Market Segmentation

Market segmentation is a marketing term that refers to aggregating prospective buyers into
groups or segments with common needs and who respond similarly to a marketing action.
Market segmentation enables companies to target different categories of consumers who
perceive the full value of certain products and services differently from one another.
Market segmentation seeks to identify targeted groups of consumers to tailor products and
branding in a way that is attractive to the group.
Markets can be segmented in several ways such as geographically, demographically, or
behaviorally.
Market segmentation helps companies minimize risk by figuring out which products are the most
likely to earn a share of a target market and the best ways to market and deliver those products
to the market.
With risk minimized and clarity about the marketing and delivery of a product heightened, a
company can then focus its resources on efforts likely to be the most profitable.
Market segmentation can also increase a company's demographic reach and may help the
company discover products or services they hadn't previously considered.
• Understanding Market Segmentation
• Companies can generally use three criteria to identify different market segments:
• Homogeneity, or common needs within a segment
• Distinction, or being unique from other groups
• Reaction, or a similar response to the market
• For example, an athletic footwear company might have market segments for basketball players
and long-distance runners.
• As distinct groups, basketball players and long-distance runners respond to very different
advertisements.
• Understanding these different market segments enables the athletic footwear company to
market its branding appropriately.
• Market segmentation is an extension of market research that seeks to identify targeted groups
of consumers to tailor products and branding in a way that is attractive to the group.
• The objective of market segmentation is to minimize risk by determining which products have
the best chances of gaining a share of a target market and determining the best way to deliver
the products to the market.
• This allows the company to increase its overall efficiency by focusing limited resources on
• Types of Market Segmentation
• There are four primary types of market segmentation. However, one type can
usually be split into an individual segment and an organization segment.
Therefore, below are five common types of market segmentation.
• Demographic Segmentation
• Demographic segmentation is one of the simple, common methods of market
segmentation.
• It involves breaking the market into customer demographics as age, income,
gender, race, education, or occupation.
• This market segmentation strategy assumes that individuals with similar
demographics will have similar needs.
• Example: The market segmentation strategy for a new video game console may
reveal that most users are young males with disposable income.
• Firmographic Segmentation
• Firmographic segmentation is the same concept as demographic segmentation.
However, instead of analyzing individuals, this strategy looks at organizations and
looks at a company's number of employees, number of customers, number of
offices, or annual revenue.
• Example: A corporate software provider may approach a multinational firm with
a more diverse, customizable suite while approaching smaller companies with a
fixed fee, more simple product.
• Geographic Segmentation
• Geographic segmentation is technically a subset of demographic segmentation.
This approach groups customers by physical location, assuming that people
within a given geographical area may have similar needs.
• This strategy is more useful for larger companies seeking to expand into different
branches, offices, or locations.
• Example: A clothing retailer may display more raingear in their Pacific Northwest
• Behavioral Segmentation
• Behavioral segmentation relies heavily on market data, consumer actions, and decision-making
patterns of customers.
• This approach groups consumers based on how they have previously interacted with markets
and products.
• This approach assumes that consumer’s prior spending habits are an indicator of what they may
buy in the future, though spending habits may change over time or in response to global events.
• Example: Millennial consumers traditionally buy more craft beer, while older generations are
traditionally more likely to buy national brands.
• Psychographic Segmentation
• Often the most difficult market segmentation approach, psychographic segmentation strives to
classify consumers based on their lifestyle, personality, opinions, and interests.
• This may be more difficult to achieve, as these traits (1) may change easily and (2) may not have
readily available objective data.
• However, this approach may yield strongest market segment results as it groups individuals
based on intrinsic motivators as opposed to external data points.
• Example: A fitness apparel company may target individuals based on their interest in playing or
watching a variety of sports.
• How to Determine Your Market Segment
• There's no single universally accepted way to perform market segmentation. To
determine your market segments, it's common for companies to ask themselves the
following questions along their market segmentation journey.
• Phase I: Setting Expectations/Objectives
• What is the purpose or goal of performing market segmentation?
• What does the company hope to find out by performing marketing segmentation?
• Does the company have any expectations on what market segments may exist?
• exist?
• Phase 2: Identify Customer Segments
• What segments are the company's competitors selling to?
• What publicly available information (i.e. U.S. Census Bureau data) is relevant and
available to our market?
• What data do we want to collect, and how can we collect it?
• Which of the five types of market segments do we want to segment by?
• Phase 3: Evaluate Potential Segments
• What risks are there that our data is not representative of the true market segments?
• Why should we choose to cater to one type of customer over another?
• What is the long-term repercussion of choosing one market segment over another?
• What is the company's ideal customer profile, and which segments best overlap with
this "perfect customer"?
• Phase 4: Develop Segment Strategy
• How can the company test its assumptions on a sample test market?
• What defines a successful marketing segment strategy?
• How can the company measure whether the strategy is working?
• Phase 5: Launch and Monitor
• Who are key stakeholders that can provide feedback after the market segmentation
strategy has been unveiled?
• What barriers to execution exist, and how can they can be overcome?
• How should the launch of the marketing campaign be communicated internally?
• Benefits of Market Segmentation
• Marketing segmentation takes effort and resources to implement.
• However, successful marketing segmentation campaigns can increase the long-term profitability
and health of a company.
• Several benefits of market segmentation include;
• Increased resource efficiency.
• Marketing segmentation allows management to focus on certain demographics or customers.
• Instead of trying to promote products to the entire market, marketing segmentation allows a
focused, precise approach that often costs less compared to a broad reach approach.
• Stronger brand image.
• Marketing segment forces management to consider how it wants to be perceived by a specific
group of people.
• Once the market segment is identified, management must then consider what message to craft.
• Because this message is directed at a target audience, a company's branding and messaging is
more likely to be very intentional.
• This may also have an indirect effect of causing better customer experiences with the company.
• Greater potential for brand loyalty.
• Marketing segmentation increases the opportunity for consumers to build long-term
relationships with a company.
• More direct, personal marketing approaches may resonate with customers and foster a sense of
inclusion, community, and a sense of belonging.
• In addition, market segmentation increases the probability that you land the right client that fits
your product line and demographic.
• Stronger market differentiation.
• Market segmentation gives a company the opportunity to pinpoint the exact message they
convey to the market and to competitors.
• This can also help create product differentiation by communicating specifically how a company is
different from its competitors.
• Instead of a broad approach to marketing, management crafts a specific image that is more likely
to be memorable and specific.
• Better targeted digital advertising.
• Marketing segmentation enables a company to perform better targeted advertising strategies.
• This includes marketing plans that direct effort towards specific ages, locations, or habits via
social media.
• Limitations of Market Segmentation
• The benefits above can't be achieved with some potential downsides. Here are
some disadvantages to consider when considering implementing market
segmentation strategies.
• Higher upfront marketing expenses.
• Marketing segmentation has the long-term goal of being efficient.
• However, to capture this efficiency, companies must often spend resources
upfront to gain the insight, data, and research into their customer base and the
broad markets.
• Increased product line complexity.
• Marketing segmentation takes a large market and attempts to break it into more
specific, manageable pieces. This has the downside risk of creating an overly
complex, fractionalized product line that focuses too deeply on catering to
specific market segments.
• Instead of a company having a cohesive product line, a company's marketing mix
• Greater risk of misassumptions.
• Market segmentation is rooted in the assumption that similar demographics will
share common needs.
• This may not always be the case.
• By grouping a population together with the belief that they share common traits,
a company may risk misidentifying the needs, values, or motivations within
individuals of a given population.
• Higher reliance on reliable data.
• Market segmentation is only as strong as the underlying data that support the
claims that are made.
• This means being mindful of what sources are used to pull in data. This also
means being conscious of changing trends and when market segments may have
shifted from prior studies.