Understanding Markets

1. Introduction

Effective market segmentation relies on identifying and understanding the overall market, its sub-markets, and then the consumer segments within those sub-markets. By clearly delineating each level of the market, you avoid the common pitfall of inadvertently defining segments by product category rather than by the characteristics and needs of consumer groups.

Below, we’ll discuss the core differences between market, sub-market, and market segment, why these distinctions are vital to a sound segmentation process, and how you can apply them across various industries.

2. Why Understanding Markets Matters

Strategic Clarity: Before diving into segmentation, you need a firm grasp of which broad market you’re serving. This ensures all analyses and strategies (e.g., identifying consumer needs, evaluating competitors) are built on a consistent scope.
Proper Segmentation: Defining consumer segments within a sub-market—rather than simply labeling “product-based segments”—keeps the focus on what consumers want rather than on how many products or services a firm offers.
Better Targeting and Positioning: By seeing how sub-markets differ, you can tailor marketing mixes and distribution strategies for each sub-market (e.g., credit cards vs. home loans) and then further refine strategies for consumer subgroups within those sub-markets.

3. Distinguishing Markets, Sub-Markets, and Market Segments

3.1 Market

A market is the broad space in which a firm competes. For instance:

Banking market: Encompasses all services such as loans, deposits, credit cards, savings, investments.
Automotive market: Includes all vehicle offerings (cars, SUVs, trucks, electric vehicles, hybrids) plus potentially adjacent mobility offerings.
Cosmetics market: Spans makeup, skincare, fragrances, haircare, etc.
Food and beverage market: Covers all categories like snacks, soft drinks, water, dairy, convenience foods.

Defining this overall market ensures everyone in the firm recognizes the scope of current and potential offerings.

3.2 Sub-Market

Within a broad market, sub-markets focus on product-specific (or service-specific) categories, typically around a narrower area where products or services fulfill a particular type of need. Examples:

Banking:
- Credit cards
- Home loans
- Savings accounts
- Wealth management
Automotive:
- New passenger cars
- Pre-owned vehicles
- Electric/hybrid vehicles
- Commercial fleets
Food and beverage:
- Soft drinks
- Bottled water
- Snacks (chips, cookies, etc.)
- Dairy products

While all sub-markets share the overarching domain of “banking,” “automotive,” or “food & beverage,” each sub-market has unique operational or consumer characteristics. For instance, the credit card sub-market might have distribution channels like direct mail or co-branding with department stores—channels that home loans or wealth management might not use effectively.

3.3 Market Segment

A market segment is a group of consumers (not products) within a sub-market who share similar needs or traits. For example, in the credit card sub-market:

High-income social class: Might want premium perks (airport lounge access, travel insurance).
Young professionals: Value sign-up bonuses or low introductory rates.
Frequent travelers: Seek airline miles or global acceptance.

Each of these is a consumer segment with fairly distinct drivers, usage habits, or motivations for choosing a credit card. Critically, these segments are not just “gold card” vs. “silver card”; rather, they represent consumer groups.

The best way to explain the differences is through a simple example, as shown below:

As shown in the diagram, the overall market of interest is the banking market. This overall market could be easily categorized into a number of sub-markets. Then, using the credit card sub-market as a further example, this smaller market could then be segmented using a variety of segmentation bases (or variables).

In this example, the psychographic segmentation base of social class has been applied (but other segmentation bases could also be effectively utilized). (Remember that the main purpose of this diagram is to outline the distinction between markets, sub-markets and market segments.)

As highlighted in the definition above, sub-markets usually have some unique market aspects. For example, in the credit card sub-market, there are some large specialist competitors, such as American Express and Diners’ Club. These are significant players in this sub-market, but do not tend to significantly compete in the broader banking market. Credit cards are often successfully sold via direct mail, direct response TV advertising, in shopping center intercepts (direct selling), and through retail store partners (such as department stores).

It would be quite unusual for the other banking sub-markets (such as home loans) to effectively use these particular distribution channels or promotional techniques.

4. Mistaking Sub-Markets for Segments

4.1 The Common Error

A frequent mistake in segmentation is to define segments based on sub-markets or product categories alone. For example, a bank might erroneously treat “credit card holders” as a “segment.” But “credit card holders” is actually a sub-market—within it, you can find a variety of consumer segments with different lifestyles, spending levels, and brand loyalties.

Similarly, an automotive firm might call “SUV buyers” a segment. But if the firm lumps all SUV buyers together, it misses crucial differences: some families want a safe, spacious SUV for carpooling, while others want a luxury SUV for prestige.

4.2 Consequences of This Mistake

Poor Targeting: Marketing strategies become broad and less effective.
Missed Opportunities: Overlooking smaller but lucrative consumer groups within that sub-market.
Inaccurate Positioning: Failing to highlight the product attributes that truly matter to certain sub-segments.

This distinction underscores the importance of focusing on consumer needs or behaviors as the basis for segmentation. Sub-markets may define a narrower product space, but segments describe who is buying and why.

5. Other Industry Examples

5.1 Automotive

Overall Market: Automotive
Sub-Markets:
- Passenger cars
- Electric/hybrid
- Luxury vehicles
- Commercial vans/trucks
Segments Within Electric/Hybrid:
- Eco-enthusiasts: Motivated by environmental concerns; might have solar panels at home.
- Tech-savvy early adopters: Drawn to in-car technology, sleek design, Tesla-like brand prestige.
- Cost-focused: View electric as an economical choice for lower fuel/maintenance costs.

Again, each sub-market (e.g., electric/hybrid) can contain diverse clusters of consumers with unique motivations.

5.2 Food and Beverage

Overall Market: Food & Beverage
Sub-Markets:
- Soft drinks
- Bottled water
- Snacks
- Dairy
- Plant-based alternatives
Segments in Soft Drinks:
- Cola loyalists: Love classic, sweet cola taste, high brand loyalty.
- Health-conscious: Seek low or zero-sugar variants, possibly organic or “clean label.”
- Flavor explorers: Interested in new, exotic flavors, seasonal limited editions.
- Budget-driven: Purchase store-brand or discounted options.

Each of these consumer segments is different. Labeling them only as “cola,” “diet cola,” or “flavored soda” sub-markets misses consumer-based distinctions that drive purchase decisions.

5.3 Cosmetics

Overall Market: Cosmetics/Beauty Products
Sub-Markets:
- Skincare (moisturizers, serums, cleansers)
- Makeup (lipsticks, foundations, eyeshadows)
- Fragrances
- Haircare (shampoo, hair treatments)
Segments in Makeup:
- Budget-conscious: Often buy drugstore brands, influenced by promotions.
- Beauty enthusiasts: Follow makeup tutorials, frequent new product launches, brand-savvy.
- Sensitive skin: Seek hypoallergenic, dermatologist-approved formulas.
- Ethical/natural: Prefer cruelty-free, organic, “clean” brand messaging.

Here again, sub-market = “makeup,” but actual consumer segments revolve around usage patterns, brand perceptions, or needs.

6. Why Sub-Market Differences Matter

6.1 Unique Competitors and Distribution Channels

Each sub-market often has specialist players who may not exist in other sub-markets. For instance, within the credit card sub-market, American Express is a significant competitor but does not necessarily compete in the “home loan” or “savings account” space. This influences how each sub-market is marketed:

Credit cards might use direct mail, partnering with department stores.
Home loans might rely on real estate brokers, financial advisors.

Recognizing that distribution channels and promotional tactics differ underscores the importance of sub-market definitions.

6.2 Different Consumer Journeys

In the home loan sub-market, consumers might do weeks of research, compare interest rates, and speak with brokers. In credit cards, many consumers respond to direct mail offers or sign up instantly at a retail store checkout line. Since the consumer decision process varies widely, a bank’s marketing approach must adapt to each sub-market’s unique consumer journey.

7. Identifying Consumer Groups vs. Products

7.1 Focusing on Consumer Needs

A hallmark of effective segmentation is focusing on consumer needs. Instead of saying:

“We have a platinum card and a gold card, so that’s two segments,”

the marketer should investigate:

What kind of consumer wants a high-fee, high-reward premium card? What kind of consumer wants a no-fee, basic card?

So the segmentation revolves around the motivations, usage habits, or financial behaviors that lead certain consumers to prefer one card type over another.

7.2 Sub-Markets Are Not the End

Remember, a sub-market’s name or label (like “credit cards”) is a product-based classification. Within that sub-market, you can discover multiple targetable consumer segments. Failing to dig deeper leaves money on the table—some subgroups might require specialized features or a different marketing pitch.

7.3 Example from E-Commerce

In an e-commerce company selling footwear, you might define sub-markets like “running shoes,” “dress shoes,” “casual sneakers,” etc. However, real segmentation emerges when you ask:

Who buys running shoes primarily for serious marathon training?
Who buys them for everyday comfort or style?
Who prioritizes brand reputation?
Who is mostly sensitive to price?

While “running shoes” is a product-based sub-market, the segments exist in how or why consumers choose those shoes.

8. Benefits of Clarifying Market, Sub-Market, and Segments

Consistency: Everyone in the organization shares the same vocabulary and strategic view.
Tailored Marketing Mix: You can adapt product features, promotion channels, pricing, and distribution methods to each sub-market and consumer segment.
Competitive Advantage: Firms that recognize distinct consumer subgroups—rather than just distinct products—tend to craft more compelling value propositions.
Enhanced Innovation: By zeroing in on consumer needs within a sub-market, you’re more likely to develop new product features or service enhancements that resonate strongly.

9. Practical Tips for Marketers and Students

Start with the Overall Market: In your marketing plan, clearly state the broad industry/market. If it’s “banking,” define it. If it’s “fast-food,” define that scope.
List Sub-Markets: Break the main market into product-based categories that are usually recognized by the industry or consumer. For instance, under the “automotive” umbrella, specify “electric/hybrid,” “SUVs,” “luxury sedans,” etc.
Define Segments by Consumer Differences: Segment within sub-markets by consumer demographics, psychographics, behaviors, or usage contexts. Resist the temptation to label your product lines as segments—focus on the people behind the purchase.
Use Real Data or Research: If possible, gather market intelligence—like surveys, CRM data, or interviews—to confirm how consumers differ within a sub-market.
Check Distribution and Competitor Differences: See if each sub-market has unique channels or specialist competitors that might guide marketing efforts.
Evolve Over Time: Market boundaries shift (e.g., digital banking rises, or e-mobility transforms automotive). Update your classification of sub-markets and re-examine segment definitions periodically.

10. Key Take-aways

Understanding markets, sub-markets, and market segments is more than just an exercise in labels; it’s the crucial scaffold upon which an organization’s segmentation, targeting, and positioning efforts rest. As demonstrated, a market defines the broad playing field, sub-markets delineate specific product-based groupings, and market segments zero in on consumer clusters with shared motivations and behaviors within those sub-markets.

The banking case (with credit cards, home loans, etc.) shows how essential it is to differentiate product categories (sub-markets) from the actual consumer groups that marketers must target. This logic applies across industries—automotive, cosmetics, food and beverage, and beyond. When you clearly separate sub-markets from segments, you avoid the typical misstep of segmenting purely by product type, thus allowing you to home in on consumer needs and ensure marketing strategies resonate with the right audience.

In summary, effective marketing starts with a structured view:

Identify the overarching market scope.
Break it down into logical sub-markets.
Segment each sub-market around consumer differences.