Market Segmentation

The Purpose of Market Segmentation

To understand the purpose of market segmentation, let's first take a look at its definition.

The market is defined by the group of people who would potentially be interested in your products or services. They are people with wants, needs, and the ability and willingness to buy products and services.

The rule of thumb in segmentation is that the difference within groups (segments) should be low (e.g., consumers in a group should share similar characteristics), and the difference between groups should be high.

It is possible to segment consumer markets based on descriptive characteristics like demographics or geographic location. Another type of segmentation involves looking at a consumer group's different types of behavior. On the other hand, marketers might use micro and macro segmentation to segment business markets. This explanation will focus on segmenting consumer markets.

Target Market Segmentation

Figure 1 below shows the four different types of target market segmentation.

Fig. 1 - Types of Market Segmentation

Demographic Market Segmentation

One of the most popular types of market segmentation is demographic segmentation.

It is quite common for marketers to segment based on demographics, as demographic factors are often associated with the wants and needs of consumers. Demographic characteristics are also relatively easy to measure. For example, measuring someone's age is more straightforward than measuring their values.

Popular demographic variables used to segment markets are:

• Age: consumers' wants and needs change with their age.

• Income: segmenting based on income is popular for specific industries like cosmetics, automobiles, or financial services.

• Family size: family size also impacts the purchase decisions of customers.

• Gender: gender differentiation has been used by marketers for a long time regarding goods like clothing or cosmetics.

• Occupation: segmenting based on occupation divides the market into groups based on their job function or seniority. This form of segmentation is popular in business-to-business (B2B) markets, which try to sell their product or service by targeting individuals who have the authority to make purchase decisions for their business.

Geographic Market Segmentation

The following form of segmentation is geographic segmentation, which creates customer groups based on location.

Geographic segmentation can be a valuable tool for marketers, as certain customers from different parts of a country could have varying wants and needs. For example, people living in a country's rural areas might have different needs than those living in large cities. It is also possible that people living in different parts of the world will have distinct needs due to their country's climate.

Psychographic Market Segmentation

Psychographic market segmentation is a more complex form of segmentation as it involves examining specific customer traits.

Psychographic segmentation divides consumers into groups based on psychological and personality traits, values, or lifestyles. Sometimes people in the same demographic group can exhibit different psychographic characteristics. Psychographic segmentation considers the 'how' and 'what' people do in their lives. Psychographic segmentation is beneficial to organizations as it helps them understand consumers' thought processes.

Behavioral Market Segmentation

Finally, behavioral market segmentation involves creating subgroups based on consumer behavior.

Behavioral segmentation might include creating customer segments with similar knowledge of, attitudes toward, or usage of a product or service.

There are four ways a marketer might approach behavioral segmentation based on product attitudes:

• Occasions: we can separate groups of customers based on occasions. Do they use the products daily, weekly, monthly, yearly, etc.? Based on these occasions, we can understand when customers develop a need, purchase, and use a product. For example, air travel is influenced by occasions related to business or holidays.

• User status: here, consumers can be categorized into potential users, first-time users, regular users, ex-users, and non-users.

• Usage rate: we can segment customers into light, medium, or heavy users. As a business owner, you would most likely want to attract heavy users of your product or service.

• Loyalty: marketers can usually split their customer base into four different groups based on the loyalty factor:

  • Hardcore loyals stick to one brand only.

  • Split loyals are loyal to a few brands at a time.

  • Shifting loyals are those that change their loyalty from one brand to another.

  • Switchers are not loyal to any specific brand.

Benefits of Market Segmentation

Market segmentation is a handy marketing tool for businesses. Segmentation can guide companies in developing appropriate market strategies by gaining helpful insight into consumers.

Here are some of the main advantages of market segmentation.

• Better customer understanding,

• Insight into consumer behavior, buying habits, and purchase patterns,

• Allows organizations to understand consumer needs,

• Helps organizations create and strengthen brand loyalty,

• Helps organizations develop effective marketing campaigns to target specific groups of consumers,

• Allows organizations to form an appropriate marketing strategy,

• Leads to better insights that help organizations create effective forecasts and budgets,

• Helps organizations optimize their pricing and product features to attract more customers,

• Can lead to increased revenues and profitability.

Disadvantages of Market Segmentation

Although market segmentation has many advantages, it also has its set of disadvantages. Let's take a closer look.

The following are some of the primary disadvantages of market segmentation:

• Inaccuracy: If market research data is incorrect and the segments the marketer constructed are inaccurate, the marketer might not engage customers; thus, the segmentation process might bring considerable losses to the company.

• Expensive: It takes a lot of research to come up with appropriate customer segments. Although the company can conduct the research, it may also decide to hire external agencies to conduct the research, which can be costly.

• Waste of resources: The marketer might spend a lot of time creating different campaigns to target the various customer segments. The company wastes significant time and resources if segments are inaccurate or simply unengaged by the campaign.

Market Segmentation Process

Let's now examine the market segmentation process through an example.

Imagine you are a marketing manager at Coca-Cola. You interview some of your customers, talk to your sales team, and look at previous sales data. Based on this data, you find out that creating multiple customer segments would be most effective.

Fig. 2. Coca-Cola Segmentation Example

Demographically, you segment customers based on family size. You find that you can divide customers into different groups - individual buyers who tend to purchase small cans of Coca-Cola, smaller families who tend to buy large bottles of Coca-Cola, and larger families who tend to purchase family packs or value packs of Coca-Cola.

Psychographically, you segment your customers based on lifestyle. Here, you find that customers with busy lifestyles occasionally purchase Coca-Cola cans from an office vending machine as a quick caffeine boost during the day. You also notice that some customers purposefully go to the shop searching for Coca-Cola products.

Behaviourally, you segment your customers based on loyalty. Here you find that some hardcore loyals only drink Coca-Cola when it comes to soft drinks. You also notice that there are shifting loyal customers who used to drink Coca-Cola but now drink Pepsi. Finally, you can group some customers into the 'switchers' category - they are not loyal to any soft drink brand.

This information allows you to tailor your marketing strategy and communications efforts to suit the different customer segments.