How to conduct product segmentation

Segmenting your product will allow you to offer different versions of your product that meet the needs of more target audiences—and ultimately expand your bottom line.

During the process of preparing to market your product, your marketing team likely performed customer segmentation to build buyer personas. You used this information to reach out to specific customers in ways designed to appeal directly to them. 

Now, your flagship product is selling well, but you believe that, with a few tweaks, your product could appeal to a number of different customer segments. This is where product segmentation comes in. 

What is product segmentation?

Product segmentation entails taking your product and making small changes to it so that it meets the needs of a different group of customers—sometimes offered under different brand names. This is done to increase market share while reducing the cost of developing completely new products. Product segmentation relies on market research to find the characteristics that will resonate with your target markets. In production, you will develop your product in varying iterations of the same basic model to meet the needs of each target segment.

As an example, let’s say your company produces calendars and planners. Your basic planner sells well, but you’d like to break into other target markets and expand your sales. You conduct some market research and find that students, teachers, executives, and families all have slightly different organizational needs—and each group is looking for a planner that will meet those requirements.

While you could try to market your general planner to these groups, you wouldn’t be meeting each group’s specific needs. With product segmentation, you could add slightly different features that meet the needs of each group. Your new versions may be of various sizes, colors, and materials and contain different organizational tools and sections. 

When you start offering these different versions of your product to new customer groups, you are participating in product segmentation. Done correctly, product segmentation will set you apart from your competitors because you are offering unique features and benefits that they are not.

Advantages of product segmentation

You may be wondering if product segmentation is worth it.

Depending on your industry, the variations of a product might cost quite a bit in time and effort. Instead of looking at it as money and work invested in the expansion of one product, consider it as the expansion of a range of products. When it’s all done, you’ll have a variety of products that stem from your original product—with new target markets and potential customers—all generating revenue. 

In the long run, it is less costly and more efficient to use product segmentation to manufacture five types of electric mixers than it is to manufacture one mixer, one can opener, and one dishwasher.

Still not convinced? 

There are several more advantages to product segmentation:

Cater to different customer groups

Sticking with our example of planners, if you choose not to go with product segmentation, your product won’t meet the needs of a broader customer base. Your generic planner will only serve the needs of a narrow group of consumers. It will either have too many features or not enough for the various customer segments needing planners. 

If you don’t offer enough of the features the customers need, they will look elsewhere to find a planner that is better suited for them. If you offer too much, they will likely feel like they are paying for features that they won’t use. With product segmentation, you will be offering the right features to the right customers.

For example, a student and an executive have very different planner priorities. A student may be looking for a functional, brightly colored planner containing a page of reference formulas, maps, and simple spaces to record each day’s homework. An executive may want a planner made of higher quality materials, contains pages for hourly scheduling each day, and has sections for notes, contact information, and business cards. Clearly, a generic planner won’t be ideal for either customer.

By using product segmentation built around your customer personas, you can offer products that work for a variety of customer segments. You’ll not only gain new customers, but you’ll also improve existing customer loyalty and retention.

For additional information, refer to our comprehensive guide for customer segmentation.

Segment willingness to pay

Willingness to pay (WTP) data is the maximum price a customer is willing to pay for a product. This is generally represented by a monetary value or range. The WTP is influenced by several factors, such as the current economy, the product quality, and what customers consider a fair price for your product.

Segmenting your willingness to pay data will not be particularly meaningful if you only have one product. Multiple products to serve varying customer segments can use the willingness to pay data to determine appropriate pricing for each variation of the product.

Identify growth opportunities

Now that you’re looking at the process as an expansion of your overall product line, you can use data from your new target audiences to uncover growth opportunities. Are there further opportunities to segment your flagship product to appeal to an even wider range of customers? Are there customer segments that you haven’t yet explored that might benefit from another segment of your product?

When we were discussing planners, we considered creating student planners. Could we segment those customers into parents of elementary school students and high school students? What about college students? Their planner needs may be quite unique. Market research will reveal whether these are viable opportunities for growth and help you identify other ways a segment of your product can meet a new market need.

Improve pricing strategy

Since you are no longer offering a one-size-fits-all product, you’ll have to determine a pricing strategy for each of your new product segments that is ideally suited to each target customer segment.

While low prices equal better value for customers and drive higher volumes of sales, they can result in a loss of revenue for each individual sale. Higher prices may indicate a higher profit for each sale, but customers may perceive they are getting less value for the cost, and you may see a decrease in customer satisfaction, loyalty, sales, and ultimately revenue.

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Price optimization uses facts and data to determine the best range of pricing that will reflect value to the customer and profit to you. You’ll need to optimize pricing for your initial price at product launch, discounted pricing to drive sales later, and promotional pricing for temporary sales boosts.

These articles will help with detailed information on pricing your products:

Market segmentation vs. product segmentation

Market segmentation and product segmentation are often used together. They are similar, but not the same process. 

  • Product segmentation is making small changes to a product in order to appeal to different markets.
  • Market segmentation is making changes to marketing strategy to appeal to different markets.

Thinking about our planners, if we’ve decided that we are going to segment our product to include planners for students and executives, the products will have different features and will clearly appeal to very different audiences. Our marketing strategy will need to have segments with advertising and campaigns that appeal to parents of young people who are students in need of planners as well as adult executives with busy schedules who want useful agendas. Your marketing segmentation will involve separate campaigns and strategies aimed at each of the audiences for these product segments.

How to conduct product segmentation

If you’ve decided that product segmentation is a good idea for your business and products, it’s finally time to take on the process. The best way to ensure success is to use data to guide your decisions.

Follow our four-step process for a successful product segmentation strategy:

Analyze product usage

Start with your current customer base. Who are your existing customers and how do they use your product? Find out what industry they are in, what features they use most, and what features they wish they had. It’s valuable to know how your current customers interact with your product before beginning segmentation.

Use the information from your current customers to inform your decision to reach out to other target markets with your product segments. Consider how you can add or expand features to reach the new customer segments you’ll be targeting. 

How do other companies analyze products? Find out.

See how JUST uses SurveyMonkey Audience to gather information about product usage.

Customer and market segmentation strategy

Before you move forward with this step, you should have a complete customer and market segmentation strategy in place. The data gathered from your market research will inform your product segmentation strategy. If you need to complete more research, SurveyMonkey has a market research survey template that you can use as a starting point. It’s completely customizable so you can gather the exact information you need. 

Important customer segmentation data for product segmentation includes:

  • Demographic segmentation: age, income, marital status, and gender will help you define which customer segments your product will appeal to
  • Psychographic segmentation: interests and activities will allow you to cater to the specific interests of your target customers and market directly to them
  • Behavioral segmentation: examine how customers behave when interacting with your product to determine what features are most important to them
  • Geographic segmentation: different locations may mean different cultures with different ways of interacting with your product

Use your customer data to create buyer personas for product development and use in your marketing efforts later on.

Price segmentation strategy

You’ve used your market research data to come up with your new product segments. Now you need to look at optimal pricing for each segment. Yes, it would be easy to set one price for all of your similar products, but it’s likely you could—and should—charge more for some of the new product variations. 

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Check out how Helix Sleep uses SurveyMonkey Audience to test product concepts and pricing strategies.

Product positioning

You have your products segmented, created, priced, and ready to launch. Now it’s time to develop your marketing strategies. You’ve already collected your data and created buyer personas for each segment, so you can market each product segment separately. It may seem like a lot of work initially, but the end goal is increased sales and less churn, so it will be worth it.

Product segmentation examples

We’ve discussed planners throughout our discussion, so now let’s look at a real-world product segmentation example or two.

Coca-Cola

The Coca-Cola Company has product segmentation perfected. The company started with its popular cola drink product and segmented it to include diet varieties, sugar-free, caffeine-free, cherry, vanilla, cherry-vanilla, and even coffee cola. Their latest product segment for the gamer customer segment is Starlight. 

In addition to segmenting by flavors, Coca-Cola has also created product segments for customers in particular regions of the world. For example, Coke uses high fructose corn syrup in the US, but in the Mexican version, the product uses sugar, which is preferred by some of the Mexican market. 

General Motors

General Motors has segmented its vehicles into four brands: Chevrolet, Buick, Hummer, and Cadillac. Each brand is aimed at different socioeconomic levels. You'll find similar products within each of these brands—using many of the same parts—with slight differences. For example, a general customer who wants an SUV may go for a Chevrolet, but the customer looking for a more luxury experience will look for a similar product from the Cadillac line. And the heavy-duty user will probably look to Hummer. 

The SUVs are all very similar in size and shape. General Motors has used its market research data to segment its products for different types of customers and their needs. And each one offers an array of trim packages and options to appeal to every customer. GM markets the brands differently even though the vehicles are incredibly similar.

Get started with product segmentation

Product segmentation is an effective way to expand your product portfolio to meet the needs of more customer segments. The keys to successful product segmentation are using hard facts and data to analyze product usage, perfect your customer and market segmentation strategies, determine your price segmentation strategy and develop your marketing strategy for each segment.
Now that you have all the necessary information, you can look for opportunities for product segmentation in your business. Use our Consumer Segmentation solution to get started on profiling your ideal customer segments today.

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