Is the process of dividing a market into different groups based on social class lifestyle or personality characteristics?

When it comes to marketing, there is a plethora of strategies companies employ to best present their product as the solution to consumer's needs. One of the most basic marketing tools is market segmentation, which allows companies to group off different kinds of consumers with varying needs, demographics or unique responses to products and better target their specific wants. 

So, what actually is market segmentation, and how does it work? 

What Is Market Segmentation?

As a marketing strategy, market segmentation is designed to help companies better market to groups that they will have the most success at meeting their needs. Market segmentation helps companies create a market mix that allows them to target their marketing campaigns to audiences that are more likely to need their product - and, potentially find under-served segments to branch out to. 

By more narrowly targeting their key markets, companies are able to be more efficient with their resources - including money and time - when mounting campaigns to draw new customers. 

Market Segmentation Definition

Market segmentation is the process of dividing prospective consumers into different groups depending on factors like demographics, behavior and various characteristics. Market segmentation helps companies better understand and market to specific groups of consumers that have similar interests, needs and habits.

In each market segment, there are typically three things that are common to all segments - homogeneity, distinctiveness and reaction.

In each individual group, the potential customers are generally homogeneous - meaning they are generally fairly similar in terms of their common needs. Additionally, the members of each individual grouping are distinct from the other groups - or, they are different in some ways than customers in other groupings. Lastly, consumers in each group have similar (or relatively similar) reactions to various marketing, advertising and products directed at their segment, and tend to perceive the full value of products differently than others in different groups. 

Factors of Market Segmentation 

What goes into the process of market segmentation? 

There are several factors that a company or business will need to examine during the market segmenting process - including how accessible the segments are and specific identification parameters.

For example, companies need to be able to clearly identify different segments of potential consumers. Additionally, the measurability of the segment's size is important to understand how best to plan a strategy, as is the segment's accessibility regarding promotional or marketing materials. 

Moreover, to support the strategy, the strategy must be appropriate for the resources of the particular company and in line with their policies. 

Types of Market Segmentation

But what types of market segmentation are there? How can companies divide their prospective markets? 

In general, there are four basic types of market segmentation (with some variation in them) - behavioral, demographic, psychographic and geographic. 

1. Behavioral

As the name may suggest, behavioral market segmentation is focused on how consumers interact with a product, or how much they know about a product. 

For example, behavioral segmentation could include what brands consumers are loyal to, how sensitive consumers are to certain prices, their usage or certain decision-making processes. Behavioral also includes occasion, engagement and life cycle. 

Behavioral marketing is often employed most during Christmas or holiday shopping seasons when consumer behavior is somewhat altered. 

2. Demographic

One of the major ways to segment the market is by demographics. Marketers often segment consumers into groups based on similar age, gender, family size, religion, nationality, income and education level. These are often helpful ways for businesses to better assess what might interest their prospective consumers and better target them based on more narrowed needs. 

An example of demographic market segmentation could be marketing a retirement service to older citizens. 

3. Psychographic

With psychographic segmentation, companies examine consumer's lifestyles, personality, interests, opinions, social class, habits and activities to better ascertain their needs. 

For example, a consumer who is very active with outdoor activities like camping, hiking and skiing would more likely be interested in tents, hiking boots and ski shoes than someone who spends lots of time reading indoors. In marketing, much of this information is procured through surveys or other data that give a company a better picture of a consumer's lifestyle and interests to better target their specific niches. 

4. Geographic

Geographic information about consumers can be very helpful (and even essential) to marketing to the right groups. Geographic market segmenting takes into account what country, region, city or area a potential consumer resides in. However, it may also encompass the density of a city, population, climate and language to help further group consumers. 

For example, marketing to Spanish-speaking consumers would be very different than marketing to English-speaking consumers. Or, a company selling heaters would likely need to know where their customers in colder climates were as opposed to those in warmer climates who may have less need of their product.

Market Segmentation Examples 

Here are some actual examples of market segmentation. 

One example of market segmentation in action is Victoria's Secret and their teenage-targeting brand PINK. Victoria's Secret primarily targets women, while their brand PINK is targeted more toward teenage girls and women. However, the brand has also long marketed itself to men - usually husbands or boyfriends of women who are looking to purchase gifts. Given the brand's pricing, Victoria's Secret also targets a relatively affluent segment with additional income to spend on lingerie or mid-price undergarments. 

Apple (AAPL) has made its fortune by segmenting the overall electronics market into primarily early adapters and affluent market segments. 

Another good example of market segmentation is the banking industry - like Wells Fargo (WFC) or JP Morgan Chase (JPM) . Both are large banks with a multitude of different products that require market segmentation to best market them individually. For example, JP Morgan Chase would not likely market 401(k)s or IRAs to college-aged customers - instead, banks may focus on a 30- to 40-year-old demographic, or even senior citizens. 

Additionally, certain food brands or grocery stores like Whole Foods typically segment their market into more health-conscious consumers who are willing to pay more for organic or naturally-sourced food products and groceries. 

While the list goes on, market segmentation may include multiple types of segmentation (like geographic or behavioral) and cover a wide variety of needs. 

Benefits of Market Segmentation 

While market segmentation is, in essence, essential to a business' success in focusing their resources on marketing to the right groups, there are several other benefits of market segmentation.

For one, market segmentation helps companies zero in their resources on areas where they have a better chance of success. Instead of marketing to an entire group of people in need of jackets, a sportswear company like Nike (NKE) could market to people in need of water-resistant running jackets - who would likely fall into a sporty, active lifestyle market segment. 

Another major benefit of market segmentation is its usefulness in helping companies narrow their message to be more unique for specific consumers. Instead of sending out generic, mass marketing messages or advertising, market segmentation allows companies to customize messages to niche audiences that are more likely to be in need of the specific product that company is offering. This can boost customer acquisition through advertising and keep costs lower. 

Market segmentation also helps companies identify underserved markets that may be able to help them expand into new territory - and grow their profits.

In fact, according to a 2008 study by Bain & Company, 81% of executives attributed market segmentation as an essential component to growing profits. 

Given its numerous advantages, market segmentation is a major marketing strategy used by the most successful companies. 

Market segmentation is a marketing term that refers to aggregating prospective buyers into groups or segments with common needs and who respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.

• Market segmentation seeks to identify targeted groups of consumers to tailor products and branding in a way that is attractive to the group.
• Markets can be segmented in several ways such as geographically, demographically, or behaviorally.
• Market segmentation helps companies minimize risk by figuring out which products are the most likely to earn a share of a target market and the best ways to market and deliver those products to the market.
• With risk minimized and clarity about the marketing and delivery of a product heightened, a company can then focus its resources on efforts likely to be the most profitable.
• Market segmentation can also increase a company's demographic reach and may help the company discover products or services they hadn't previously considered.

Companies can generally use three criteria to identify different market segments:

1. Homogeneity, or common needs within a segment
2. Distinction, or being unique from other groups
3. Reaction, or a similar response to the market

For example, an athletic footwear company might have market segments for basketball players and long-distance runners. As distinct groups, basketball players and long-distance runners respond to very different advertisements. Understanding these different market segments enables the athletic footwear company to market its branding appropriately.

Market segmentation is an extension of market research that seeks to identify targeted groups of consumers to tailor products and branding in a way that is attractive to the group. The objective of market segmentation is to minimize risk by determining which products have the best chances of gaining a share of a target market and determining the best way to deliver the products to the market. This allows the company to increase its overall efficiency by focusing limited resources on efforts that produce the best return on investment (ROI).

Market segmentation allows a company to increase its overall efficiency by focusing limited resources on efforts that produce the best return on investment (ROI).

There are four primary types of market segmentation. However, one type can usually be split into an individual segment and an organization segment. Therefore, below are five common types of market segmentation.

Demographic segmentation is one of the simple, common methods of market segmentation. It involves breaking the market into customer demographics as age, income, gender, race, education, or occupation. This market segmentation strategy assumes that individuals with similar demographics will have similar needs.

Example: The market segmentation strategy for a new video game console may reveal that most users are young males with disposable income.

Firmographic segmentation is the same concept as demographic segmentation. However, instead of analyzing individuals, this strategy looks at organizations and looks at a company's number of employees, number of customers, number of offices, or annual revenue.

Example: A corporate software provider may approach a multinational firm with a more diverse, customizable suite while approaching smaller companies with a fixed fee, more simple product.

Geographic segmentation is technically a subset of demographic segmentation. This approach groups customers by physical location, assuming that people within a given geographical area may have similar needs. This strategy is more useful for larger companies seeking to expand into different branches, offices, or locations.

Example: A clothing retailer may display more raingear in their Pacific Northwest locations compared to their Southwest locations.

Behavioral segmentation relies heavily on market data, consumer actions, and decision-making patterns of customers. This approach groups consumers based on how they have previously interacted with markets and products. This approach assumes that consumers prior spending habits are an indicator of what they may buy in the future, though spending habits may change over time or in response to global events.

Example: Millennial consumers traditionally buy more craft beer, while older generations are traditionally more likely to buy national brands.

Often the most difficult market segmentation approach, psychographic segmentation strives to classify consumers based on their lifestyle, personality, opinions, and interests. This may be more difficult to achieve, as these traits (1) may change easily and (2) may not have readily available objective data. However, this approach may yield strongest market segment results as it groups individuals based on intrinsic motivators as opposed to external data points.

Example: A fitness apparel company may target individuals based on their interest in playing or watching a variety of sports.

Other less notable examples of types of segmentation include volume (i.e. how much a consumer spends), use-related (i.e. how loyal a customer is), or other customer traits (i.e. how innovative or risk-favorable a customer is).

There's no single universally accepted way to perform market segmentation. To determine your market segments, it's common for companies to ask themselves the following questions along their market segmentation journey.

Phase I: Setting Expectations/Objectives

• What is the purpose or goal of performing market segmentation?
• What does the company hope to find out by performing marketing segmentation?
• Does the company have any expectations on what market segments may exist?

Phase 2: Identify Customer Segments

• What segments are the company's competitors selling to?
• What publicly available information (i.e. U.S. Census Bureau data) is relevant and available to our market?
• What data do we want to collect, and how can we collect it?
• Which of the five types of market segments do we want to segment by?

Phase 3: Evaluate Potential Segments

• What risks are there that our data is not representative of the true market segments?
• Why should we choose to cater to one type of customer over another?
• What is the long-term repercussion of choosing one market segment over another?
• What is the company's ideal customer profile, and which segments best overlap with this "perfect customer"?

Phase 4: Develop Segment Strategy

• How can the company test its assumptions on a sample test market?
• What defines a successful marketing segment strategy?
• How can the company measure whether the strategy is working?

Phase 5: Launch and Monitor

• Who are key stakeholders that can provide feedback after the market segmentation strategy has been unveiled?
• What barriers to execution exist, and how can they can be overcome?
• How should the launch of the marketing campaign be communicated internally?

Marketing segmentation takes effort and resources to implement. However, successful marketing segmentation campaigns can increase the long-term profitability and health of a company. Several benefits of market segmentation include;

• Increased resource efficiency. Marketing segmentation allows management to focus on certain demographics or customers. Instead of trying to promote products to the entire market, marketing segmentation allows a focused, precise approach that often costs less compared to a broad reach approach.
• Stronger brand image. Marketing segment forces management to consider how it wants to be perceived by a specific group of people. Once the market segment is identified, management must then consider what message to craft. Because this message is directed at a target audience, a company's branding and messaging is more likely to be very intentional. This may also have an indirect effect of causing better customer experiences with the company.
• Greater potential for brand loyalty. Marketing segmentation increases the opportunity for consumers to build long-term relationships with a company. More direct, personal marketing approaches may resonate with customers and foster a sense of inclusion, community, and a sense of belonging. In addition, market segmentation increases the probability that you land the right client that fits your product line and demographic.
• Stronger market differentiation. Market segmentation gives a company the opportunity to pinpoint the exact message they way to convey to the market and to competitors. This can also help create product differentiation by communicating specifically how a company is different from its competitors. Instead of a broad approach to marketing, management crafts a specific image that is more likely to be memorable and specific.
• Better targeted digital advertising. Marketing segmentation enables a company to perform better targeted advertising strategies. This includes marketing plans that direct effort towards specific ages, locations, or habits via social media.
  

Market segmentation exists outside of business. There has been extensive research using market segmentation strategies to promote overcoming COVID-19 vaccination hesitancy and other health initiatives.

The benefits above can't be achieved with some potential downsides. Here are some disadvantages to consider when considering implementing market segmentation strategies.

• Higher upfront marketing expenses. Marketing segmentation has the long-term goal of being efficient. However, to capture this efficiency, companies must often spend resources upfront to gain the insight, data, and research into their customer base and the broad markets.
• Increased product line complexity. Marketing segmentation takes a large market and attempts to break it into more specific, manageable pieces. This has the downside risk of creating an overly complex, fractionalized product line that focuses too deeply on catering to specific market segments. Instead of a company having a cohesive product line, a company's marketing mix may become too confusing and inconsistently communicate its overall brand.
• Greater risk of misassumptions. Market segmentation is rooted in the assumption that similar demographics will share common needs. This may not always be the case. By grouping a population together with the belief that they share common traits, a company may risk misidentifying the needs, values, or motivations within individuals of a given population.
• Higher reliance on reliable data. Market segmentation is only as strong as the underlying data that support the claims that are made. This means being mindful of what sources are used to pull in data. This also means being conscious of changing trends and when market segments may have shifted from prior studies.

Market segmentation is evident in the products, marketing, and advertising that people use every day. Auto manufacturers thrive on their ability to identify market segments correctly and create products and advertising campaigns that appeal to those segments.

Cereal producers market actively to three or four market segments at a time, pushing traditional brands that appeal to older consumers and healthy brands to health-conscious consumers, while building brand loyalty among the youngest consumers by tying their products to, say, popular children's movie themes.

A sports-shoe manufacturer might define several market segments that include elite athletes, frequent gym-goers, fashion-conscious women, and middle-aged men who want quality and comfort in their shoes. In all cases, the manufacturer's marketing intelligence about each segment enables it to develop and advertise products with a high appeal more efficiently than trying to appeal to the broader masses.

Market segmentation is a marketing strategy in which select groups of consumers are identified so that certain products or product lines can be presented to them in a way that appeals to their interests.

Market segmentation realizes that not all customers have the same interests, purchasing power, or consumer needs. Instead of catering to all prospective clients broadly, market segmentation is important because it strives to make a company's marketing endeavors more strategic and refined. By developing specific plans for specific products with target audiences in mind, a company can increase its chances of generating sales and being more efficient with resources.

Types of segmentation include homogeneity, which looks at a segment's common needs, distinction, which looks at how the particular group stands apart from others, and reaction, or how certain groups respond to the market.

Strategies include targeting a group by location, by demographics—such as age or gender—by social class or lifestyle, or behaviorally—such as by use or response.

Upon analysis of its target audience and desired brand image, Crypto.com entered into an agreement with Matt Damon to promote their platform and cryptocurrency investing. With backdrops of space exploration and historical feats of innovation, Crypto.com's market segmentation targeted younger, bolder, more risk-accepting individuals.

Market segmentation is a process companies use to break their potential customers into different sections. This allows the company to allocate the appropriate resource to each individual segment which allows for more accurate targeting across a variety of marketing campaigns.