Market Segmentation
ARD 206
Introduction
• In marketing, market segmentation is the process of dividing a broad consumer or
business market, normally consisting of existing and potential customers, into sub-groups
of consumers (known as segments) based on some type of shared characteristics.
• In dividing or segmenting markets, researchers typically look for common characteristics
such as shared needs, common interests, similar lifestyles, or even similar demographic
profiles. The overall aim of segmentation is to identify high yield segments – that is, those
segments that are likely to be the most profitable or that have growth potential – so that
these can be selected for special attention (i.e. become target markets). Many different
ways to segment a market have been identified. Business-to-business (B2B) sellers might
segment the market into different types of businesses or countries, while business-to-
consumer (B2C) sellers might segment the market into demographic segments, such as
lifestyle, behavior, or socioeconomic status.
Contd.
• Market segmentation assumes that different market segments require different
marketing programs – that is, different offers, prices, promotion, distribution, or some
combination of marketing variables. Market segmentation is not only designed to
identify the most profitable segments, but also to develop profiles of key segments in
order to better understand their needs and purchase motivations. Insights from
segmentation analysis are subsequently used to support marketing strategy
development and planning. Many marketers use the S-T-P approach; Segmentation
→ Targeting → Positioning to provide the framework for marketing planning
objectives. That is, a market is segmented, one or more segments are selected for
targeting, and products or services are positioned in a way that resonates with the
selected target market or markets.
Definition and brief explanation
• Market segmentation is the process of dividing up mass markets into groups with
similar needs and wants. The rationale for market segmentation is that in order to
achieve competitive advantage and superior performance, firms should:
1. Identify segments of industry demand,
2. Target specific segments of demand, and
3. Develop specific 'marketing mixes' for each targeted market segment.
From an economic perspective, segmentation is built on the assumption that
heterogeneity in demand allows for demand to be disaggregated into segments with
distinct demand functions.
History & Evolution
The business historian, Richard S. Tedlow, identifies four stages in the evolution of market segmentation:
1. Fragmentation (pre-1880s): The economy was characterized by small regional suppliers who sold goods on a
local or regional basis
2. Unification or mass marketing (1880s–1920s): As transportation systems improved, the economy became
unified. Standardized, branded goods were distributed at a national level. Manufacturers tended to insist on
strict standardization in order to achieve scale economies to penetrate markets in the early stages of a product's
lifecycle. e.g. the Model T Ford
3. Segmentation (1920s–1980s): As market size increased, manufacturers were able to produce different models
pitched at different quality points to meet the needs of various demographic and psychographic market
segments. This is the era of market differentiation based on demographic, socio-economic, and lifestyle factors.
4. Hyper-segmentation (post-1980s): a shift towards the definition of ever more narrow market segments.
Technological advancements, especially in the area of digital communications, allow marketers to communicate
with individual consumers or very small groups. This is sometimes known as one-to-one marketing.
• The practice of market segmentation emerged well before marketers thought about it at a
theoretical level. Archaeological evidence suggests that Bronze Age traders segmented trade
routes according to geographical circuits. Other evidence suggests that the practice of modern
market segmentation was developed incrementally from the 16th century onwards.
• Evidence of early marketing segmentation has also been noted elsewhere in Europe. A study of
the German book trade found examples of both product differentiation and market segmentation
in the 1820s. From the 1880s, German toy manufacturers were producing models of tin toys for
specific geographic markets; London omnibuses and ambulances destined for the British
market; French postal delivery vans for Continental Europe and American locomotives intended
for sale in America. Such activities suggest that basic forms of market segmentation have been
practiced since the 17th century and possibly earlier.
• Contemporary market segmentation emerged in the first decades of the twentieth century as
marketers responded to two pressing issues. Demographic and purchasing data were available
for groups but rarely for individuals and secondly, advertising and distribution channels were
available for groups, but rarely for single consumers.
Importance
• Unlocking new competitive advantages: Market segmentation can allow us to unlock competitive
advantages by introducing new markets for organizations to explore. Using the insights gained from this
method, we can identify untapped and growing markets but have low competition. High-growth and low
competition markets allow the organization to expand its customer base and eventually drive product
discovery.
• Improving the product development process: Through the use of market segmentation, organizations can
power their product development process. Uncovering new segments and discovering their needs allows
product teams to create products that satisfy that particular group’s pain points. In turn, specialized products
or services may have little competition – and if niche enough, they may have no competition at all.
• Optimizing campaign performance: Insights gained from market segmentation efforts can help marketing
teams create tailored messaging that strengthens campaign communications. Most importantly, market
segmentation insights allow teams to make more calculated decisions, reducing media spend and improving
the campaign’s cost-effectiveness.
Market segmentation strategy
• A key consideration for marketers is whether to segment or
not to segment. Depending on company philosophy,
resources, product type, or market characteristics, a business
may develop an undifferentiated approach or differentiated
approach. In an undifferentiated approach, the marketer
ignores segmentation and develops a product that meets the
needs of the largest number of buyers. In a differentiated
approach the firm targets one or more market segments, and
develops separate offers for each segment.
Main Strategic Approaches to Segmentation
Number of segments Segmentation strategy Comments
Zero Undifferentiated strategy Mass marketing: no segmentation
Niche marketing: focus efforts on a small,
One Focus strategy
tightly defined target market
Multiple niches: focus efforts on 2 or more,
Two or more Differentiated strategy
tightly defined targets
One-to-one marketing: customise the offer for
Thousands Hypersegmentation
each individual customer
Factors that are likely to affect a company's segmentation strategy
• Company resources: When resources are restricted, a concentrated strategy may be more effective.
• Product variability: For highly uniform products (such as sugar or steel) undifferentiated marketing may be
more appropriate. For products that can be differentiated, (such as cars) then either a differentiated or
concentrated approach is indicated.
• Product life cycle: For new products, one version may be used at the launch stage, but this may be
expanded to a more segmented approach over time. As more competitors enter the market, it may be
necessary to differentiate.
• Market characteristics: When all buyers have similar tastes or are unwilling to pay a premium for different
quality, then undifferentiated marketing is indicated.
• Competitive activity: When competitors apply differentiated or concentrated market segmentation, using
undifferentiated marketing may prove to be fatal. A company should consider whether it can use a different
market segmentation approach
S-T-P process (Segmenting, Targeting, Positioning)
• The process of segmenting the market is deceptively simple. Seven basic steps
describe the entire process including segmentation, targeting, and positioning.
• Segmentation comprises identifying the market to be segmented; identification,
selection, and application of bases to be used in that segmentation; and development
of profiles.
• Targeting comprises an evaluation of each segment's attractiveness and selection of
the segments to be targeted.
• Positioning comprises the identification of optimal position and development of the
marketing program.
Segmentation Research
• Market segmentation research is used to help a firm identify segments in a market,
with the end goal of developing different strategies and tactics for the different
segments .
• Segmentation research can be classified into 4 broad types of methodology:
1. Quantitative survey-based research
2. Research carried out on secondary data
3. Research carried out based on company databases
4. Qualitative research
1. Quantitative survey-based research: Survey-based research involves the collection
of data from a survey of people in the market of interest, and then using a
segmentation algorithm, such as k-means cluster analysis or latent class analysis, to
form segments. This is the main way that companies form market segments,
because/since this method is the most flexible and produces the most detailed
outputs, in that:
• Any form of data can be collected, such as demographics, behavior, attitudes, price
sensitivity, preferences, etc.
• As a byproduct, it can produce all the key bits of information that are required for the
implementation of the market segmentation (e.g., the size of the segments, the
differences between segments in their attitudes, media viewing, etc.)
2. Research carried out on secondary data: Secondary data is data that has already
been collected and is usually in the public domain. Most commonly this is data
collected by government statistical agencies, such as census data. Segmentations
based on secondary data tend to focus on demographics.
3. Research carried out based on company databases: Segmentation research
studies based on company databases tend to focus on behavioral data, such as
frequency and types of products purchased, customer value, and loyalty.
4. Qualitative research: The three most common qualitative research methods are
focus groups, in-depth interviews, and ethnography. The strength of qualitative
research is its ability to provide complex textual descriptions of how
people experience a given research issue. One advantage of qualitative methods in
exploratory research is that the use of open-ended questions and probing gives
participants the opportunity to respond in their own words. Researchers often use
qualitative and quantitative material to complement each other. The final qualitative
report containing descriptions and estimates of the sizes of the segments.
The table is an example of the end-
point of a basic segmentation study.
It describes four segments of
toothpaste buyers.
Identifying the market to be segmented
• The market for a given product or service known as the market potential or the total
addressable market (TAM). Given that this is the market to be segmented, the market
analyst should begin by identifying the size of the potential market. For existing products
and services, estimating the size and value of the market potential is relatively
straightforward. However, estimating the market potential can be very challenging when a
product or service is totally new to the market and no historical data on which to base
forecasts exists.
• A basic approach is to first assess the size of the broad population, then estimate the
percentage likely to use the product or service and finally to estimate the revenue potential.
• A more robust technique for estimating the market potential is known as the Bass
diffusion model
Bass diffusion model for identifying the market
N(t) – N(t−1) = [p + qN(t−1)/m] × [m – N(t−1)]
Where:
• N(t)= the number of adopters in the current time period, (t)
• N(t−1)= the number of adopters in the previous time period, (t-1)
• p = the coefficient of innovation
• q = the coefficient of imitation (the social contagion influence)
• m = an estimate of the number of eventual adopters
The major challenge with the Bass model is estimating the parameters for p and q. However, the Bass model has
been so widely used in empirical studies that the values of p and q for more than 50 consumer and industrial
categories have been determined and are widely published in tables. The average value for p is 0.037 and for q is
0.327.
Bases for segmenting consumer markets
• A major step in the segmentation process is the selection of a suitable
base. In this step, marketers are looking for a means of achieving
internal homogeneity (similarity within the segments), and external
heterogeneity (differences between segments). In other words, they are
searching for a process that minimises differences between members of
a segment and maximises differences between each segment.
• In reality, marketers can segment the market using any base or variable
provided that it is identifiable, substantial, responsive, actionable
and stable.
• Identifiability refers to the extent to which managers can identify or recognise distinct
groups within the marketplace.
• Substantiality refers to the extent to which a segment or group of customers represents a
sufficient size to be profitable. This could mean sufficiently large in number of people or in
purchasing power
• Accessibility refers to the extent to which marketers can reach the targeted segments with
promotional or distribution efforts
• Responsiveness refers to the extent to which consumers in a defined segment will respond
to marketing offers targeted at them
• Actionable – segments are said to be actionable when they provide guidance for marketing
decisions.
Major bases of Market Segmentation
Broadly 4 bases, but
sometimes it is extended
towards 5 or more
Segmentation base Brief explanation of base (and example) Typical segments examples
Young, Upwardly-mobile, Prosperous,
Quantifiable population characteristics. ( age, gender,
Professionals (YUPPY); Double Income No
Demographic income, education, socio-economic status, family size
Kids (DINKS); Greying, Leisured And Moneyed
or situation).
(GLAMS); Empty- nester, Full-nester
Physical location or region ( country, state, region, city, New Yorkers; Remote, outback Australians;
Geographic
suburb, postcode). Urbanites, Inner-city dwellers
Rural farmers, Urban professionals, 'sea-
Geo-demographic or Geoclusters Combination of geographic & demographic variables.
changers', 'tree-changers'
Lifestyle, social or personality characteristics. (typically Socially Aware; Traditionalists, Conservatives,
Psychographics
includes basic demographic descriptors) Active 'club-going' young professionals
Tech-savvy (aka tech-heads); Heavy users,
Purchasing, consumption or usage behaviour. ( Needs-
Enthusiasts; Early adopters, Opinion Leaders,
Behavioural based, benefit-sought, usage occasion, purchase
Luxury-seekers, Price-conscious, Quality-
frequency, customer loyalty, buyer readiness).
conscious, Time-poor
The same consumer changes in their attractiveness to Actively shopping, just entering into a life
marketers based on context and situation. This is change event, being physically in a certain
Contextual and situational
particularly used in digital targeting via programmatic location, or at a particular retailer which is
bidding approaches known from GPS data via smartphones.
Firmographic segmentation is the classification of Performance and annual revenue, Average
business-to-business customers based on shared sales cycle, Size and employee population
company or organization attributes. This practice can Ownership (public, private, government, etc.),
Firmographic Organizational trends
help guide marketing, advertising, and sales by
providing deeper business insights and ultimately lead
to more focused and effective campaign strategies.
Geographic segmentation
Geographic segmentation divides markets according to geographic criteria. In practice,
markets can be segmented as broadly as continents and as narrowly as neighborhoods
or postal codes. Typical geographic variables include:
• Country Brazil, Canada, China, France, Germany, India, Italy, Japan, UK, US
• Region North, North-west, Mid-west, South, Central
• Population density: central business district (CBD), urban, suburban, rural, regional
• City or town size: under 1,000; 1,000–5,000; 5,000–10,000 ... 1,000,000–3,000,000
and over 3,000,000
• Climatic zone: Mediterranean, Temperate, Sub-Tropical, Tropical, Polar
Demographic segmentation
Typical demographic variables and their descriptors are as follows:
• Age: Under 5, 5–8 years, 9–12 years, 13–17 years, 18–24, 25–29, 30–39, 40–49, 50–59, 60+
• Gender: Male, Female
• Occupation: Professional, self-employed, semi-professional, clerical/ admin, sales, trades, mining, primary producer, student,
home duties, unemployed, retired
• Socio-economic: A, B, C, D, E, or I, II, III, IV or V (normally divided into quintiles)
• Marital Status: Single, married, divorced, widowed
• Family Life-stage: Young single; Young married with no children; Young family with children under 5 years; Older married
with children; Older married with no children living at home, Older living alone
• Family size/ number of dependents: 0, 1–2, 3–4, 5+
• Income: Under $10,000; 10,000–20,000; 20,001–30,000 etc.
• Educational attainment: Primary school; Some secondary, Completed secondary, Some university, Degree; Post graduate or
higher degree
• Home ownership: Renting, Own home with mortgage, Home owned outright
• Ethnicity: Asian, African, Aboriginal, Polynesian, Melanesian, American Indian, etc.
• Religion: Catholic, Protestant, Muslim, Jewish, Buddhist, Hindu, Other
Psychographic segmentation
• Psychographic segmentation, which is sometimes called psychometric or lifestyle
segmentation, is measured by studying the activities, interests, and opinions (AIOs) of
customers. It considers how people spend their leisure, and which external influences
they are most responsive to and influenced by. Psychographics is a very widely used
basis for segmentation, because it enables marketers to identify tightly defined market
segments and better understand consumer motivations for product or brand choice.
• While many of these proprietary psychographic segmentation analyses are well-
known, the majority of studies based on psychographics are custom designed. That is,
the segments are developed for individual products at a specific time. One common
thread among psychographic segmentation studies is that they use quirky names to
describe the segments.
Behavioural segmentation
Typical behavioural variables and their descriptors include:
• Purchase/Usage Occasion: regular occasion, special occasion, festive occasion, gift-
giving
• Benefit-Sought: economy, quality, service level, convenience, access
• User Status: First-time user, Regular user, Non-user
• Usage Rate/Purchase Frequency: Light user, heavy user, moderate user
• Loyalty Status: Loyal, switcher, non-loyal, lapsed
• Buyer Readiness: Unaware, aware, intention to buy
• Attitude to Product or Service: Enthusiast, Indifferent, Hostile; Price Conscious,
Quality Conscious
• Adopter Status: Early adopter, late adopter, laggard
• Scanner data from super market or credit card information data.
Other bases
• Online customer segmentation
• Generational segmentation
• Cultural segmentation etc.
