What Is Segmentation Analysis in Retail?

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 target your market with ad campaigns better? 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 is essentially studying the customers and consumers in specific categories. To understand and use segmentation analysis, we need to start with market segmentation.

What is market segmentation?

Market segmentation is the art of understanding the target market and is an essential part of successful sales. As suppliers understand their ideal buyer persona, they can use more specific advertising methods, create more leads, and ensure they become customers.

Once the supplier has sufficient data on who the target market is – 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 targeting marketing plans.

The different types of marketing 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 that 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

Related Reading: Analyzing Store of the Community Demographics

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 to think of in marketing campaigns.

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

Plus, 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 will typically see fewer billboards. 

Psychographic

Psychographic segments don’t have any specific metrics that 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

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

Behavioral

The behavioral segments require in-depth research to create since they depend on the supplier’s customers’ purchasing habits within their 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. 

Related Reading: How Do I Do Segmentation Analysis in Retail Link?

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 all 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 the stores in organized retail are so large, the companies usually have professional supply chain management and distribution systems. Some common examples include Walmart, The Home Depot, 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, whether that be hardware products or children’s clothing. As such, these retailers generally have wholesale suppliers. 

Also, unorganized retail usually doesn’t need complex distribution chains or management systems. They often have a sole owner or are family-run businesses. To find an example of unorganized retail, think of small, locally-owned stores in the area.

Why you should use segmentation analysis in retail

Once suppliers create their segments, they need to take some time analyzing them. If suppliers keep accurate records, they can see and learn a lot about their marketing strategies, products, and branding. 

Suppliers must use the information they find in the segmentation analysis to improve product development and lead generation.

Product development

The more a supplier knows about its customers, the more it can learn about its products’ success. Suppliers can see which products various demographics prefer, what goods people are interested in, and which items specific segments are likely to buy again. 

Suppliers can take all the information from their segments and apply that to developing new products – or improve upon the ones they already have. 

Lead generation

As suppliers understand their market better, they can create more specific ads and campaigns. Instead of just creating promotions that advertise the overall product, vendors can target the particular needs of each segment. 

For example, by understanding the audience’s interests and needs, vendors can incorporate them into an ad. The more effective the campaigning approach is, the more it will generate leads and, consequently, conversions. 

How to implement segmentation analysis in retail

To get started improving upon 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 maybe want to 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 the interaction with each ad and the percent 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.

Once you start implementing segments into your marketing strategy, you’ll begin to see considerable changes in your lead generation and conversions. Take your retail business to the next level and begin segmentation analysis!

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