Market Segmentation Explained for Dummies

What is market segmentation? 

Market segmentation is a marketing term that refers to the process applied by a business (for instance a company) to identify prospective customers and divide them into groups or segments based on factors like location and behaviour, as well as different characteristics such as age, income, and consumer preferences.  

Marketing analysts and businesses generally apply the following three criteria to identify different market segments because these criteria are typically considered common to all segments:  

• Homogeneity 

Homogeneity refers to the common needs within a group or segment. In a community, a homogenous society is regarded as a kind of society that has similar kinds of people.  

• Distinction 

Distinction, also known as distinctiveness, refers to the characteristics that set someone apart from others. Put differently, a distinction of a group implies being unique from other groups, meaning that customers from one group are different in some ways from customers in other groups or segments.  

• Reaction 

In marketing, reaction means that customers in each segment (group) have the same (or relatively the same) reactions to various marketing campaigns and advertising directed at their group, behaving in particular ways that are different from the reactions of customers in other groups. 

The process of market segmentation 

The goal of market segmentation can be described in different ways. For example: 

• To pursue and create value for the identified customers. 
• To develop detailed profiles of each market group. 
• To enable businesses or companies to better understand specific groups of consumers that have similar characteristics in order to improve the marketing methods of the companies.  

To achieve this goal, marketers apply a process which comprises three steps, namely, segmentation, targeting, and positioning. The process is commonly referred to as the STP process. 

The STP process is a key concept in the marketing industry, enabling firms to compete effectively and successfully in their industries.  

Although the letters STP refer to three fundamental steps or concepts in marketing, they essentially represent one integrated process, collaborating to create a high-level marketing strategy, which is then used by a company or business as its marketing mix to promote its brand, products, or services in the market.  

The marketing mix, also called the four Ps of marketing, refers to the four core elements of a marketing strategy, namely product, price, place, and promotion.  

• Segmentation, the first step in the STP process, splits a market into smaller groups of customers with similar product needs and subsequently identifies the characteristics of those customers. For instance, companies or businesses that manufacture high-value products can split customers into two categories: price-insensitive and price-sensitive, representing customers with probably less disposable income.  

During the segmentation step, a business asks the important question ‘What market are we competing in?’  

• Targeting 

The STP process enables a company to execute the second step to identify attractive and viable segments, which subsequently allows the company to improve its marketing strategy and to answer the question ‘Where to compete?’ 

This step is called targeting or target market selection, in which the company will determine the attractiveness of the particular segment, based on profitability, the strength of competitors, the size of the segment, and the ability of the company to serve the customers in the segment. 

The Market Segmentation Study Guide defines targeting as follows: ‘An organisation’s proactive selection of a suitable market segment (or segments) with the intention of heavily focusing the firm’s marketing offers and activities towards this group of related consumers.’ 

• Positioning 

Positioning, occasionally called product positioning, is the final step in the STP process. Positioning is defined by the Market Segmentation Study Guide as ‘the target market’s perception of the product’s key benefits and features, relative to the offerings of competitive products.’ 

This entails the creating of a value proposition for the firm that will appeal to the selected customer group in the selected target market. The key question to be answered in product positioning is ‘how to compete?’ 

Simply put, market researchers determine what products, prices, and promotions will attract and convince customers to buy the products of companies. 

Businesses communicate the value of a specific product to consumers via the design, distribution, and advertising of the product. 

For example, for price-sensitive customers, a company can create value by accentuating the efficiency and reliability of the given product.  

Types of market segmentation and examples 

There are various ways to segment markets. Marketing analysts are unanimous that there are four basic types of market segmentation: demographic, psychographic, behavioural, and geographic. Although, demographic segmentation can be divided into an individual segment and an organisation segment, which is called firmographic segmentation, making it five types of market segmentation. 

Demographic segmentation

Demographic segmentation is a simple and common type of market segmentation, albeit a very important one.  

Marketers and businesses typically split consumers into groups based on customer demographics such as age, gender, religion, family size, nationality, income, education level, marriage status, cultural background, and occupation, to name a few. 

One method to obtain these customer demographics is to use surveys in which different questions are asked. For example:  

• What is your age? 
• What is your highest level of education? 
• What is your marriage status? 
• How many members are there in your household? 
• What is your nationality? 
• Are you employed? 
• If employed, what is your monthly income? 

Demographic segmentation assumes that people with similar characteristics will have similar tastes, interests, needs, preferences, and lifestyle patterns that will influence their purchasing behaviour. 

Example: Demographic market segmentation could be marketing a new energy drink to young people or a retirement village to senior citizens. 

Firmographic segmentation

Firmographic segmentation is based on the same concept as demographic segmentation. However, this type of market segmentation focuses on organisations, instead of individuals. It is a marketing strategy that analyses a business such as a company, looking, inter alia, at the following demographics: 

• Location. 
• Number of employees. 
• Number of customers. 
• Characteristics of customers. 
• Annual turnover and net income. 
• Credit worthiness. 
• Organogram, indicating the structure of the company, relationships between management and employees, different departments, and offices. 

Example: A provider of accounting software may approach a large company with a more diverse and customisable software program, while smaller to medium companies may need a simpler product. 

Behavioural segmentation

Behavioural segmentation focuses on aspects such as: 

• The interaction of consumers with a certain product. 
• Decision-making patterns of customers. 
• Customers’ knowledge of a product. 
• Price sensitivity of customers. 

This strategy assumes that the spending habits of customers in the past, are indicators of what they may purchase in the future. However, spending habits may change over time due to global events or during particular seasons of the year, for example, Christmas or holidays. 

Example: People of different generations, for instance, generation X and the millennials (generation Y), may prefer different types of clothing or motor vehicles.  

Geographic segmentation 

Technically, geographic segmentation is a subdivision of demographic segmentation. This strategy is significantly useful for marketing to the right groups with similar needs, locations, and cultural backgrounds.  

This type of segmentation identifies the physical location of customers, for instance, what city, town, village, region, or area a possible customer resides in. In addition, the density of a city or area, the climate of a country, and language may also be included to allow further refinement of consumer groups.  

Geographic segmentation assumes that customers in a certain geographical area may have similar needs and preferences. 

Example: Marketing to customers in South America would be quite different from marketing to customers in Asia. Also, manufacturers of heaters will certainly sell more of their products in countries in Northern Europe compared to countries in Southern Europe.  

Psychographic segmentation

The aim of psychographic segmentation is to classify customers according to their lifestyles, interests, personalities, opinions, and activities to determine their needs. 

It is one of the most difficult types of market segmentation because these characteristics of customers may change quickly and easily. 

Much of this information is obtained through surveys or other data available, providing a business with a clearer picture of a consumer’s lifestyle and interests, and allowing the business to target specific niches in the market. 

Example: An outdoor enthusiast who regularly goes on a camping trip, would be more likely interested in camping gear such as tents, sleeping bags, camping stoves, and first aid kits than a bookworm who prefers to stay at home, spending lots of time reading.  

Some benefits of market segmentation 

The process of market segmentation takes time, effort, and resources (including financial resources) to implement. However, if executed efficiently and successfully, it is worth the energy, time and money spent on it. 

The various benefits of market segmentation, include, amongst others, the following: 

• In general, successful market segmentation can improve the long-term profitability and economic health of a business. 
• Market segmentation allows companies to focus on a specific group of consumers, instead of marketing a product to an entire market. Such a focused approach can reduce marketing costs and attract more customers. 
• It enables companies to identify undeveloped markets that may be able to help the companies to move into new territories and increase their profits. 
• Market segmentation enhances stronger product differentiation by specifically conveying a message that a given company’s products are different from those of its competitors.  
• It compels management to decide how it wants the be considered by a specific segment of people in a given market. When the market segment is identified, management has to decide how to create a brand which will directly speak to the company’s target audience. With the target audience as the focus point, a company’s branding and messaging is more likely to be significantly deliberate and purposeful. 
• Based on customer demographics, a company may offer different prices to different groups, which will enhance and maximise the profitability of the company.  
• Marketing segmentation allows customers to build long-term relationships with a given company. A more direct, personal marketing approach may evoke a sense of belonging and inclusion in customers.  
• It enables a business to execute improved targeted digital advertising. This strategy comprises plans that directly focus on specific ages, habits, or locations via social media. 

Disadvantages of market segmentation 

Although an important tool in the marketing process, market segmentation has also limitations. For example: 

• If the targeted segment is too small, a company will not generate the proper turnover which will eventually negatively affect the profit margins and the viability of the company. 
• There is a greater risk of misassumptions. This is possible because market segmentation assumes that similar demographics will share similar needs. However, this may not always be the case. 

People who are grouped with the understanding that they share common characteristics, may not necessarily have the same needs, values, or preferences.  

• Market segmentation entails considerable upfront market expenses. To achieve the long-term goal of being efficient, companies are required to spend financial resources upfront to gain insight and obtain data to achieve their long-term goal. 

Frequently Asked Questions

Why is market segmentation important for businesses?

Market segmentation helps businesses identify and target specific customer groups, allowing for more effective marketing strategies, improved customer satisfaction, and increased profitability.

What are the main types of market segmentation?

The four primary types of market segmentation are demographic, geographic, psychographic, and behavioral segmentation. Additionally, firmographic segmentation applies to businesses.

How does the STP process relate to market segmentation?

The STP (Segmentation, Targeting, Positioning) process is a strategic approach businesses use to identify market segments, choose the most viable ones, and position their products effectively to meet customer needs.