What is segmentation in marketing?

Market segmentation refers to the division of a market into different groups of customers with distinctly similar needs and product/service requirements. The variables used for segmentation include geographic, demographic, behavioural and psychographics. Let’s understand more about Market segmentation using definitions, explanations, and examples.

Related: STP process in Marketing

What is Market Segmentation?

Market segmentation is the process by which organizations/marketers try to divide its potential customers into smaller, homogeneous groups (Dibb, et al. 2012) based on factors such as, age, income, personality traits or behavior.

Segmentation is the process by which customers in market with some heterogeneity can be grouped into smaller, more similar or homogeneous segments. Market segmentation is therefore a group of individual, groups or organisations sharing similar product needs and buying characteristics.

Johnson (2014) defines a market segment as a group of customers who have similar needs that are different from customer needs in other parts of the market. Customer needs vary & that focusing on distinctive customer needs is one means of building a secure segment strategy. Where these customer groups are relatively small, such market segments are called ‘niches’.

Purpose of market segmentation

Marketers should segment their audiences in order to ensure that they are able to meet their needs. Mass marketing has been overtaken by a need to offer a personalised service and offering for consumers (Solomon, 2020).

• To leverage scarce resources.
• To ensure that elements of the marketing mix are designed to meet particular needs of different customer groups.
• Allows organisations to focus on specific customers needs, in most efficient and effective way.

Aim is to identify segments where:

• identifiable differences exist between segments (segment heterogeneity).
• similarities exist between members within each segment (members homogeneity).

Advantages of Segmentation

Market segments allow marketers to develop or service benefits that are appropriate for them. It help companies come up with better product, sales, and marketing strategies; these segments help companies advertise and sell their products more efficiently (Wood, 2017). Customizing marketing communications based on segmentation helps a company achieve better response rates and lower acquisition costs. Market segments also helps in creating appropriate products for different segments like men vs women or budget or premium product (for low income or high income).

Process of Market Segmentation

There are two main approaches to segmenting markets:

Breakdown Method: Adopts the view that the market is considered to consist of customers which are essentially the same, so the task is to identify groups which share particular differences.

Build-Up Method: Considers a market to consist of customers that are all different, so here the task is to find similarities.

Segmentation Bases/Criteria

Segmentation Variables

There are several segmentation variables that individual’s characteristics fall under, in order for businesses to segment effectively. These variables include demographic, geographic, and psychographic and behaviouristic. (Dibb, et al. 2012. p.216) states that “the variables chosen should relate to customers’ needs for, uses of or behaviour towards a product or service.

• Profile Criteria – Who my market are and where are they? (Demographic, Geographic, Socio-economic)
• Behavioural Criteria – Where, when, and how does my market behave? (Purchase/transaction, Consumption/usage, Media usage, Technology usage)
• Psychological Criteria – Why does my market behave that way? (Lifestyle, Personality, Perceptions, Attitudes, Motives, Benefits sought)

Demographic Segmentation: Age and Lifecycle, Life Stage, Gender, Income, Generation, Social Class.

Geodemographic: Combines demographic and geographic

See ACORN (developed by CACI)

Psychographic segmentation

Psychographic segmentation divides buyers into different groups on the basis of traits, lifestyles or values.

AIO factors that describe individual lifestyles: Activities, Interests, Opinions

The VALS system is a proprietary psychometric method that measures….predictive attitudes—in conjunction with behaviors and demographics—for developing countrywide typologies such as US VALS.

Behavioural segmentation: Needs and benefits, Usage, Decision roles

Needs and benefits – Constellation Brands

Enthusiast, Image Seekers, Savvy Shoppers, Traditionalist, Satisfied Sippers, Overwhelmed

Behavioural Segmentation: usage

• Occasions – can trigger purchases at specific times
• User status – nonusers, ex-users, potential users, first-time users, and regular users
• Usage rate – light, medium, heavy.
• Buyer-readiness – some people are unaware of the product, some are aware, some are informed, some are interested, some desire the product, and some intend to buy
• Loyalty status – hard core loyals, split loyals, shifting loyals, switchers
• Attitude – enthusiastic, positive, indifferent, negative, and hostile. Eg political campaigns
• Multiple

Segment Profiling

Example of customer segment profile:

Geographic

• Region: UK, England, Wales, Scotland, Ireland
• City: Cities with a population of 0.2 to million, cities with a population of over 1 million
• Rural and semi-urban areas: Rural villages with a population of over 10,000; semi-urban areas: small towns with a population of between 20,000 and 50,000.

Demographic

• Age: Under 6 years, 6-11 years, 12-19 years, 20-34 years, 35-49 years, 50-60 years, 60 years
• Family Size: Young, single; young, married, no children; young, married, youngest child under 6; young, married, youngest child under 6 or over; Older, married, with children; older, married, no children under 18; older, single; other
• Gender: Male, female
• Income: Low (up to 20.000 p.a.), middle (20,001-60.000 p.a.), upper middle (60.001-100.000 p.a.) and high (above 100.000 p.a.)
• Occupation: Unskilled worker, skilled worker, petty traders, shop owners, businessman/industrialist, self-employed (professionals, clerical / salespersons, supervisory levels, officers/junior executives, middle/senior executives.
• Education: Illiterate, school up to 4 years, school between 5 and 9 years, non-graduate, undergraduate/postgraduate (general), graduate/postgraduate (professional)

Psychographic

• Socioeconomic Classification (SEC): A1, A2, Bl, B2, C, D, El E2
• Lifestyle: Culture-oriented, sports-oriented, outdoor-oriented
• Personality: Compulsive, gregarious, authoritarian, ambitious

Behavioral

• Occasions: Regular, special
• Benefits: Quality, service, economy, speed
• User status: Nonuser, ex-user, potential user, first-time user, regular user
• Usage rate: Light, medium, heavy Loyalty Status: None, medium, strong, absolute
• Readiness stage: Unaware, aware, informed, interested, desirous, intending to buy
• Attitude toward product: Enthusiastic, positive, indifferent, negative, hostile

Another term for psychographics is IAO variables (or AIO). IAO stands for interest, activities, and opinions. These are three major areas of psychographic research.

• Activities: Work, Hobbies, Social Events, Vacation, Entertainment, Club Membership, Community, Shopping, Sports
• Interests: Family, Home, Job, Community, Recreation, Fashion, Food, Media, Achievements
• Opinions: Themselves, Social Issues, Politics, Business, Economics, Education, Products, Future, Culture

VALS (Values attitude lifestyle) segments people into eight distinct types-or mindsets-using a specific set of psychological traits and key demographics that drive consumer behavior. Its one of the primary ways to perform psychographic segmentation.

VALS Types: Innovators, Thinkers, Believers, Achievers, Strivers, Experiencers, Makers, Survivors.

It’s common for businesses to make a profiling chart that lists the various variables of segmentation. The business can then analyze the various segments (geographic, demographic, behavioural, psychographic) to come up with better strategic marketing decisions.

Segment profiling can help a business develop its marketing mix activities to target a segment’s unique traits and preferences. Often, segment profiles form the basis on which an organization’s marketing programs are developed.

When planning to target a new segment, a business has to ensure that the new segment is:

Practical Considerations

Marketing is a constantly changing discipline, and positioning, despite its long history, can be considered a contemporary tool in strategic marketing (Ries & Trout, 2001, p. foreword). Most marketers face uncertainties as to how to achieve a clear and unique brand position in the mind of the consumers.

In the past, results of several segmentation studies were found to be disappointing as the segments derived from the study were not actionable from a marketing perspective. This was because the marketers failed to understand the competitive environment while designing segmentation studies (Young et al, 1978).

There are certain situations when Segmentation may not be useful. If the market itself for a product is very small, marketing to a portion of it is not going to be profitable. In some markets, heavy users make a large proportion of the sales volume, in which case they are the only relevant target for marketers. Giordano also needs to decide if it wants to adopt an undifferentiated or differentiated marketing strategy to sell its products.

References

• Dibb, S., Simkin, L., Pride, W.M. & Ferrell, O. (2012). Marketing concepts and strategies. 6th ed. Andover: Cengage Learning. Pg.212
• Wood, M. (2017). Essential guide to marketing planning. 4th ed. Pearson