Market segmentation has been acknowledged as the “oldest marketing trick in the book”. But what exactly is it? Here’s our no-nonsense guide to market segmentation for SMEs.
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 are most relevant for your business.
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 types of market segmentation.
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.”
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.
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.
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? We’ve compiled a list of some of the benefits of market segmentation below:
- 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 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 – one of the biggest companies in the world uses market segmentation
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
|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|
|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|
|AspirerSucceeder Explorer||Aspirer Succeeder Explorer||Aspirer Explorer|
(2) Tesco & how they use market segmentation
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.
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|
|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|
|Benefits sought||Cost advantage, variety|
|User status||Active user|
(3) Coca-Cola : market segmentation on a global scale
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:
Market Segmentation: Our 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.
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