include considering prior purchases, brand loyalty, or purchase patterns. For example, grocery brands that have a higher rate of repeat customers should consider adding recurring discounts or deals for their most dedicated audience. Leaning in to the existing behaviors of audiences can help elevate their shopping experiences with your brand.

Benefits of market segmentation

Marketing segmentation offers many benefits. It can help you create personalized or tailored marketing campaigns, optimize resources, mitigate risk, increase brand loyalty, and identify niche markets. Discover four core benefits of marketing and audience segmentation.

1. Personalized digital marketing

Segmentation allows marketers to create more personalized digital advertising by providing insights and defining the characteristics of your audience, allowing you to direct online marketing efforts to specific age groups, locations, buying habits, interests, and more.

2. Optimize resources

Marketers can optimize resources through segmentation by identifying and understanding unique customer segments with diverse needs, preferences, and behaviors. Tailoring marketing strategies to cater to each segment's specific requirements enables more efficient and effective resource allocation, maximizing the impact of marketing efforts.

3. Increase brand loyalty

When brands understand their customers' specific needs and preferences through segmentation, they can deliver targeted messaging, relevant offers, and customized products or services that resonate with each segment. This personalized approach can increase brand loyalty and make customers feel valued and understood, fostering a deeper emotional connection with the brand.

4. Identify niche markets

Segmetation can help marketers identify niche markets. Advertisers can use audience insights to identify new or underserved markets and discover approaches to better cater campaigns and messaging to existing ones. These opportunities can be leveraegd strategically expand market reach and foster brand trust.

Even more examples from advertisers

One example is regarding sustainable marketing. In a recent study by IBM and the National Retail Federation, 6 in 10 respondents said they’d change their shopping habits to help reduce environmental impact.2 Advertisers should consider this an example to use in their psychographic segmentation, addressing the intent and desires of their customers for their lifestyle.

Another example comes from the Bedding & Pillows category on Amazon. These products are likely to appeal to new-to-category customers, rather than repeat shoppers. We found that from December to March, there was an above-average number of entry points, a detail that could be very useful to household brands looking to promote their products in new locales. This is an example of behavioral segmentation, considering the purchasing habits of audiences and addressing this within campaigns.

An example of geographic segmentation is seen in a collaboration between LG Italy and Amazon Ads. They were aware that sports were especially of interest to their Italian audience, and consequently the marketers used the UEFA Champions League’s matches for a campaign to help boost interest in areas where customers had shown prior interest.

How to create a market segmentation strategy

There is no single answer to how many buyer personas a company should have or how to determine what will make your audience segmentation successful. Determining your serviceable addressable market, and serviceable obtainable market (TAM SAM SOM) is a good first step. From there, utilizing surveys with your customers and running A/B tests within ad campaigns can give you great insights into the behaviors and needs of your audience.

Next, you can begin crafting campaigns with the help of Amazon Ads. Amazon Marketing Cloud (AMC) can help you gather audience insights, and Amazon Ads API will help you automate campaigns based on your desired audience segments. Additionally, Amazon Attribution can provide you with details on non-Amazon Ads campaigns. With a sound audience segmentation strategy, your brand can get your products in front of the right audiences at the right time.

1Smith, Wendell R. “Product Differentiation and Market Segmentation as Alternative Marketing Strategies.” Journal of Marketing 21, no. 1 (1956).
2Meet the 2020 consumers driving change, IBM and the National Retail Federation, US, 2020