Market Segmentation: A strategic & choiceful approach

A successful market segmentation strategy offers commercial benefits across revenue and margins. However, there’s no one-size-fits-all approach.  To be effective, segmentation must be grounded in wider business strategy, with factors such as organisational maturity and current growth trajectory acting as critical considerations, writes Michael Hallam. 

On paper, at least, market segmentation looks like a go-to tactic for all businesses. After all, the ability to pursue distinct customer groups with precision – by aligning products, pricing and marketing to their specific needs – is shown to drive higher conversion rates, improve customer loyalty and ultimately boost profitability. 

What is Market Segmentation?  The strategic process of dividing a broad market into distinct groups of customers who share similar needs, behaviours or characteristics. It helps businesses focus their efforts where they can create the greatest commercial impact with the customers they can serve best. At its core, segmentation is about making smarter choices: understanding who to prioritise, how to win with them, and how to grow profitably.

The reality though is that getting segmentation right can be a complex challenge. And there is no standard approach. Any segmentation strategy must be tailored to the maturity of the organisation and the sector it works in. 

Two approaches to segmentation

Broadly, there are two types of segmentation for businesses to choose from, depending on where they currently sit on their growth trajectory: marketing-led and operational-led. The former might be better known, but the latter could prove more effective, on a case-by-case basis. 

When people think of segmentation, the first instinct is often to gather market insights. Who are our customers and what are their attitudes, needs and behaviours? What can we then do to meet them? 

With this marketing-led approach, segments might be defined by psychographics, customer lifestyle and aspirations, often using detailed qualitative research. Penetrative intelligence can then be used to produce powerful propositions, pricing strategies and creative campaigns. 

However, there’s a risk that the business gets carried away and over-reaches. It’s important to robustly question whether the shimmering, new pathways can be followed through to success, given the current stage of maturity.  

For many companies, an operational-led approach may be more feasible. What can the business realistically target, based on hard dimensions such as geography, product availability, service capability and existing infrastructure? 

Softer insights can then be layered on top to differentiate those segments. For businesses earlier in their journey, thinking inside-out tends to be more practical. It could be smarter to focus activities on what the business can efficiently deliver and then enrich it with deeper understanding to drive relevance and growth.

Of course, it’s not a binary choice between a marketing- or operational-led approach. There’s a spectrum that allows companies to lean in one direction or the other. Considering where the business sits is a useful exercise for breaking open segmentation. 

Finding the right level of complexity

For mature businesses, market segmentation can be extremely sophisticated. Their strategy may involve multiple layers, variables and criteria – often requiring advanced analytics and deep data dives. The result is highly nuanced insights and precision targeting. 

However, this level of complexity also brings the risk of confusion, slow adoption and operational burden. The findings can prove difficult to communicate and implement across teams, leading to resistance or inconsistent execution.

For an earlier-stage business, such intricacy will likely tie itself in knots. The key is to build a model that fits the current capabilities and strategic priorities, not one that aims for theoretical perfection. A segmentation that’s 'right for now' can be a foundation for future refinement. Simplicity is critical. Far better to aim for four to six segments that are distinct, actionable and easy to understand. Adding more risks diluting focus and raising execution costs.

Again, locating the business on a spectrum of complexity to simplicity is a valuable task.  

A living tool that needs regular exercise

Segmentation should be seen as a strategic journey, not a one-time deliverable. It will evolve as the business grows, customer needs shift and market dynamics change. Initial phases may focus on deploying the current proposition more effectively, while later phases can explore new benefits, refine targeting and adapt to emerging behaviours. 

Crucially, market segmentation must be embedded across the entire business, not just within marketing. Sales, customer service, product development, IT and operations all need to understand and apply it. There should be a flow of information, rather than an ‘us and you’ mentality, which won’t end well. When segmentation becomes part of the business DNA, it drives alignment, consistency and commercial impact across every customer touchpoint.

Beyond behavioural data to attitudinal insight

It’s tempting to assume that having lots of data is a greenlight for segmentation. But data only tells you what people do – not why they do it. Insight is about uncovering motivations, needs and decision drivers. Without this layer, segmentation lacks depth and will struggle to inform meaningful strategy. Businesses often have strong behavioural data but limited attitudinal insight. 

Bridging this data-insight gap – through customer surveys, synthetic research or qualitative input – is essential for building segments that truly resonate. A thorough data audit is a good place to start, as it allows businesses to review the breadth, completeness and relevance of existing customer and market data. With a strong foundation, they can also track progress and demonstrate impact over time. 

Commercial gains, not just pen portraits

Customer segmentation must do more than look good on flipcharts and spidergrams. It needs a steely commercial purpose that targets measurable outcomes like increased revenue and improved margins. Insights will guide important decisions on pricing, promotions and messaging. A well-designed segmentation will enable smarter resource allocation and drive growth.

For the record, pen portraits certainly have their place in segmentation. They can provide intuitive profiles that help internal teams to visualise and relate emotionally to target audiences. Done well, they provide a powerful, story-telling tool that humanises each segment and informs day-to-day decision-making.

However, as much as it helps to know that “Ken from Shropshire, is a dad of three, drives a BMW and likes climbing"; it shouldn’t be the whole show. If the business is simply defining its target audiences – without focusing on how to attract, win and retain them – then returns could prove limited. 

Competitive context matters

Understanding how your proposition compares to competitors adds another vital dimension to segmentation. Segmentation should reinforce where your business has a competitive advantages (e.g., better rural services, unique product features, pricing flexibility etc.), highlighting which benefits to emphasise and where to invest in differentiation.

Including competitor analysis in the segmentation process strengthens strategic decision-making and ensures the model reflects what’s going on in the real world. By sharpening its edge, customer segmentation can slice out a bigger share of the current market. 

A checklist for segmentation success

The aim is to create the right segmentation for the business, its category and its current reality.  As an overview, a winning segmentation strategy is one that: 

• Differentiates customers into segments of meaningful size
• Facilitates putting commercial decisions into action
• Is based on robust, measurable criteria
• Drives diverse actions and outcomes across segments
• Is clearly and simply communicated 

Track record of delivery

Cognosis works with clients to develop and implement strategies that move beyond good intentions into meaningful growth. Segmentation is a valuable element for how we help hone strategies towards target markets and customers, and for developing new propositions and business models.