Market Segmentation

Market segmentation is the first step in defining and selecting a target market to pursue. Basically, market segmentation is the process of splitting an overall market into two or more groups of consumers. Each group (or market segment) should be similar in terms of certain characteristics or product needs.

The concept of market segmentation was first identified by Smith back in the 1950s. He 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, 1956)

To clarify this statement in simple language, he basically 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 more recent definitions of what is 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. They also indicate that market segmentation is simply a step in the process of identifying and evaluating potential target markets, which is best achieved by breaking the overall market into smaller, related groups of consumers. Therefore, an alternate definition provided by this market segmentation study guide is:

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.

The division of a market into different homogeneous groups of consumers is known as market segmentation.

Rather than offer the same marketing mix to vastly different customers, market segmentation makes it possible for firms to tailor the marketing mix for specific target markets, thus better satisfying customer needs. Not all elements of the marketing mix are necessarily changed from one segment to the next. For example, in some cases only the promotional campaigns would differ.

A market segment should be:

• measurable
• accessible by communication and distribution channels
• different in its response to a marketing mix
• durable (not changing too quickly)
• substantial enough to be profitable

A market can be segmented by various bases, and industrial markets are segmented somewhat differently from consumer markets, as described below.

Consumer Market Segmentation

A basis for segmentation is a factor that varies among groups within a market, but that is consistent within groups. One can identify four primary bases on which to segment a consumer market:

• Geographic segmentation is based on regional variables such as region, climate, population density, and population growth rate.
• Demographic segmentation is based on variables such as age, gender, ethnicity, education, occupation, income, and family status.
• Psychographic segmentation is based on variables such as values, attitudes, and lifestyle.
• Behavioral segmentation is based on variables such as usage rate and patterns, price sensitivity, brand loyalty, and benefits sought.

The optimal bases on which to segment the market depend on the particular situation and are determined by marketing research, market trends, and managerial judgment.

Business Market Segmentation

While many of the consumer market segmentation bases can be applied to businesses and organizations, the different nature of business markets often leads to segmentation on the following bases:

• Customer type - based on factors such as the size of the organization, its industry, position in the value chain, etc.
• Geographic segmentation - based on regional variables such as customer concentration, regional industrial grown rate, and international macroeconomic factors.
• Buyer behavior - based on factors such as loyalty to suppliers, usage patterns, and order size

Profiling the SegmentsThe identified market segments are summarized by profiles, often given a descriptive name. From these profiles, the attractiveness of each segment can be evaluated and a target market segment selected.