The complete guide to market segmentation

Economists have a name for it: deadweight loss. It's what happens when a market misses the mark—when producers push something nobody wants, or price it in a way that chases off the very people it's meant for. In marketing, the same dynamic shows up when you aim broad. You burn through budget trying to reach everyone, and in doing so, you resonate with no one.

That’s what market segmentation is designed to fix. When done right, it forces clarity: Who are you actually building for? What do they care about? And how do you reach them in ways that matter—without wasting time, spend, or attention?

This is a working guide to what segmentation means, the different ways to approach it, and a step-by-step process you can put to work—whether you're selling to consumers or businesses, at early-stage or scale.

Book a demo of Tenet →

What is market segmentation?

At its core, market segmentation is about not treating your entire audience like one faceless blob. It’s the process of dividing a broader market into smaller groups of people who share something meaningful (needs, behaviors, priorities) so you can actually serve them in a way that works.

It’s about figuring out which patterns actually affect how people buy, what they expect, and what drives their decision-making. And from there, designing messages, offers, and even products around those realities.

Of course, not every segment is useful. A reliable segment should check a few boxes:

• People in the group actually have something important in common

• You can measure it

• You can reach them

• It’s big (or valuable) enough to be worth going after

Why segmenting markets matters for growth and efficiency

Different customers want different things. They’re not reading the same blogs. They don’t all care about the same features. And they’re definitely not buying for the same reasons. If you’re talking to them the same way, you’re leaving performance on the table.

When you segment well, you can:

• Speak to each group in language that actually lands

• Focus on the stuff they care about—not what you wish they cared about

• Package the right features, pricing, and delivery model to fit how they buy

And the impact is visible. When people feel like something was built for them, conversion rates go up. CAC goes down. LTV and retention improve. Not because you’ve tricked anyone—but because you’re finally meeting them where they are.

Market segmentation vs targeting vs positioning (STP)

Segmentation is just the first move. It’s part of a three-part framework often called STP:

• Segmentation: break your market into groups with shared needs

• Targeting: pick the ones you’ll actually prioritize

• Positioning: figure out how you want to show up to them—compared to every other option they’re considering

Think of segmentation as the analytical groundwork. Targeting and positioning are where you get strategic and creative: building campaigns, products, and stories that speak directly to the segments you chose.

Why you should care about market segmentation (benefits and use cases)

Market segmentation shows up in how well your messaging lands, how efficiently you spend, and how clearly you prioritize what to build, and who to build it for.

Better messaging and higher conversion rates

Generic messaging gets you generic results. If you’re writing copy that tries to appeal to everyone, it won’t resonate deeply with anyone. But when you understand your segments, you can create campaigns that speak to real motivations, using the language, visuals, and formats each group actually responds to.

Example: a fitness brand might talk to one segment about weight loss, another about performance and PR times. Same product, different angle. Different stories, imagery, and testimonials. The result? More clicks, more signups, more purchases—because the message hits.

More efficient marketing spend and higher ROI

Segmentation isn’t just about relevance. It’s about efficiency. It helps you stop spending money on audiences that were never going to convert in the first place—or that are too expensive to go after profitably.

With clear segments, you can:

• Focus budget on high-fit, high-value groups (think: strong LTV and manageable CAC)

• Match your channel mix and creative to what each group actually pays attention to

That’s how you get more out of the same (or smaller) budget—higher ROAS, better LTV:CAC, and fewer wasted impressions.

Stronger product–market fit and feature adoption

Segmentation isn't just a marketing lever. It’s a product input.

When product and marketing operate from the same segmentation model, roadmap decisions get clearer:

• You know which features matter to which segments

• You stop chasing requests from groups that were never going to stick around

Say a SaaS company sees small teams in financial services are expanding faster and adopting more deeply than big enterprise accounts. That insight can shape what gets built, how it’s priced, and where the roadmap goes next. You double down on what’s working instead of stretching to serve everyone.

Real‑world examples of companies winning with segmentation

Some of the most successful B2B SaaS brands are explicitly targeting and personalizing based on distinct segments, and the data backs up the results.

HR tech and vertical focus in European SaaS

A recent BCG survey of more than 100 B2B SaaS providers in Europe showed a clear pattern: top performers aren’t treating every potential customer the same. Firms that tailor their go‑to‑market and messaging by industry segment (like HR, healthcare, and sustainability) grow much faster than those with broad, undifferentiated outreach. Firms that personalize content and campaigns based on the specific challenges and buying behaviors of these vertical segments outpace competitors who stick with generic messaging—growing revenue approximately 40% faster than peers who don’t personalize by segment.

AI‑driven segmentation is improving lead quality

In B2B sales and marketing operations, companies leveraging AI‑driven segmentation for lead qualification and outreach are seeing dramatic performance lifts. By automatically clustering prospects based on firmographics, behavior, and intent signals, one top enterprise software provider reported a 50% increase in sales‑ready leads, a 60% reduction in acquisition costs, and a 30% shorter sales cycle—all because the right segments were getting the right outreach at the right time.

Across both marketing and product functions, the pattern holds: companies that take segmentation seriously—not just as an academic exercise but as a driver of targeting, messaging, and campaign execution—tend to get more revenue from the same (or less) marketing input.

The main types of market segmentation (with examples)

At a basic level, there are six types of market segmentation groups for companies to think about.

Demographic segmentation groups people by relatively objective traits—age, gender, income, education, family status, occupation. It’s a go-to in B2C because this data is usually easy to get and tends to correlate with predictable needs and buying power.

Examples:

• A children’s clothing brand segments by age brackets and family status (expecting parents vs parents with toddlers vs parents with teens).

• A financial services firm offers tailored products by income and life stage (student accounts, first-time homebuyer mortgages, retirement planning).

Demographics alone can be shallow, but combined with behavior or psychographics, they start to get much more useful.

2. Geographic segmentation

Geographic segmentation groups people by where they live—country, region, city, climate, even neighborhood. Geography influences culture, regulation, buying habits, and local demand, so it’s often a solid first filter.

Examples:

• A quick-service restaurant adapts its menu and promotions by region to reflect local tastes.

• A B2B supplier shifts messaging and pricing based on how mature or competitive a market is in each country.

• Even digital-only products sometimes tweak their offering by location to reflect language, tax laws, or currency differences.

  
  

3. Psychographic segmentation

Psychographic segmentation is about what people believe, value, and care about—their attitudes, interests, and motivations. It gets at why people buy, not just who they are.

Examples:

• A wellness brand builds segments around “biohackers,” “holistic health seekers,” and “casual exercisers,” each with distinct content, visuals, and product bundles.

• A travel company markets differently to “adventure seekers,” “luxury relaxers,” and “family planners,” even if their demographics overlap.

Psychographic segments often come from interviews, surveys, or community insights, then get scaled using behavior or purchase proxies.

4. Behavioral segmentation

Behavioral segmentation is grounded in what people actually do—how often they use your product, how recently they bought, how loyal they are, how they respond to offers, and what triggers them to act.

Examples:

• A subscription app separates users who hit a key “aha moment” right away from those who stall out or become daily power users—and tailors onboarding, nudges, and feature prompts accordingly.

• An e-commerce brand segments into first-time buyers, repeat customers, and VIPs based on purchase history—then builds separate retention and upsell plays for each.

Because it’s tied directly to observable behavior and revenue outcomes, behavioral segmentation is often the most actionable for growth, retention, and lifecycle strategy.

5. Firmographic segmentation (for B2B)

Firmographic segmentation is like demographics for companies. It groups accounts by industry, company size, revenue, location, business model, or even tech stack.

Examples:

• A B2B SaaS company segments by employee count and ARR potential (SMB vs mid-market vs enterprise), and runs different sales and onboarding motions for each.

• A vendor selling across verticals tailors its outreach by industry (finance, healthcare, manufacturing), using different case studies, use cases, and language to resonate.

Firmographics are the starting point for most B2B segmentation, often layered with intent and behavioral data in account-based marketing (ABM) models.

6. Advanced and hybrid segmentation approaches

Mature companies rarely stop at one dimension. They combine data sources and methods to build richer, more accurate segments that tie closely to value.

Common hybrid models include:

• RFM segmentation: group customers by recency, frequency, and monetary value to identify loyalists, high-spenders, and at-risk churners.

• Needs-based segmentation: focus on underlying needs or jobs-to-be-done, regardless of industry or demographics.

• Occasion-based segmentation: segment by context—weekday vs weekend, seasonal vs event-driven, major life milestones, etc.

These methods take more effort and more data, but they typically drive stronger ROI because they map closely to actual customer behavior and outcomes.

Market segmentation for B2C vs B2B

The core idea is the same in both worlds: find real groups that matter, and serve them better. But how you segment—and why—depends a lot on whether you're selling to people or to companies.

Key differences between consumer and business markets

In B2C, you’re usually segmenting individuals or households. Emotional drivers, identity, lifestyle—these tend to shape the buying decision. It’s often about taste, convenience, or aspiration.

In B2B, you're dealing with companies—and often, multiple stakeholders inside those companies. That means your segments need to account for:

• Firmographics (industry, size, location)

• Use cases and operating models

• Decision-makers, influencers, and end users

• Buying cycles, budgets, and procurement dynamics

  
  

Common B2C segmentation patterns

Consumer brands often combine demographic, psychographic, and behavioral data to shape segments that reflect real-world preferences and purchase behavior.

Examples:

• Retail: segments like “fashion-forward value shoppers,” “premium basics buyers,” and “deal-driven clearance hunters”—each with their own mix of channels, messaging, and promos.

• Subscription media: segments based on content tastes (genres, formats), usage patterns (binge vs casual), and pricing preferences (premium vs discount-sensitive).

Done right, this lets teams tailor everything, from homepage layouts to email flows, to match the segment, not the average.

Common B2B segmentation patterns

B2B companies usually start with firmographics, then layer in behavior and account potential to get sharper.

Examples:

• SaaS: segments like “small teams adopting self-serve,” “mid-market accounts needing light sales support,” and “enterprises with complex deployments.” Each requires a different onboarding flow, pricing model, and sales motion.

• Services: segments like “early-stage startups needing hands-on support,” “growth-stage companies focused on scale,” and “enterprises looking for specialized transformation.” Each segment gets a different scope of work and engagement model.

This structure supports clear GTM motions, from PLG and self-serve to full-scale ABM.

How to do market segmentation step by step

Here's a practical guide to begin segmenting your target buyers.

Step 1: Define objectives and hypotheses

Before diving into data, get clear on why you’re segmenting in the first place. What decision are you trying to inform? What behavior are you trying to change?

Common objectives:

• Improve acquisition efficiency (target better, lower CAC)

• Boost activation, adoption, or expansion in key cohorts
  Inform product roadmap, packaging, or pricing

Once you know your goals, translate them into hypotheses you can test—like:

“We think there are 2–3 distinct customer groups with different primary use cases. If we identify and target them separately, we’ll increase conversion and retention.”

Step 2: Gather data (internal and external)

Start pulling the data that can help you spot real patterns—not just assumptions.

Internal data sources:

• CRM and billing data (e.g., industry, company size, deal size, renewal status)

• Product analytics (e.g., feature usage, frequency, depth of engagement)

• Marketing analytics (e.g., campaign performance, conversion paths)

External or qualitative data:

• Customer surveys and interviews

• Support tickets and customer feedback

• Third-party firmographic or demographic enrichment

Qualitative inputs are especially valuable early—they help reveal needs, motivations, and blind spots your dashboards might miss.

Step 3: Choose your segmentation bases

Now decide which dimensions you’ll use to define your segments. These are your segmentation bases—the core attributes you’ll group by.

Common bases:

• Demographic or firmographic (who they are)

• Behavioral (what they do)

• Psychographic or needs-based (why they do it)

• Geographic (where they are)

In practice, you’ll usually mix a few. For example, a B2B SaaS company might start with firmographic segmentation (e.g., company size), layer on needs (e.g., collaboration vs compliance use cases), and refine using behavioral data (e.g., daily active users).

What matters is that your variables are:

• Tied to your goals (e.g., retention, expansion, CAC)

• Measurable from the data you have

• Actionable—meaning you can target and serve them differently

Step 4: Group customers into segments

With bases defined, now you actually build your segments. There are two broad methods:

Rules-based segmentation:
Manually define segment rules like “SMB = 1–50 employees,” or “Power users = logged in 10+ times in the past 30 days.”
Easy to implement and explain—but can oversimplify or miss patterns.

Analytical/model-based segmentation:
Use clustering, RFM analysis, or other algorithms to group customers based on actual patterns.
This can surface less obvious segments (like a small group that buys infrequently but spends heavily when they do).

Hybrid approaches often work best; use rules where it’s obvious, then apply analysis where things get more complex or fuzzy.

Step 5: Evaluate segment attractiveness

Not every segment is worth chasing. Once you’ve mapped the landscape, score your segments to figure out which ones deserve focus.

Criteria to evaluate:

• Size and growth: Is the segment big now, and is it growing?

• Profitability: What’s the revenue, margin, LTV?

• Accessibility: Can you reach them with your current channels and resources?

• Fit: Does this group align with your strengths, product vision, and brand?

The goal is to find segments that are attractive (economically and strategically) and attainable (you can win them and keep them).

Step 6: Select target segments and define positioning

Once you’ve scored your segments, choose your priorities. These are your target segments.

Then define your positioning for each one:

• Who are they?

• What are they trying to accomplish—and what’s in their way?

• Why is your product the right answer for them?

• What proof backs that up?

This positioning feeds everything else: campaigns, onboarding, sales enablement, pricing, even product roadmap. 

Data and methods for building segments

Segmentation isn't just a strategy problem—it’s a data and tooling one too. You need the right inputs and the right methods to make your segments real, measurable, and actionable.

Data sources you can use

Rich segmentation almost always pulls from multiple sources across your stack. A few of the most useful:

• CRM: account info, deal size, stage history, closed-won/lost data

• Product analytics: events, feature usage, time to value, depth of use

• Marketing analytics: channels, campaigns, content engagement

• Support and success tools: common issues, sentiment, NPS, escalation rates

• Surveys and interviews: self-reported needs, preferences, budgets

For B2B in particular, external data, like firmographic enrichment, tech stack, hiring activity, or third-party intent signals, can sharpen segments even further.

Simple analytical approaches

You don’t need complex modeling to start building useful segments. Some lightweight methods go a long way:

• RFM analysis: group customers by recency, frequency, and monetary value to spot loyalists, at-risk buyers, or high spenders

• Cohort analysis: track retention or revenue by signup month, acquisition channel, or first product touched

• Rules-based personas: define traits like “power users” or “self-serve buyers,” then validate with data

These methods are intuitive, spreadsheet-friendly, and often more than enough to start improving targeting, messaging, and retention.

Advanced approaches (cluster analysis and AI-driven segmentation)

For more complex use cases—or larger datasets—advanced methods can unlock deeper insights:

• Cluster analysis (e.g., k-means, hierarchical clustering) lets you group customers by many variables at once, uncovering hidden patterns

• Predictive modeling helps you forecast churn risk, upsell potential, or feature adoption likelihood

• AI-driven segmentation dynamically updates segments based on real-time behavior, letting you automate and personalize at scale

The trade-off: these models are more powerful, but they require strong analytics, clear governance, and a way to keep segments interpretable and usable across teams.

How to turn market segments into action: targeting and positioning

Segmentation doesn’t matter unless you act on it. Once you’ve defined your segments, the next move is figuring out which ones to prioritize—and how to reach them in ways that actually stick.

Think across segments and target audiences

Not every segment is worth equal time or effort. Once you’ve scored them for fit and value, break them out like this:

• Primary targets: strategic priorities for new acquisition and/or expansion

• Secondary targets: worth serving, but not the main growth driver right now

• De-prioritized segments: supported passively, not actively pursued

Write this down. Share it. Bake it into how product, marketing, and sales operate, so everyone stays focused on the right people.

Craft segment-specific value propositions and messaging

For each priority segment, distill your positioning into something usable:

• Problem: what this segment is struggling with

• Outcome: what “success” looks like for them

• Proof: features, results, or customer stories that show you can get them there

You can reuse this structure across web pages, ads, emails, sales decks, onboarding flows—anywhere you need to speak directly to a specific group.

Choose channels and tactics by segment

Different segments hang out in different places. They don’t all respond to the same content, tone, or format.

• Technical buyers tend to favor docs, API guides, and peer forums

• Executives prefer sharp one-pagers, business cases, and ROI stories

Map each segment to the channels they trust and the formats they prefer. That’s how you design efficient, targeted journeys, without forcing everyone through the same funnel.

Common market segmentation mistakes (and how to avoid them)

Even solid segmentation strategies can fall apart if the execution is off. These are the mistakes that show up most often—and how to sidestep them before they drag down your marketing and product decisions.

1. Segments that are too broad, too small, or not actionable

Just because a segment sounds clever doesn’t mean it’s useful. A good segment should help you make clearer decisions—not just check a strategic box.

Common failure modes:

• Too broad: segments that cover basically “everyone,” leaving you nowhere to focus

• Too narrow: tiny segments that are hard to operationalize and don’t move the needle

• Not actionable: segments built on traits you can’t measure, target, or personalize against

Useful segments are meaningfully different in behavior or value, large enough to matter, and directly tied to something you can act on.

2. Over-relying on surface attributes

It’s tempting to segment based only on what’s easy to see—like demographics or firmographics—but that rarely tells the whole story.

For example, lumping all companies with 500+ employees into one “enterprise” segment ignores huge differences in:

• Use case

• Tech maturity

• Buying process

You get far more actionable insights when you combine surface-level traits with behavioral patterns and real customer needs.

3. One-and-done segmentation

Markets shift. Customer behavior changes. Your product evolves. If your segmentation doesn’t keep up, it quickly loses relevance.

Treat segmentation as a living system, not a static slide:

• Re-check assumptions regularly—at least once a year, or after major product or GTM changes

• Track performance by segment and use that data to refine your model

The goal is to keep your segments grounded in what’s happening now—not just what made sense last quarter.

4. Misalignment across teams

If product, marketing, and sales each use their own version of segments, you're not aligned—you’re guessing in parallel.

To avoid fragmentation:

• Document your segmentation model clearly and share it

• Build it into your CRM, dashboards, and day-to-day reporting

• Make sure every team is using the same terms, the same definitions, the same logic

When teams speak the same segmentation language, you can turn strategy into execution, and execution into results.

Measuring the impact of market segmentation

You can’t improve what you don’t track. The best segmentation models aren’t just designed well—they’re measured, tested, and refined over time.

Core KPIs to track

If you want to know whether segmentation is actually working, track your metrics by segment, not just in aggregate.

Useful metrics include:

• Acquisition: conversion rate, CAC, channel performance

• Retention: churn rate, renewal rate, engagement depth

• Revenue: ARPU, LTV, expansion revenue, segment-level profitability

Segment-level reporting shows you which groups are really driving your growth—and which ones might be eating into your budget without a return.

Experimentation and A/B testing

Segmentation and experimentation go hand in hand.

You can:

• Run A/B tests on messaging, creative, or offers, tailored to each segment
  Compare performance between segments to see where tactics land best

This turns segmentation from a static framework into a dynamic, test-and-learn system.

Feedback loops and ongoing refinement

Segmentation isn’t one-and-done. Your customers evolve, and your segments should too.

Build in mechanisms to keep things current:

• Regularly review segment performance in dashboards and business reviews

• Pull in qualitative input—support tickets, CS feedback, interviews

• Update your criteria when products, pricing, or customer behavior shifts

The most effective segments are the ones that get sharpened over time—based on both numbers and conversations.

Market segmentation in the age of AI and personalization

Segmentation used to be a planning exercise. Define your personas, update them once a year, move on. Not anymore. With modern data infrastructure and AI, segmentation can be real-time, reactive, and deeply integrated into how you operate.

From static segments to dynamic micro-segments

AI makes it possible to move beyond a handful of static segments into dynamic, ever-shifting clusters based on real behavior—not assumptions.

Instead of setting segments annually, you can:

• Continuously regroup users based on real-time behavior, predictions, and context

• Run micro-segments that update automatically as users interact with your product, content, or campaigns

The upside is sharper targeting and higher relevance. The trade-off: you need clean data, solid infrastructure, and tight governance to make it work.

Using predictive analytics and CDPs

Customer data platforms (CDPs) and predictive models bring segmentation closer to execution.

They can:

• Merge behavioral, transactional, and third-party data into unified profiles

• Score users for things like churn risk, upsell likelihood, or product fit

• Automatically sync dynamic segments with tools across your stack—ads, email, product, CS

The result is a segmentation layer that’s not just smarter, but fully embedded in how you operate.

Privacy, ethics, and regulation

As segmentation gets more powerful, it also gets more sensitive. Granularity without guardrails is a liability.

Keep it clean:

• Be transparent about what you collect and how you use it

• Avoid sensitive variables that might be discriminatory or legally restricted

• Stay aligned with GDPR, CCPA, and relevant local privacy rules

Consent-based, respectful segmentation isn’t just a legal requirement—it’s a long-term trust builder.

Market segmentation checklist (quick reference)

Segmentation isn’t a one-time exercise; it’s a working system that touches nearly every part of your business. Whether you’re building your model from scratch or tightening what’s already there, this checklist can help you pressure-test the basics and keep your strategy grounded in reality.

Use this as a quick checklist when designing or revisiting your segmentation.​

• Objectives: Clear reasons for segmenting and specific business outcomes.

  
  

• Data: Sufficient quantitative and qualitative inputs.

  
  

• Bases: Chosen dimensions that are measurable and actionable.

  
  

• Segments: Defined groups that are distinct, sizable, and understandable.

  
  

• Evaluation: Scored attractiveness, fit, and feasibility.
  
  

• Targeting: Explicit choices about primary and secondary segments.
  
  

• Positioning: Segment‑specific value propositions and messaging.
  
  

• Activation: Channels, campaigns, and product experiences tailored by segment.
  
  

• Measurement: Segment‑level KPIs and dashboards.
  
  

• Iteration: Regular review and refinement cadence.

Implement market segmentation in your business

If you’re just starting:

• Pick one or two key outcomes (e.g., improve trial conversion, reduce churn) and design a simple segmentation approach around those.​

• Start with a small number of clearly defined segments and a few targeted experiments per segment.

If you’re more mature:

• Audit your existing segmentation for clarity, alignment, and performance.

• Connect your segmentation model to your CRM, analytics, and activation tools so segments are consistently applied.​

In both cases, the goal is the same: move away from generic messaging and experiences, toward a world where the right people see the right stories, products, and offers at the right time—because you’ve deliberately chosen how to segment your market and act on it.