What is Segmentation Analysis in Retail?

In this article, learn about:

• What market segmentation is

• The different types of segmentation

• How to implement segmentation

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Have you ever wondered how to better target your market with ad campaigns? Perhaps you have a broad, diverse market but lower-than-average sales. Or maybe you are looking for a way to generate more leads with a truly effective marketing campaign.

Either way, segmentation analysis can help. This type of retail analytics studies the customers and consumers in specific categories. To better understand segmentation analysis, we first need to look at market segmentation.

What is Market Segmentation?

Market segmentation is the art of understanding your target market and is essential to successful sales. As suppliers understand their ideal buyer persona, they can use more specific advertising methods, create more leads, and convert those leads into customers.

Once the supplier has sufficient data on the target market, whether through surveys or tools like Google Analytics, the supplier can use market segmentation to prepare future marketing strategies. 

Market segmentation is simply dividing—or segmenting—the intended market into smaller, more specific groups so that suppliers can design targeted marketing plans.

The Different Types of Market Segmentation

The ways to categorize target markets are endless—vendors can create groups as broad or as specific as they wish. However, each potential category generally falls within one of four main types of market segmentation: 

• Demographic

• Geographic

• Psychographic

• Behavioral

Demographic

One of the most popular segments is market demographics. Who are the customers? How old are they? What is their yearly income? 

Numerous vendors and companies use this line of questioning to divide their market into groups that generally have similar buying traits. 

For example, one demographic subcategory is age. Customers who fall in the 20-30 age range have different buying habits than people in the 40-50 age range. Suppliers may benefit from an online or social media ad targeting younger buyers, while a physical newspaper ad or more personable communication may draw in older buyers. 

Some standard market segments for retail suppliers include:

• Age

• Income

• Family size

• Education

• Gender

• Occupation

Geographic

Another way to categorize the consumer is by geographic location. Whether suppliers consider various countries, cities, or regions, the people in these areas have different needs that must be considered in marketing campaigns.

For example, if the supplier sells clothing, they must consider the weather in various locations. People in seasonal areas will be interested in goods that can last through weather changes, while those in warmer climates may need products that can adapt to the heat. 

In addition, people living in rural, suburban, and urban areas all have unique needs and buying habits. These marketing segments also have different channels or media available. For example, outdoor signage in urban areas ensures high visibility, while rural regions typically see fewer billboards. 

Psychographic

Psychographic segments don't have any specific metrics to follow. Instead, they center around understanding the customer's personality. 

Suppliers should do extensive research about their target market, including exploring the following areas:

• Lifestyle

• Buying priorities

• Interests

• Purchasing motivation

• Personality

• Beliefs

• Values

It may be more challenging for B2C businesses to create psychographic segments. However, suppliers can learn to target multiple areas or conduct a customer survey to better understand their market.

Behavioral

Behavioral segments require thorough research, as they are based on customers' purchasing habits within the supplier’s brand.

Suppliers need to look at the data concerning repeat buying patterns, product ratings, and brand interaction. For example, a supplier may want to create a target segment for people who made a purchase one year ago and have not repurchased. 

Two Main Types of Retail Markets

While there are four types of market segmentation, retail vendors need to consider the types of retail markets specific to their industry. 

As vendors choose which type of segmentation to use, they need to keep in mind what target market they have: organized or unorganized retail. Then, they can utilize segmentation within that particular retail market to best suit their needs.

Organized Retail

Organized retail refers to stores with a large scale of operations. They usually have chains of stores across the nation—or even the globe. 

The merchandise sold in these large stores usually comes directly from the producer or manufacturer. Plus, each location often has an impressive variety of products, not focusing on just one brand or item category. 

Since organized retail stores are so large, companies usually have professional supply chain management and distribution systems. Some common examples include Walmart, Target, and Kroger. 

Unorganized Retail

Unorganized retail consists of smaller, local stores. Most stores in this market have only one to three locations, all in the same area. 

Because the physical locations are smaller, these stores’ products usually focus on one category, like hardware products, shoes, children’s clothing, etc. As such, these retailers generally have wholesale suppliers. 

Unorganized retail usually does not need complex distribution chains or management systems. It often has a sole owner or is a family-run business. To find an example of unorganized retail, think of small, locally owned stores in your area.

What is Segmentation Analysis?

Now that we understand market segmentation, let's take a look at segmentation analysis. Segmentation analysis is the process of evaluating customer segments to uncover patterns, preferences, and trends. By analyzing these segments, suppliers can refine their marketing strategies, enhance product development, and better meet customer needs, ultimately driving business growth.

Using Segmentation for Product Development

The better a supplier understands its customers, the more insights it gains into product performance. Suppliers can identify which products resonate with different demographics, which items generate repeat purchases, and emerging trends in consumer preferences.

With these insights, suppliers can develop new products tailored to specific market needs or refine existing ones to improve their success.

Driving Lead Generation Through Targeted Marketing

A deeper understanding of customer segments allows suppliers to create more effective ads and campaigns. Instead of broad, one-size-fits-all promotions, vendors can craft targeted marketing strategies that speak directly to the needs of each segment.

For example, by aligning ads with audience interests and behaviors, vendors can increase engagement and conversions. A well-executed marketing approach not only attracts leads but also strengthens overall business performance.

How to Implement Segmentation Analysis in Retail

To get started on improving sales and marketing strategies, suppliers should just follow these steps:

1. Research: Suppliers must spend time analyzing the data and statistics surrounding their target audience. If they already have the information available, they need to dissect it. If they are just starting, they’ll need to set up methods to track the audience’s buying habits and demographics. 

2. Create segments: Suppliers and vendors should use the data they collected to pinpoint potential successful segments. Perhaps a supplier wants to target buyers looking for holiday deals or create campaigns for customers who value efficiency. Either way, suppliers should mark their potential segments and get working on ads and campaigns. 

3. Test the segments: Suppliers should then send out ads, campaigns, and marketing material that targets each segment. They’ll need to analyze each ad's interaction and the percentage of leads generated. Next, they must compare these results with previous campaigns and see if the new segmented marketing technique worked. If not, they should create new segments and do the same.

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