Market Segmentation

Market Segmentation: The Reason Spotify Is Beating Apple Music

With over 50m users, Spotify is the clear market leader in music streaming. Apple trails behind with about 20m users. What did Soptify do really well? Simple. They used market segmentation to reach the right audience, which ignited their growth.

Here’s how they did it…

When it comes to marketing your product or service (and even your brand as a whole) you essentially have two different approaches you can take:

#1. Market Your Brand To A Mass Audience (Apple Music)

This option is essentially a numbers game: you’re simply casting a wide net into an ocean of consumers with the hopes of bringing in a big haul. There’s really not much strategy involved in this process; any success you may experience is almost certainly due to the law of averages and a whole lot of luck (unless you’re a monster brand like Apple, for example).

#2. Market Your Brand To A Smaller/Niche Audience (Spotify)

Your other choice is to adopt a more targeted approach to your marketing initiatives. Here, you’re narrowing your focus to a small pool of relatively similar customers and attracting them to your brand with content and offers that are relative to these individuals.

This is the approach Spotify has taken since day one to build the largest music subscription business in the world, currently valued at around $20B.

A successful targeted marketing campaign relies heavily on research conducted on your customers and on your understanding of how they operate as consumers – and as people. If it’s not already clear, targeted marketing is definitely the way to go. For one thing, targeted marketing allows you to take control of your marketing initiatives (instead of casting a wide net and hoping for the best).

Spotify Billboard Ad
Spotify’s customer base skews heavily to millennials and their ads represent that
Apple Music Ad
Apple, on the other hand, is taking a broad and more generic approach in their marketing

The modern consumer not only wants but expects your marketing campaigns to feel like they’re targeting directly at their own personal wants and needs.

Take a look at the ads above. Spotify’s ad clearly skews to a younger audience. It’s colorful, fun and intriguing. If you’re under 30, you’ll resonate with the messaging in the ad.

Apple Music’s ad, as you can see, is a lot more generic. The colors are boring (black and white!) and the message is broad and simple – “All the ways you love music. All in one place”.

Here, Spotify is spot on with their message (heavily targeting a younger audience who have “banner blindness” and literally don’t even seen most ads) while Apple is trying to get everyone to use Apple Music.

As we publish this post, here’s how market share looks between Spotify and Apple Music:

Spoty vs Apple Music - Market Share 2017
Spotify is not only competing against Apple Music, they’re winning too…

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Why is Market Segmentation Important?

Here are 3 stats that should explain it:

  • 86% of consumers say personalization of content and offers affects their shopping and purchasing decisions
  • 73% of consumers prefer brands that use their personal data to provide a relevant customer experience
  • On average, targeted ads are twice as effective in generating engagement and conversions than generic, mass-market ads

So, now that we understand the importance of targeted marketing, the question we need to answer is how do we go about creating these targeted marketing campaigns? That’s what we’ll look at now…

Market Segmentation: What It Is & Why It’s Important

(Note: Looking for a tool to help you research and segment your market, so you can improve your product and identify your perfect customers? Fieldboom can help. Sign up free.)

I imagine you used your powers of deduction to figure out that the answer to our previous question has to do with market segmentation, right?

I mean, it is the title of this article, after all…

Anyways, yes: market segmentation is essential to creating targeted ads, content and offers that resonate with your customers.

That’s because market segmentation requires you to consider everything you know about your customers before you create your ads, pieces of content and offers (again, rather than presenting these things to a mass audience and hoping they resonate with somebody).

“The aim of marketing is to know the customer so well, the product or service fits them and sells itself.” – Peter F. Drucker

What is Market Segmentation?

Marketing segmentation is the process of dividing your target customer base into groups based on specific characteristics, such as their interests, personalities, behaviors/actions, needs and more.

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As I’ve alluded to, the purpose of market segmentation is to begin the process of creating content, ads and offers by first considering what your customers actually want from your brand. This, in turn, all but ensures the content you create will generate a maximum amount of engagement among the customers you intended to engage with.

In other words, market segmentation allows you to get the right offer in front of the right people at the right time.

Additionally, segmenting your customer base enables you to define your marketing mix for a given marketing campaign. This entails (at the very least) deciding on a product to be offered, the price at which to offer it, the manner in which you’ll promote it, and, of course, who you’ll be marketing it to.

Finally, market segmentation can save you from the making the more common mistakes that are often made when planning a marketing campaign, such as:

  • Learning just the “basics” about a large amount of customers, rather than learning as much as possible about a small group of consumers
  • Focusing your energies on specific marketing channels before considering if your best-fit customers use these channels
  • Approaching marketing campaigns and initiatives in a haphazard, non-strategic manner

Throughout the rest of this article, I’ll discuss some of the things you can do to segment your customer base in ways that not only make sense, but make a difference to your bottom line too.

Let’s dive in, shall we?

(Note: If you need a simple way to survey your customers so you can start segmenting them, Fieldboom can help.)

Getting Started With Market Segmentation

In this section, we’ll go through the basic tenets of market segmentation, including:

Let’s start by discussing how to know whether or not a segment is actually valid and meaningful.

Essential Characteristics of a Valid Market Segment

Spotify Customer Persona
One of Spotify’s customer personas that came from their market segmentation efforts

Here, we’ll discuss the six attributes a customer segment needs to have in order to be of any use to your company. While some of these attributes may seem more significant than others, your customer segments must exhibit each in order for you to get maximum value from them.

Identifiable

For our purposes, identifiability works in two ways.

For one thing, your customer segments must be identifiable as a whole. In other words, there should be no information left “up in the air, and no questions left unanswered, with regard to a given segment.

Secondly, you should be able to place a given customer into a specific segment with ease, given all the information you know about them.

So it works both ways: if you know a customer exhibits x, y and z characteristics, you should know they belong to XYZ segment; if you know a customer belongs to XYZ segment, you should know they exhibit x, y and z characteristics.

As you can see in Spotify’s example above, “Marcus the Sophomore” is clearly identifiable based on tech skills, age, location and occupation (student and part-time work).

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Substantial

For a market segment to be of any use to your organization, it must be made up of a significant amount of customers.

For example, if your entire customer base consists of 1,000 customers, it probably isn’t profitable to spend time, effort, and money creating marketing campaigns targeting a segment of five individuals (unless you know for a fact these five customers will drive a vast majority of your profits in the near future).

Substantiality comes into play especially in small companies (or those just starting to scale), as marketing budgets and capacities in these organizations is typically limited. The larger the company, the better its ability to reach even the smallest of micro-segments.

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Accessible

Speaking of capacity, your company needs to actually be able to reach the market segment in question through the channels preferred by those within the segment.

But accessibility isn’t simply about being able to reach a segment – it’s about being able to reach them effectively and authentically. In other words, it’s not enough for your company to have a Twitter account just because you know your customers use the platform often – you need to have a strategic approach for engaging with them through this platform.

But you shouldn’t just completely ditch a segment because you don’t have the capacity to reach them. Instead, you’ll need to begin working toward expanding your organization’s capacity in order to utilize these new channels effectively.

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Stable

For the most part, marketing segments need to remain relatively stable over an extended period of time in order to be worth pursuing.

As a simple example, let’s say one of your segments consists entirely of sports fans. It’s rather safe to assume that the vast majority of customers belonging to this segment will still be sports fans in the years to come – perhaps for the remainder of their lives. In knowing this, you can be confident that the individuals in this segment will continue to provide value to your company for a long time to come.

One thing to note here is that age-based segmentation (age, life stage, etc.) is, by nature, unstable in this sense of the word. Even so, you know that you have a finite amount of time to consider a specific individual a target customer before they “age out” of the given segment. For your purposes, this is stable enough; it’s not like you’ll have individuals in your “20-25 year old” segment magically become 45 years old without warning.

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Differentiable

One of the main purposes of segmenting your customers in the first place is to group them based on their needs.

In fact, putting all other characteristics to the side, your customers’ needs – and your ability to provide for these needs – is of utmost importance.

All this being said, each of your customer segments should be defined by the unique needs of the individuals that make up these segments.

Perhaps a better way of explaining this is to say that no two customer segments should share the same overall need. If two seemingly different segments do share the same need, you might want to revisit how you’ve defined both of these segments and see if they actually can be combined into one.

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Actionable

This goes along with accessibility, in that once you’ve defined a segment, you need to actually be able to do something with the information you’ve found.

To illustrate this, imagine you’ve put all this work into determining the numerous characteristics of a certain segment – only to realize the services your company provides don’t align with the needs of the segment. Obviously, the resources you’d sunk into defining this segment will have been all but wasted – at least for the time being.

Again, though, such a discovery can be the catalyst for growth within your organization, as you’ll have found a new market that you can work toward serving in the future. So, while you’ll currently want to put such a segment on the backburner, you shouldn’t completely toss it to the wayside.

Okay…we now know what a proper marketing segment looks like.

But how do we actually go about creating such a well-defined segment of customers?

(Hint: The answer to that question is, in turn, a list of entirely new questions.)

(Note: Looking for a tool to help you research and segment your market, so you can improve your product and identify your perfect customers? Fieldboom can help. Sign up free.)

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Defining Your Market Segments

As we’ve alluded to, to define your market segments effectively, you need to know a lot about your customers.

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Of course, saying you “need to know all you can possibly know” about them is pretty broad advice (not to mention the fact that it’s rather intimidating, as well).

So, let’s discuss some of the most important questions you’ll need to answer in order to define customer segments that fit all six of the criteria mentioned in the previous section.

Questions Regarding External Characteristics

External characteristics refer to the surface-level traits of an individual. While not as “deep” as some of the other information we’ll discuss momentarily, these characteristics are essential for drawing a “full picture” of a given customer.

To elicit information regarding external characteristics, you’d want to ask questions such as:

  • How old is the individual?
  • Where do they live?
  • What do they do for a living?
  • What is their level of education?
  • What is their marital/parental status?

Again, though this information is important, it’s not to be taken at face value. In fact, doing so may lead you to make incorrect assumptions about an individual based on factors that don’t truly define who that person is.

In other words, you’ll need to dig deeper.

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Questions Regarding Socioeconomic Status

Naturally, you’ll need to have a solid understanding of where your customers stand in terms of their socioeconomic status if you want them to buy your goods or services.

On the surface, you might just think we’re talking about whether or not an individual can afford whatever it is you offer. But there’s a bit more to look at here, such as:

  • Do they want to spend their money on your product?
  • Do they need your product in their life, or is it something “extra”?
  • Will they need to sacrifice something else in order to purchase your product?

To be clear, your goal isn’t to convince those who can’t afford your product to neglect their needs in order to buy it. Your goal is to define the people who need your product and can afford to purchase it without breaking the bank. In finding these individuals, you’ll have found the customers who will provide the most value over time for your company.

Questions Regarding Who Your Customers Are As People

The questions we’ll discuss in this section relate to those we’ve discussed in the previous two, but go deeper in order to round out the “full picture” of your customers we mentioned earlier.

When looking for the answers to these questions, you want to forget all about your business and the fact that the individuals you’re talking about are your customers. Here, you’ll be thinking about them simply as people.

Such questions include:

  • What culture(s) do they belong to?
  • What do they enjoy doing?
  • What type of attitude(s) do they exhibit throughout their lives?

If you don’t know the answers to these questions offhand, you can solicit such info from your target customers using a semantic differential scale survey. This will allow you to gauge their interest and overall perspective toward certain ideas, products, and services – enabling you to determine whether or not a certain persona is a good fit for your brand.

Questions Regarding Their Needs

Okay…back to your customers as consumers.

Of course, you absolutely need to know how your product or service aligns with their overall needs. Otherwise, you simply won’t be able to convince them of your ability to help them.

Again, when I say “convince” here, I don’t mean “coerce”. You’re not trying to trick potential customers into doing business with your company – but you will need to convince them that your product will be of value to them.

So, you need to know the answers to questions like:

  • What are your customer’s pain points?
  • What do they wish they could accomplish?
  • What’s holding them back from their true potential?

In finding the answers to these questions, you can immediately explain the value of your offering to your customers in a way that all but ensures they’ll take a closer look at your brand.

Questions Regarding Their Consumer-Related Behaviors

To round out your customer profile, you’ll want to take a look at the way your target customers act when in “shopping mode.”

In doing so, you’ll take into consideration their personality, attitudes, socioeconomic status, and, essentially, all else we’ve discussed thus far. And, if possible, you’ll want to consider their past history as consumers – either with your company or in general.

You’ll need to answer questions such as:

  • How do they conduct research on products/services and companies?
  • How do they make purchasing decisions?
  • How do they make purchases?

Once you know the answers to these questions, you’ll be able to streamline your customer experience up until – and through – the point of purchase. By providing for their needs at all points of their journey, you’ll make their decision to convert that much easier to make.

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Approaches to Segmenting Your Customers

While there are a number of methods for segmenting your customers, the two most popular methods are doing so from the top down and from the bottom up.

As you might assume, these options are polar opposites of one another. Let’s take a look at each.

Top-Down Segmentation

When segmenting your customers from the top down, you consider your offering first, then create and prioritize segments based on which is most likely to find value in your product or service.

For example, say your company produces sports equipment. You know for a fact that there are people “out there” who will want to buy your products – you just don’t know exactly who they are just yet. You develop your offers, ads, and other marketing campaigns first, then work on identifying individuals with whom these campaigns will resonate with.

This approach can work if, as we mentioned, you know for sure there’s a market for your products or services that you can inject your brand into with relative ease.

But a number of problems can arise when taking a top-down approach to market segmentation, such as:

  • The segment you intended a campaign to target ends up being smaller than you thought
  • The campaign misses the mark in terms of resonating with your most profitable segment
  • A potentially more profitable segment exists that you had ignored when creating your campaign – and you’ll have to start from scratch to reach these customers

Your other option, then, is to segment your customer base from the bottom up.

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Bottom-Up Segmentation

Working from the bottom up to segment your market requires that you consider who you’re marketing to before you create your marketing campaigns.

This requires that you answer the questions we discussed above before you do anything else in terms of creating ads, developing offers, or otherwise attempting to get people to engage with your brand. In doing so, you allow your customer base to dictate your brand’s unique selling proposition and the offers you provide, rather than defining these things yourself (and basically telling potential customers to “take it or leave it”).

While taking a bottom-up approach to segmenting your customers certainly does require more effort up front, you can be confident that your efforts won’t be wasted (in contrast to the hit-or-miss nature of the top-down approach).

“Selling to people who actually want to hear from you is more effective than interrupting strangers who don’t” – Seth Godin

A bottom-up approach essentially takes the guesswork out of the equation. Since you’ve done the research on your potential customers, you’ll know with certainty what they’re looking to get out of engaging with your company – and can get to work tailoring your offer to these expectations.

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Conclusion

The more you know about your customers, the better you’ll be able to provide for their needs. But, the larger your customer base, the more difficult it becomes to actually provide for the needs of each individual you engage with.

By creating market segments, though, you can find common denominators among specific “types” of individuals within your customer base – and work toward developing targeted offers that resonate heavily within these segments.

Finally, if you’re looking for a tool to help you research and segment your market, so you can improve your product and identify your perfect customers? Fieldboom can help. Sign up free.