Nonprofits can and should adopt best practices borrowed from the for-profit sector when it can help them run a more efficient and productive organization. In fact, any business or operating practice that can cut costs and further stretch the operating budget should be taken seriously by nonprofits. One of these practices is that of market segmentation.
Market segmentation is the discipline of dividing your potential target audience or market into segments – or groups – for the purpose of designing marketing outreach efforts that hyper target each segment.
The result of a well-designed and executed market segmentation effort can lead to a much higher return on investment (ROI) for the organization’s marketing dollars, since campaigns targeted to reach segments most likely to convert will, on average, drive a much higher conversion rate for every dollar spent.
Executives of businesses and nonprofits may wonder if their market segmentation efforts should differ in any way from the segmentation efforts of for-profit companies. Here’s how to do market segmentation for nonprofits in 7 steps:
1. Identify your catchment area:
Depending on whether your organization is local, regional, national, or global, your business area will vary in size, scope, and location. It is important to start your segmentation efforts by measuring your sales area realistically. You can designate your shopping area in a number of ways, including using names of cities or major metropolitan areas, zip code lists, states / provinces, or even custom polygon shapes around each of your physical locations.
2. Determine if there are any disqualifications for your target market:
Next, it’s time to calculate the total market size within your trading area. This is usually best done at the household level. Start by calculating the total number of households, then subtract the total number of households that meet obvious exclusion criteria. For example, if your organization makes eco-friendly insulation kits for older homes, you might want to subtract from your target market size any homes that have been built in the past 10 years.
3. Find out what descriptive information you can about your existing stakeholders / customers and separate them into categories:
Now is the time to build a model of all your current or recent stakeholders (i.e. customers). The best way to do this is to add relevant data to each one. You can use a number of methods to do this, including adding demographic information (like marital status or income) or taking advantage of pre-existing market segmentation systems that take into account psychographic factors and others.
4. Divide your stakeholders into segments based on these categories:
At this point, it is important that you divide your stakeholders into segments based on different combinations of the categories you created in step 3. For example, a segment might include all households whose median household age is 45 to 50 years of age and have a median household income of $ 50,000 to $ 75,000. Maybe you will call this one segment A. Another segment could be the median age 45 to 50 with a median income of $ 75,000 to $ 90,000. Suppose you call this one Segment B, etc. (Note that if you had decided to take advantage of a pre-existing segmentation system, your stakeholders will already be conveniently divided into segments.)
5. Determine which segments have the highest index relative to the general population in your catchment area:
Now compare the percentage of households in each of your stakeholder segments with those of all households in the shopping area. For example, if 15% of your stakeholders belong to segment A but only 5% of the general population of your catchment area belong to that segment, you can say that segment A is indexed at 300 (15% / 5% x 100 = 300). Another way to put it is that segment A households are three times more likely to become your customers than any randomly selected household in your catchment area. This is valuable information to have! Now is the time to apply what you have learned to your marketing and advertising campaigns.
6. Design a campaign to target your best segments:
Isolate segments that have high index scores compared to households in your catchment area. These are your best segments. Chances are there are thousands or millions of potential stakeholders who belong to your best segments but who you are not currently doing business with. You need to locate these households and reach them with targeted marketing. You can buy targeted mailing lists or design TV, radio, newspaper, or online campaigns designed to reach areas with a high concentration of your best segments.
7. Create messaging and branding campaigns that speak the language of your best segments:
Finally, make sure the ads and other marketing materials you create reflect the motivations, interests, and habits of your best segments. Adapt the positioning statements, benefit statements, visual images and language you use in your campaigns to “speak” specifically to households in your best segments.
A smartly executed market segmentation effort will provide your nonprofit with a much higher marketing ROI by helping you focus your marketing investments on households that are 3-5 times or more likely to respond to your campaigns.