As a small business owner, you likely feel passionate about how your products and services can improve the lives of customers and potential customers. Feeling that on the inside and communicating that on the outside are two different things, but product segmentation can help you to bridge this gap. By tweaking your products slightly to better meet the needs of different customer segments, you form new business relationships that can help your bottom line expand more rapidly.

Understanding Product Segmentation

Product segmentation is when a business changes its product slightly so that it appeals to and meets the needs of different groups of customers. Let's say you are in the business of producing planners to help people organize their lives. Chances are good that students, single parents, teachers, executives and large families will all have slightly different organizational needs.

Instead of trying to make one generic product that somehow meets all of those needs simultaneously, you could create slightly different planner features to appeal to these different markets. Materials, price points, color options and paper size might even be slightly different.

As soon as you start offering different versions of your flagship product to different customer groups, you are participating in product segmentation. When product segmentation is well executed, it also results in product differentiation, which is when you stand out as offering unique benefits that your competitor does not. For instance, if a competing planner manufacturer does not offer specialized planners for teachers or single parents, you are likely to gain an edge in those markets.

Examples of Product Segmentation

Visitors to the World of Coca-Cola in Atlanta, Georgia find out how sodas are made and marketed and learn about Coca-Cola's product segmentation strategy. While the basic Coca-Cola recipe is similar worldwide, they tweak their product slightly for different markets. For instance, Coca-Cola in Mexico is made with sugar instead of high-fructose corn syrup like in the United States. They create different flavors to suit regional tastes, like Fanta melon frosty in Thailand or guaraná Kuat in Brazil.

Likewise, General Motors has established a basic model for making cars utilizing standardized parts across different models. From this basic car design, they have tweaked their automobile in order to offer vehicles in different price ranges and designs through brands like Chevrolet, Buick and Cadillac. Customers who need a heavy-duty pickup truck for farm work are likely to be drawn to Chevrolet, while comfort-focused and luxury-focused consumers find Cadillac more appealing.

Product Segmentation vs. Market Segmentation

While product segmentation and market segmentation are similar and are often used together, they are not the same thing. Product segmentation is when a business tweaks its product in order to appeal to different markets. Market segmentation is when that same business tweaks its marketing strategy in order to appeal to different markets.

For instance, a small legal business office with bilingual lawyers might offer some legal advertisements in English and others in Spanish, and those advertisements are likely to run on different stations and at different times.

While product segmentation helps businesses tailor their products to key markets, market segmentation helps them tailor their message to key markets. Market segmentation breaks down communication, access and language barriers so that companies can include as many people as possible in what they have to offer. It empowers businesses to develop relationships with a diverse client base and grow their bottom line at the same time.

Example of Market Segmentation

Market segmentation occurs in most areas of business but is especially popular in the financial services industry. Banks offer a range of services and financial products that are advertised to a wide range of customers. For example:

  • Free checking accounts to people just starting out
  • Business checking accounts to small businesses
  • Retirement planning to aging professionals
  • College savings accounts to young families

While the basic banking services offered are available to everyone, banks tailor their advertising and marketing strategies in order to reach market segments most likely to take advantage of their services. They place advertisements for free checking services in areas with high concentrations of college students, retirement planning advertisements in publications aimed at older adults and so forth. By changing the feel, location and message of their marketing, banks are able to connect consumers with the products that serve them best.

Combining Product and Market Segmentation

Both product segmentation and market segmentation occur based on demographics, geographics, psychographics and behavior. When a company first alters its product through product segmentation, it naturally follows that its marketing will change too. Conversely, when a company produced targeted advertising through market segmentation, it is likely to discover new needs of customers in various market segments.

In the example of Coca-Cola, who is such a pro at product segmentation, you also see how their marketing strategy changes and adapts to different markets. Their advertisements, billboards, store displays and packaging colors shift to adapt to local language and culture. Products aimed toward younger or older customers feature a different feel entirely, and all marketing is tailored to the values in a particular market segment.

Because of how they marry product and market segmentation, Coca-Cola has been able to reach and retain a broad customer base worldwide.

Conduct Market Analysis

As a small business, not everyone will be your customer, and that is OK, but you might be missing customer segments if you have not done a thorough market analysis. You can conduct a new market analysis with the purpose of discovering new potential market segments and subsections within your existing customer base. Consider consumers who might benefit from your products and services as well as their:

  • Age
  • Gender
  • Culture
  • Income bracket
  • Needs
  • Interests
  • Location
  • Preferences
  • Language 
  • Personality

You can gather data about these market segments through a variety of means. Consider conducting focus groups and offering samples to specific market segments to get an idea of their wants, needs, likes and dislikes. Additional information is available through governmental departments, websites, articles and even potential competitors. You can compile the data you collect into a report to help you tweak your products for certain markets, determine price points and more.

Identify Customer Groups

Your market analysis results will help you determine customers who are most likely to desire and benefit from your products and services. Several factors will help you consider to which groups you should adapt and market your products. These factors include:

  • Potential growth rate
  • Potential profit margins
  • Degree of interest expressed
  • Distribution availability
  • Potential for customer retention

Choose to serve customer bases with whom you feel a connection and where you expect to generate a good profit for your business. Changing your products to meet the needs of varying market segments can be costly, so it is wise to consider which opportunities present the lowest risk to your long-term success and growth.

Building Customer Relationships

Building customer relationships is key to a successful product segmentation strategy. For example, a planner company seeking to offer planner features that benefit single moms needs to develop relationships with single moms. The single moms themselves know better than anyone on the outside what they need in order to keep track of responsibilities and appointments.

The planner company could forge these relationships through product sponsorships, corporate social responsibility initiatives, hiring single moms to serve as consultants, conducting additional focus groups and more.

Savvy Segmentation of Product Features

Different product features are going to be more important to some consumers than others. For example, Cadillac owners are likely to care more about seat warmers and automatic features than Chevy owners who are hauling farm equipment in the back of a pickup truck. If General Motors put the same features in a Chevy as they did in a Cadillac, they would likely lose a lot of money.

Poor segmentation of product features is preventable, so take a cue from more established companies about how to best compromise and give your customers what they need most.

Segmentation of product features is necessary to avoid overspending across the board. The following questions can help you choose how to best serve each marketing segment in your customer base:

  • Who desires the lowest price point?
  • Who wants a premium version of your product?
  • Who prefers a colorful product?
  • Who prefers trendy simplicity?
  • What language is needed for the packaging?
  • Where is it cheapest to distribute your product?
  • Where is your product most in demand?
  • Who spends the most money on similar products?

Price Segmentation and Accessibility 

If you have ever paid five bucks for a bottle of water in an amusement park that would cost you one buck at your local convenience store, you have experienced price segmentation. Companies know that people in an amusement park are likely to be very thirsty and do not have the ability to leave and find a cheaper alternative, so they easily pay premium prices. You might find that you can also segment your products so that they are more or less expensive depending on where they are sold.

Sometimes, small business owners have a heart for certain market segments that aren't likely to be very profitable. Consider how you can include them in your overall product and price segmentation strategy.

For instance, TOMS offers moderately priced shoes to consumers who have the desire and ability to pay and then offers a free pair of shoes to someone in need. It's the same pair of shoes, but one market segment pays, while the other gets them for free.

Finding Strategies That Work

One reason the TOMS segmentation and corporate social responsibility plan works is because their largest market segment cares about making a difference in the lives of others. They want to feel like they are making a purchase with a purpose simply by purchasing something they need anyway.

Like TOMS, listen to your customers and their wants, needs and values. You might find that you can market your products in a way that engages consumer hearts so that you can partner to make a tangible difference over the long haul.

Product Positioning and Marketing

Once you tailor your products and pricing to meet the needs of your customer, you are faced with another hurdle: getting the word out. This is when your market analysis and market segmentation can help you tailor your product positioning and marketing strategy to your desired customers.

Consider whether they spend time on social media, what language they speak, what their values are and what colors catch their attention. When in doubt, culturally aware marketing specialists can help you craft a marketing plan that engages consumers and helps create long-term repeat customers.

You might consider the following product positioning, marketing and community relations strategies:

  • Social media marketing
  • Webinars
  • Billboards
  • Snail mail campaigns
  • Television or radio commercials in the consumer's language
  • Community sponsorships
  • Donations to local nonprofit agencies
  • Volunteer efforts
  • Involvement in local events