A guide to developing a product segmentation strategy

Most successful product managers suffer from the same challenge.

They start with a niche product for a niche audience, dominate it, and start scaling. As they scale, they need to cater to the needs of an increasingly wider audience, shifting towards a generic product that tries to be everything for everyone.

Then, new companies appear on the market and try to steal part of the audience by targeting a niche sub-segment, and the cycle repeats. However, some PMs break from this cycle and keep their product a market leader for decades.

By segmenting your offering, you can tailor value propositions and marketing activities to specific niches, remaining competitive enough to fend off other market entrants. In other words, the bigger you are, the more critical it is to start segmenting your product offering.

Keep reading to learn how to do so.

What is product segmentation?

Product segmentation refers to dividing your product offering into smaller groups of products that target different market segments.

It can take various forms. For example, Samsung divides its core mobile offering into:

• Galaxy Z Fold — For innovators who want to be different
• Galaxy S – For people expecting the best yet classic experience
• Galaxy A – For more budget-oriented buyers who just need a phone that does the job

By segmenting the product offering, Samsung can tailor each product line to the needs of a specific audience. Combining those three models into “one-fits-all” would create a mediocre product that wouldn’t nail the needs of any of the audiences.

Types of product segmentation

In theory, you can segment products by any criteria that makes sense to you. Common types include:

Demographic segmentation

Demographic segmentation is probably the oldest type of product segmentation. For example, you often segment products based on:

• Gender (“girly” versus more “manly” phone cases)
• Age (children-dedicated tablets versus normal tablets)

Geographic segmentation

Cultural differences between geographic locations often call for dedicated product segmentation.

For example, McDonald’s offers different offerings:

• US (beef focused)
• India (more vegetarian options)
• Spain (beer instead of coke as a go-to drink)

Behavioral segmentation

People tend to display different behaviors, needs, and preferences, so it might be wise to adjust the product offering to address different personalities.

A recent example is Netflix’s introduction of a subscription tier with ads. This way, Netflix has a dedicated offering for more patient people who don’t mind ads but are more budget-conscious while still catering to impatient people who hate interruptions with a more expensive plan tier.

Use case segmentation

Finally, some people might use the same product for a different objective.

For example, ChatGPT has a free tier for users who just need a casual Q&A while offering GPT Plus for people using AI for more advanced actions. It also offers corporate plans for companies that need to use GPT’s API at a scale.

Costs and benefits of product segmentation

The biggest problem with product segmentation is the cost. Catering for new market segments can lead to the following expenses:

• Development — To customize the offering for different segments
• Marketing — To run different campaigns
• Operations — The more products you have, the more overhead you need to keep the company running

Instead of focusing your full attention on a single product, you need to split it into numerous sub-products.

Given the cost, most early- and mid-stage companies are better off focusing on one main offering. However, you can expect many benefits once you get big enough to afford the cost of product segmentation.

Stronger positioning

Instead of marketing a single product for the masses, you can run smaller campaigns with dedicated messaging, positioning, and target audience. This allows you to resonate better and grab more attention.

Better CAC/LTV ratio

The more focused your marketing actions are, the more customized your product is for your audience, and the cheaper your customer acquisition becomes.

Generic products simply don’t sell as well as those truly tailored to specific segments’ needs.

Higher satisfaction

Most importantly, product segmentation allows you to stay competitive in terms of user experience and value delivery.

The more product segmentation you have, the smaller the audiences for each product category, and the higher the chance of creating a product that truly resonates with the whole audience rather than being mediocre for the masses.

How to implement a product segmentation strategy

To implement a product segmentation strategy, follow these key steps:

1. Do market research

First of all, you must understand your market well. Gather information about your users through:

• Surveys
• Interviews
• Focus groups
• Market reports

How do they differ in terms of geography, demographics, behaviors, and use cases? How do their satisfaction and willingness to pay differ depending on those factors?

2. Define segmentation criteria

Your market research should give you clear signals about what factors most impact satisfaction and willingness to pay.

Some of these could include:

• Age
• Use case
• Behavior

If you don’t see clear differences in users’ needs, it most likely means you need to conduct more research. If, even after interviewing dozens of users, you don’t see any clear patterns, then the users you’re targeting might be very homogenous, and product segmentation doesn’t make much sense.

3. Segment the market

If you manage to find what criteria most impacts your customers’ satisfaction and willingness to pay, you can segment the market based on them.

Say you’re building an EdTech product for students, and you notice that depending on how much they care about their grade, their needs and expectations change. Then, it might make sense to segment the market for:

• D- students — Who just want to pass
• B students — Who care about grades, but not that much
• A+ students — Who want to nail their grades

4. Prioritize segments

Product segmentation is a step-by-step process. If you have a single product, your next step should be to segment it into two different sub-products. Only when you nail two product segments do you add a third one, and so on.

So, you must first prioritize the two main segments you want to target.

I usually use four evaluation criteria:

• Size — The bigger the segment, the better
• Easiness — If it’s a segment that you know well and already have many tailored experiences for, it’s a better next step than some completely new and unknown market segment
• Satisfaction — The less satisfied the segment currently is, the more impact you can expect from a dedicated sub-product
• Willingness-to-pay — The more willingness to pay within the segment, the bigger the opportunity

I don’t use any specific formula or framework. Deciding which segments to prioritize is a critical strategic decision, so it should come from a series of discussions and broader considerations instead of some simple math.

5. Create user personas

Once you’ve chosen your segments, dive even deeper into research and develop a dedicated and well-informed user persona for each segment.

Personas will not only help you develop custom products but also provide a great sanity check. If you identify more than one persona in a segment, that means there’s an opportunity to further sub-segment the market.

I also like creating a user journey map for each persona. They come in handy for evaluating the current experience and deciding what adjustments are needed to fully satisfy the segment.

6. Tailor the product

Lastly, you need to develop a great product for each defined persona.

The principles here don’t differ from your normal product development, you’re just building on two separate tracks.

Whether it’s working on iPhone Pro Max versus iPhone Mini, or developing different tiers of Figma’s subscription, the goal is to balance between:

• Nailing the experience for a given niche
• Maintaining enough similarity and scalability between products to reduce the costs of segmentation

Final thoughts

Product segmentation is expensive, and yet it’s often the only way to remain a market leader.

The more popular your product becomes, the more diverse your audience becomes. This makes it increasingly harder to satisfy everyone. When you find yourself in this position, turn towards product segmentation.

Start by understanding what criteria impact your customers. If you see a strong correlation between two criteria, consider different product lines for those segments. This allows you to tailor your value proposition and communication to maintain the best solution on the market for a particular group of users.

Just make sure to go slow. Product segmentation comes with significant costs and makes it harder to maintain cohesive branding, vision, and alignment within the company. It should be a cautious strategic decision preceded by detailed analysis.

Featured image source: IconScout