Sales & Marketing

Market segmentation 101: Everything you need to know

11 min read

14 December 2018

Market segmentation has been acknowledged as the “oldest marketing trick in the book”. But what exactly is it?

In order for a business to win over customers, it needs to consider numerous marketing strategies – one of which is market segmentation.

As the term suggests, much of it has to do with dividing a market into separate areas of focus.

What is market segmentation?

With the global population increasing and customer expectations and preferences becoming more defined, businesses are finding the need to tailor marketing for specific groups.

That’s where market segmentation comes in. At a basic level, it’s about determining who your marketing should target.

By creating subsets of a market based on, for example, demographics, you can find out which groups exist – and which ones to zone in on.

As Jerry Thomas, CEO of Decision Analyst, further explains: “The purpose of this is to concentrate marketing energy and force on that segment to gain a competitive advantage. It’s analogous to the military principle of ‘concentration of force’ to overwhelm an enemy.

“Concentration of marketing energy (or force) is the essence of all marketing strategy, and market segmentation is the conceptual tool to help achieve this focus.”

Types of market segmentation

While there are many markets to sort people into, businesses tend to initially go for these four.

(1) Demographic

This is the most common form of market segmentation because how much people are willing to spend is often based on demographic factors. These include age, income, education, gender, race, nationality and family size.

“Music streaming services tend to be targeted to the young, while hearing aids are targeted to the elderly,” Thomas suggests.

“Education levels often define market segments. For instance, private elementary schools might define their target market as highly educated households containing women of childbearing age.”

(2) Psychographic

Here, people are sorted by their beliefs, emotions, perceptions and interests. It sounds rather tricky, but you’ll gain far better insight into what makes customers tick.

As experts have lauded many times, a successful advertisement taps into a single emotion. This is how you find out which one to leverage.

“Qualitative research techniques (focus groups, depth interviews and ethnography) are invaluable,” Thomas reminds. You won’t find this knowledge through normal analysis.

(3) Behavioural

Behavioural segmentation taps into the way people respond to offerings, as well as their decision-making process. It looks at which occasions they’re more likely to spend and what they want out of the product or service.

For example, entrepreneurs would buy phones that come complete with work-related apps. You’ll also find out which customers switch products quickly – and which ones are more likely to stay.

This is perhaps the best starting point if you’re looking to go the market segmentation route.

(4) Geographic

If you’re looking to expand overseas or start a chain, then geographic segmentation will work wonders.

This will highlight the regional differences. More importantly, it will show you how to tailor your offering with a certain international group in mind.

“Several things including language and lifestyle can differ from one region to another,” says Thomas. “The size and style of one IKEA store in US can be different from another in Australia.

“People living in colder areas may have different needs than the ones living closer to the equator.”

Benefits of market segmentation

Aside from honing your marketing efforts, what can market segmentation do for your business?

  • Corporate focus – Market segmentation helps you define which customers to target. This, in turn, will help you create a better narrative and vision for the wider company.
  • Expansion advice – Most company ambitions involve growth. When you undertake geographic segmentation, you’ll know where to expand to, whether it’s abroad or within the UK.
  • Competitive advantage – When you’re vying for a specific audience, knowing how to capture their attention is key. It will increase brand loyalty and help you stand out from the crowd.
  • Better communication – When you know exactly who your customer is, you’ll be able to craft better content and create a message they can buy into.
  • Tapping into the customer lifecycle – Zoning in on a certain segment will allow you to tap into a customer lifecycle. Think of it this way: whenever one batch of customers moves out of your range, the next batch comes in. You’ll always have someone to target.

Drawbacks of market segmentation

Of course, it doesn’t come without drawbacks. Here are some factors to consider before making the leap.

  • Potentially higher costs – Market segmentation doesn’t necessarily limit you to one segment. You may want to tap into several of them. That means, however, creating different advertisements.
  • Becoming too niche – By relying on one or two segments, you could end up being excessively specialist. What happens, then, when your segment suddenly changes behaviour? Any investment made could become useless.
  • It’s easy to confuse the results – According to Thomas: “Segmentation studies are large and complicated, with enormous amounts of data. It’s easy to get lost and come up with confusing results which in turn will turn customers away.”

Market segmentation examples

There are numerous examples of companies using market segmentation.

Demographic segmentation is a mainstay of the car sector, with the likes of Audi and BMW targeting high-end buyers. When it comes to young people, Dove tends to pop up. Meanwhile, Blackberry and Samsung rely on behavioural segmentation.

But let’s take a look at what three famous companies tend to rely on.

(1) Apple

Apple positions itself as a premium brand, which offers extras and advanced features for additional costs. Its main audience is well-off and tech-savvy, willing to pay more for better design and functionality, while able to make use of products’ capabilities.

Demographics aside, Apple is also known for its use of psychographic segmentation.

John Dudovskiy of Research Methodology created an in-depth graph of its segmentation. Take a look:

 

Type of segmentation

 

Segmentation criteria

Apple  target customer segment
Devices: iPhone, iPad, Mac, iPod Services: iTunes and the iTunes Store, Mac App Store, iCloud, Apple Pay, Operating system & software: iOS, OSX, iLife, iWork Accessories: Apple TV, Apple Watch and related accessories
Geographic Region US and international US and international US and international US and international
Density Urban Urban Urban Urban
Demographic Age 20 – 45 18 – 30 20 – 35 20 – 45
Gender Males & Females Males & Females Males & Females Males & Females
Life-cycle stage Bachelor StageNewly Married Couples

Full Nest I

Full Nest II

Bachelor StageNewly Married Couples

 

Bachelor StageNewly Married Couples

 

Bachelor StageNewly Married Couples

Full Nest I

Full Nest II

Income High earners High earners High earners High earners
Occupation Professionals, managers and executives StudentsProfessionals, managers Professionals, managers and executives Professionals, managers
Behavioural Degree of loyalty ‘Hard core loyals’‘Switchers’ ‘Hard core loyals’‘Switchers’ ‘Hard core loyals’‘Switchers’ ‘Hard core loyals’‘Switchers’
Benefits sought Sense of achievement and belongingSelf-expression

Speed of service, advanced features and capabilities

Speed of serviceEfficiency EfficiencySpeed of service RecreationSelf-expression

 

Personality Determined and ambitious Determined and ambitious Determined and ambitious Determined and ambitious
User status Non-users, potential users UsersNon-users, potential users UsersNon-users, potential users Non-users, potential users
Psychographic Social class Middle and upper classes Middle and upper classes Middle and upper classes Upper class
Lifestyle[1] ResignedAspirer

Succeeder

Explorer

AspirerSucceeder Explorer Aspirer Succeeder Explorer Aspirer Explorer

(2) Tesco

The retail giant has a more diverse range of customers, highlighting that you don’t need to focus on one or two segments to garner success.

It does, however, rely on the income and age of customers – mostly lower and middle-class workers ranging from their teens and above – as well as family size. In contrast to Apple, Tesco has more cost-conscious customers.

The below graph comes from Research Methodology analysis.

 

Segmentation bases

Target customer segment for Tesco Technika 19-230 18.5 inch Widescreen HD Ready LCD TV

 Geographic Region UK, and 13 other countries
Density Rural and urban
     

Demographic

 

Age All age categories
Gender Males and females
Income Low and middle income category
Occupation Students, employees, professionals
Education High school, technical, Bachelors,
Social status Working class, skilled working class, lower middle class, middle class
Family size Single individuals, nuclear and extended families
Psychographic Lifestyle Traditionalists, contended conformers
Personality Easy-going, determined
   Behavioural Occasions Regular
Benefits sought Cost advantage, variety
User status Active user
Attitude Sceptical, positive

(3) Coca-Cola

Coca-Cola markets to numerous segments by delivering a variety of products, from Coke to Oasis.

Being global, Coke relies on geographic segmentation, offering specific products to specific areas alongside its overarching offerings.

Coke’s segmentation strategy was unveiled in a blog post:

Conclusion

Market segmentation is the stepping stone to not only a more targeted marketing strategy but company vision and tailored products as well.

It will help you understand your audience better – though you have to be careful not drive yourself into a corner or overextend your budget.