A Quick Introduction to Market Segmentation

What is Market Segmentation?

Market segmentation is the process of splitting an overall market into two or more groups of related consumers, where each of these related consumer groups (known as market segments if correctly defined) are somewhat similar to each other in terms of their buying characteristics and/or product needs.

A good way of thinking about market segmentation is that we want to create smaller and more defined markets from the overall market. That is, end up with several mini-markets which have highly interrelated and similar needs, rather than one overall market with a broad range of needs.

Market Segmentation is a Step in an Overall Process

Market segmentation is a key component of the market segmentation, targeting and positioning process, usually referred to in marketing textbooks as the STP process.

Market segmentation is NOT implemented in isolation and is not an end in itself (other than for analytical and market insight purposes). This is because market segmentation is usually undertaken as the first step in the STP process.

In some marketing textbooks, the STP process is referred to at the STDP process, where the letters stand for:

• S = Segmentation of the consumers in the market into related groups to create market segments
• T = Target market selection = choosing the most appropriate segment for the company to pursue
• D = Differentiation of the product offering
• P = Positioning of the product offering

Please note that it is common for differentiation (D) to be part of positioning (P), but it is also sometimes listed as a separate component of the STDP process because it is critical to marketing success. However, most marketing textbooks will simply use the letters STP. Either way it refers to the same process.

The three phases of market segmentation, targeting and positioning are linked and are designed to be executed together and sequentially, as shown in the following diagram:

Market Segmentation is a Key Component of Marketing Strategy

Market segmentation is a critical and important component of developing any marketing program, because it is the stepping-stone to identifying and selecting target market/s for the firm. This is an important strategic decision which answers the question “where to compete?”

This is a key component of marketing strategy and helps the company focus upon selected market segments, rather than pursuing a mass-marketing strategy (which is typically not effective for most companies.)

On what Basis are Markets Segmented?

Market segmentation is a foundational step in the STP process (Segmentation, Targeting, and Positioning), where an overall market is divided into distinct groups of consumers with shared characteristics or needs. The goal is to identify and analyze these groups, or segments, to create targeted marketing strategies that better serve their specific requirements and maximize business outcomes.

These segments are constructed using segmentation bases, which describe consumers’ similarities across certain attributes. Here’s a detailed explanation of the main segmentation bases and their roles:

1. Demographic Segmentation

Definition: Dividing the market based on quantifiable population characteristics.
Common Variables:

• Age: Youth, Millennials, Baby Boomers.
• Gender: Male, Female, Non-binary.
• Income: High-income, middle-income, low-income groups.
• Education: High school, vocational, university graduates.
• Family Size/Stage: Singles, couples without children, families with kids, empty nesters.
• Occupation: Professionals, skilled trades, entry-level employees.
• Ethnicity/Religion: Cultural or faith-based segmentation.

Purpose:
Demographics are widely used because they are easy to measure and often directly influence consumer needs. For instance, a luxury car brand may target high-income professionals, while a budget snack company may focus on large families.

2. Geographic Segmentation

Definition: Grouping consumers based on their physical location or geographic boundaries.
Common Variables:

• Country/Region: International, national, or local segmentation.
• Urban vs. Rural: Consumer preferences often differ between urban centers and rural areas.
• Climate: Hot, temperate, or cold climates influencing product choices (e.g., winter clothing or air conditioners).
• Proximity: Coastal vs. inland preferences.

Purpose:
Geographic segmentation acknowledges that location significantly affects consumer preferences due to climate, culture, and regional trends. For example, ski equipment manufacturers would primarily target colder regions with high snowfall.

3. Psychographic Segmentation

Definition: Segmenting based on consumers’ lifestyles, values, attitudes, and interests.
Common Variables:

• Values: Sustainability-focused, family-oriented, or status-driven.
• Lifestyle: Active and sporty vs. laid-back and leisurely.
• Social Class: Upper class, middle class, lower class.
• Personality: Adventurous, introverted, ambitious.

Purpose:
Psychographics provide a deeper understanding of why consumers behave as they do. For example, a brand of organic products might target environmentally conscious consumers who value sustainability and ethical sourcing.

4. Behavioral Segmentation

Definition: Segmenting consumers based on their actions, habits, and patterns in the marketplace.
Common Variables:

• Usage Rate: Light, medium, or heavy users of a product.
• Occasions: Regular use, seasonal events, or special occasions.
• Brand Loyalty: Loyal customers vs. brand switchers.
• Price Sensitivity: Budget-conscious vs. value-seekers.
• Buying Stage: Ready-to-buy vs. information-gathering consumers.

Purpose:
Behavioral segmentation focuses on how consumers interact with products and services. For instance, airlines may offer frequent flyer programs for heavy users, while targeting occasional flyers with promotional discounts.

5. Benefit Segmentation

Definition: Grouping consumers based on the specific benefits they seek from a product or service.
Examples:

• Convenience: Time-saving solutions like ready-to-eat meals.
• Quality: High-performance products for professionals, like DSLR cameras.
• Status: Products signaling prestige, such as luxury watches.
• Cost-efficiency: Budget brands or private-label products.
• Health/Safety: Non-toxic, organic, or health-focused products.

Purpose:
Benefit segmentation allows marketers to address the core motivations driving purchase decisions. For example, toothpaste brands often segment markets by benefits like whitening, cavity protection, or sensitivity relief.

6. Hybrid Segmentation

Definition: Combining multiple segmentation bases to create more refined and actionable segments.
Examples:

• Geo-demographic Segmentation: Blending geographic and demographic data, such as young professionals in urban areas.
• Psycho-behavioral Segmentation: Combining psychographics with purchasing behavior, such as eco-conscious heavy users of sustainable products.

Purpose:
Hybrid segmentation recognizes the complexity of consumer behavior and integrates multiple variables for more precise targeting. For example, a fitness brand might target middle-income professionals (demographic) who are health-conscious (psychographic) and heavy gym-goers (behavioral).

Formal Definitions of Market Segmentation

It should be noted that the concept of market segmentation was first identified by Smith back in the 1950s. This academic was one of the first to recognize the importance of market segmentation, as shown in the following quote:

• “Market segmentation is based upon developments on the demand side of the market and represents a rational and more precise adjustment of product and marketing effort to consumer or user requirements.” (Smith, Journal of Marketing, Vol. 21, No. 1 Jul., 1956)

To clarify this statement in simple language, Smith saw market segmentation being an important tool to enable marketers to better meet customer needs.

Since that time, market segmentation has become a widely accepted and used marketing approach. Here are some  definitions of market segmentation:

• “Market segmentation is the process of splitting customers, or potential customers, in a market into different groups, or segments, within which customers share a similar level of interest in the same, or comparable, set of needs satisfied by a distinct marketing proposition” (McDonald & Dunbar, 2004)
• “Market segmentation involves aggregating prospective buyers into groups that (1) have common needs and (2) will respond similarly to a market action.” (Kerin, 2011)

Both of these definitions highlight that:

• market segmentation is designed to split customers into similar groups
• market segmentation is a step in the process of identifying and evaluating potential target markets
• marketing is improved by splitting the overall market into smaller, related groups of consumers

Here is another definition as developed by the Market Segmentation Study Guide:

• Market segmentation is the process of splitting a market into smaller groups with similar product needs or identifiable characteristics, for the purpose of selecting appropriate target markets. (Fripp 2023)