Table of Contents
Key takeaways:
- Customer segmentation and market segmentation are similar concepts that both provide value data for your business to act on
- Customer segmentation groups customers by performance, demographic data, or quantifiable data like expectations or pain points
- Market segmentation divides target markets into segments based on criteria like behavior, geography, or psychographic traits
- Both can help you better understand your customers, develop stronger marketing strategies, and identify high-value audience segments, but it's important to understand the difference between them and when to use each
Customer segmentation is defined as the practice of dividing a company's customers into groups based on shared characteristics such as demographics, behavior, or value, while market segmentation refers to dividing a broader target market into smaller, more defined categories based on traits like geography, psychographics, or demographics. Both can help you identify key business opportunities, assess customer value, and make strategic decisions for your business moving forward.
Last updated: March 2026
In this article, we'll examine customer segmentation vs. market segmentation. Which approach should be used and when? Are these two segmentation practices really that different?
They are.
We'll guide you through the differences below. Let's discuss what customer segmentation and market segmentation actually mean.
What Is Customer Segmentation?
Customer segmentation is defined as the practice of dividing customers by various segmentation metrics, such as expectations or demographics. Segmenting customers helps businesses organize their resources to effectively communicate with each customer segment, maximizing their marketing efforts for retention and revenue growth.
The three basic forms of customer segmentation are:
- Post hoc segmentation is defined as the most widely recognized form of segmenting customers. This strategy uses characteristics or demographics to create customer groups sharing the same attributes based on research conducted for marketing purposes.
- Needs-based segmentation refers to the practice of grouping customers based on their differing reasons for purchasing a specific item or service rather than other characteristics such as age or location.
- Value-based segmentation is defined as the approach that groups customers by the value they bring your business. You can use this segmenting information to create a value-based pricing model, for instance.
A specific segment made into a persona or profile is called an archetype. An archetype is defined as a representative persona built from segmented customer data that helps your sales team devise a specific marketing strategy for each segment, such as a free trial strategy for a specific set of customers. Targeted activities, such as an email series, help you maximize value for your customers – and your business.
What Are the Benefits of Customer Segmentation?
Every customer is different. Dividing your customer base into different types of customers ensures you're sending the right marketing messages to the right customers at the right time in their customer journey.
Customer segmentation helps you:
- Identify the most valuable segments based on customer needs
- Improve your marketing ROI by targeting only those customers likely to purchase
- Dramatically improve your customer loyalty by customizing your products or services for your best customers (or even creating new products for your die-hard followers!)
- Offer improved customer service, which leads to better customer experience
- Improve revenue
- Reduce waste
What Is Market Segmentation?
Market segmentation refers to the practice of dividing target markets into smaller, more easily defined categories. Market segments are groups of customers sharing similar characteristics, interests, locations, and more.
There are four types:
- Demographic segmentation is defined as the most commonly used form of market segmentation, which uses statistics regarding a specific group of customers.
- Psychographic segmentation refers to the approach that uses personality and character traits to group target audiences and potential customers.
- Behavioral segmentation is defined as the method that focuses on how a customer behaves rather than who the customer is.
- Geographic segmentation refers to the approach that separates audiences into customer segments geographically and is the easiest of all market segmentation types.
What Are the Benefits of Market Segmentation?
Market segmentation has its own set of benefits. After market research, you'll gain insight into how you can do the following for your small business:
- Design better marketing campaigns and messaging
- Identify the best marketing tactics
- Design hyper-focused ads for a specific target audience
- Attract – and convert – higher quality leads
- Differentiate your business from the competition
- Build deeper affinity and customer loyalty
- Identify niche opportunities
Customer Segmentation vs. Market Segmentation – How are they different?
Customer segmentation offers a lot more detail when you're creating your buyer personas. In contrast, an archetype is a much broader definition of an ideal customer.
Using market segmentation to build a buyer persona isn't recommended because it's such a general overview of the customer, the market overall, and your place in it.
It's like looking for needles in nicely rounded haystacks – it's still a needle, and it's still a haystack.
While customer segmentation offers a much more detailed view of your ideal customer, market segmentation does have its place.
However, it's important to remember that all types of segmentation require accurate, detailed data.
SaaS analytics platforms with customer segmentation dashboards like Baremetrics can help with this. See how to segment customers in Baremetrics to get started.
Frequently Asked Questions About Customer Segmentation and Market Segmentation
What is the difference between customer segmentation and market segmentation?
Customer segmentation divides your existing customer base into groups based on shared characteristics such as demographics, behavior, needs, or value to your business. Market segmentation, on the other hand, divides a broader target market into smaller categories based on traits like geography, psychographics, demographics, or behavior. The key difference is that customer segmentation focuses on people who already buy from you, while market segmentation targets potential audiences you want to reach.
What are the types of customer segmentation?
The three main types of customer segmentation are post hoc segmentation (grouping customers by demographics or shared attributes after research), needs-based segmentation (grouping customers by their reasons for purchasing), and value-based segmentation (grouping customers by the economic value they bring to your business). Each type helps businesses tailor their marketing strategies and resource allocation differently.
What are the four types of market segmentation?
The four types of market segmentation are demographic segmentation (using statistics like age, income, or education), psychographic segmentation (using personality and character traits), behavioral segmentation (focusing on how customers act and make purchasing decisions), and geographic segmentation (separating audiences by location). These four approaches can be used individually or combined for more precise targeting.
Why is segmentation important for SaaS businesses?
Segmentation is critical for SaaS businesses because it enables more targeted marketing campaigns, improves customer retention by tailoring experiences to specific groups, and helps identify your most profitable customer segments. With accurate segmentation data, SaaS companies can optimize pricing strategies, reduce churn, improve marketing ROI, and allocate resources more effectively toward high-value customers.
How do you choose between customer segmentation and market segmentation?
Choose customer segmentation when you want to better understand and serve your existing customers, improve retention, or identify upsell opportunities. Choose market segmentation when you are entering new markets, launching new products, or trying to attract new audiences. Many businesses benefit from using both approaches together: market segmentation to identify and attract prospects, and customer segmentation to retain and grow relationships with current customers.
How Baremetrics Can Help
Without data, you can't determine whether different price points, sales, or better messaging will appeal to different segments of your current customers. You could be missing out on real opportunities to market to more profitable segments effectively.
That's where Baremetrics can help.
With our customer segmentation tool, you can divide and subdivide your customers in whatever ways make the most sense for your business.
Gain the insights you need to make stronger strategic decisions to improve the acquisition and retention of high-value customers.
Tired of wasting time on spreadsheets? Get a free trial of Baremetrics today!
