Why Most Market Segmentations Fail - And How to Make Yours Work

A great segmentation can transform your business, so why are there so many bad ones?

Does this scenario seem familiar? It’s been weeks since you presented your new market segmentation to the executive team. At the time, the room buzzed with excitement over the possibilities of how the segmentation would transform the business. But now? Silence. Concerns have crept into meetings, support has cooled, and your carefully built project risks being shelved.

What went wrong?

The truth is that most market segmentation projects fail to meet expectations. Businesses have high hopes for what segmentation can achieve. And they should! Market segmentations can transform a business by giving direction on where to invest and how to engage with customers.

But with high expectations comes risk.

A Harvard Business Review article reported that while 81% of businesses say segmentation is critical for growth, only 25% believe they’re using it effectively. The gap isn’t about the value of segmentation itself — it’s about execution. Too many projects fall into avoidable traps.

This article outlines five common pitfalls that can derail market segmentation projects, providing practical insights that marketers can use to avoid failure and drive real business growth.

• Design Issues: Segmenting the Wrong Market
• Business Alignment Issues: Not supporting the business strategy
• Solution: Segments that have no story
• Outcome Issues: Overlooking ROI
• Implementation Issues: Failing at the last hurdle

Design Issues: Segmenting the Wrong Market

Failure often starts at the design stage. Businesses frequently segment the wrong market, or worse, let personal bias steer the process.

If your business objective is growth, focusing on existing customers alone may blind you to new opportunities. If conversion is the goal and you rely on third-party channels, then you need to segment your influencers and not just your buyers. If you have more than one market, such as business and consumers, you need to either segment both or choose which one will give you the best outcome. If your buyers and users are separate, then your segmentation must include this dynamic.

Another pitfall is allowing personal opinions to drive your segmentation. Everyone in the business will have a view on the types of customers and who they are. While this may come from direct experience, when it comes to segmenting your market, it mistakes opinion for fact and bases strategies on stereotypes rather than real people.

Case Study: To move from sales decline to growth, our client, a national retailer of weight loss products, undertook a major segmentation of its customer base. The logic was simple: if we could attract more of the types of people who are our best customers, then we would get more of them and grow. Except it didn’t work. Existing customers had learnt about the business and represented markets that they had already successfully targeted. To transform their marketing, we took an external view. To grow, they needed to attract the much larger market of people who had not yet bought into the category and those who had only tried. The result was a market segmentation that drove new product development, improved messaging, and opened them up to profitable markets that fueled their next phase of growth.

Takeaway: Be crystal clear about your business objective before segmenting. Spend time upfront defining whether you’re targeting customers, non-customers, decision influencers, or a mix. And challenge your own assumptions about who your customer really is.

Business Alignment Issues: Not Supporting the Business Strategy

Segmentation can group people in an infinite number of ways. Unless those groups align with how your business operates, they won’t be useful. The variables you use to create your segmentation need to reflect what drives differences in customer behavior; either directly explaining buying and usage behavior, or indirectly, like retailer choice.

Be cautious when basing your segmentation of media choice. It is better to focus on the underlying reasons that shape media use that also relate to how they engage with your category. For example, young females have distinctly different hair care engagement and media use compared to older females. Using social media use as a predictor gets the relationship around the wrong way.

Case Study: Our client, an international energy provider, undertook a national study of households to build a values-based segmentation to drive personal one-to-one marketing with their millions of customers. However, lifestyle values were not predictive of energy or service use, and since none of the variables were in the customer file, they then faced the impossible task of trying to infer these values based on the available information. To salvage our client’s career, our agency was called in to find a quick-win solution. Starting from their account data, account owner profile and geographic data, we built a predictive segmentation, and because it linked to climate and weather through geographic data, it was dynamic and could be used for quickly developed campaigns targeting rapidly changing needs.

Takeaway: Always ask, ‘Does this segmentation help explain how people make choices or determine their usage in my category?’.

Solution Issues: Segments that Have No Story

A strong segmentation requires members of each group to be highly similar to one another and distinctly different from other groups.

Statistical tools like k-means clustering or latent class analysis can help, but clear thinking and storytelling also matter. If senior management can’t easily understand what makes one segment different from another and why they matter, they won’t adopt it.

Sometimes it is better to focus on the archetypal persona of a segment — the types of people that typify your segment — to explain who they are and acknowledge that not everyone in the segment is exactly the same. Be careful not to confuse this archetype for the whole segment. A client of a skin care brand had a key segment that was 60% female. By never addressing the 40% of males, they alienated them and lost market share to a competitor.

Case Study: Working with a banking client to increase cross-product ownership, we built out highly targetable segments using customer profiles and account behaviour. While meeting the brief, the segmentation failed to gain traction with the marketing and senior management teams. The reason was that there was no overarching narrative that explained who the segments were and why they acted as they did. To remedy the situation, we run focus groups with each segment to create more intuitive personas.

Takeaway: Tell a story with your segmentation. Keep the definitions simple, distinct, and easy to communicate.

Outcome Issues: Overlooking ROI

Segmentation isn’t just an academic exercise — it needs to deliver business value. If your segments are too small, they won’t justify investment in targeted campaigns or products. On the other hand, lumping groups together dilutes insight.

As a rule, segments smaller than 15% will struggle to attract investment, while segments exceeding 60% will be too broad and offer little to no benefit from segmentation. Remember, you can always group similar segments to create an investment case.

Case Study: The female haircare market is complex. Intersecting between different hair needs, climates, styling fashion, lifestyle, and personal values. In creating segments for our client, a global FMCG/CPG manufacturer of women’s beauty products, we developed ten distinct segments. Each segment was too small to justify investment, so to enable our client to build investment cases, we demonstrated how segments could be recombined to create more profitable segments and how different strategies could drive results across multiple segments.

Takeaway: Define minimum viable segment sizes before finalizing your solution. Demonstrate how your segments differ in terms of communication, product, or service usage to illustrate their ROI potential.

Implementation: Failing at the Last Hurdle

Even the best segmentation is worthless if it can’t be implemented. Many market segmentations fail when marketers can’t match the segmentation to their customer base, require increased operating costs to be effective, or lack support from other teams to implement them successfully.

For businesses that rely on their CRM platforms, having a segmentation that can be mapped back to customers is a non-negotiable for success. For segmentations targeting non-customers, buy-in from sales and communication teams is needed.

Getting buy-in is critical. The more strategic your segmentation, the more areas of your business it will impact, their costs and ability to meet their strategic objectives.

Case Study: At a presentation to the senior leadership team of a retail client that heavily relied on customer segmentation, it went perfectly until the end, when the head of franchise management asked why they had not been consulted. They felt that the segmentation did not accurately reflect how their network viewed customers and their local markets. Despite showing that the segmentation covered the different markets, without consulting the division at the start, they viewed the strategy as driving up costs and complexity. Getting the segmentation back on track meant going back to store managers and workshopping their needs and views, then amending the segmentation to address internal political needs rather than customer needs.

Takeaway: Design for implementation from the start and engage stakeholders early and often.

Wrapping It Up

Market segmentation is a powerful tool for marketers. Providing a way to transform their business through deeper insights, more relevant products and communication, and prioritizing their focus.

But it’s also easy to get wrong.

By avoiding common pitfalls — poor design, weak alignment, unclear story, not addressing ROI, and implementation gaps — you can dramatically increase the chances of success.

Market segmentation creates a strategic asset for a business. When building out your next segmentation, approach it strategically, and you will also have a strategic asset.