Types of Market Segmentation
Target audience as big as thousands of people is rarely homogeneous. Clients differ by gender, age, lifestyle, frequency of purchases, etc. That is why a universal approach to promotion may not be effective. Dividing target audience by subgroups is a step towards customized offers, better targeted advertising campaigns and new product ideas.
What is market segmentation
Market segmentation is the division of consumers into groups according to some criteria (for example, gender, age, or place of residence).
Why do you need market segmentation
The main goal of audience segmentation is to increase profits, which is achieved by solving several problems:
- Developing business strategy. Target audience segmentation allows you to calculate market share and total revenue, and identify development areas.
- Selecting communication channels. Awareness of the target audience portrait allows you to choose better targeted advertising channels for brand promotion and optimize your marketing budget.
- Building communication with the audience. To attract the consumer’s attention, you need to know what triggers they respond to: their needs, preferences, sore spots, weaknesses, etc. That is why advertising communications most often emphasize the benefits of using the product, rather than its technical characteristics.
- Increasing customer loyalty by improving the product in accordance with people’s needs and preferences.
- Evading competition thanks to the exploration of unoccupied market segments.
Market segmentation stages
Market and client base segmentation involves several stages:
Stage 1. Preparation
Evaluate the product as seen by the client by answering 3 questions:
- What problem does the product solve?
- What does the client expect from the product?
- How does the client choose the product to solve the problem?
This way, you can identify significant features and requirements for the product, as well as find out the buying decision factors.
Stage 2. Data collection
There several data sources that could be used for audience segmentation:
- client base, data from the CRM system;
- web analytics systems;
- records of telephone conversations with clients;
- online surveys on the website and in social media;
- social media pages, thematic forums, websites for feedback sharing.
Stage 3. Data analysis
The data collected is analyzed in detail to identify behavior patterns, decision-making algorithms, etc.
Stage 4. Segmentation
Group consumers with similar behavior patterns. To do this, select a group of products and describe its characteristics and tasks. Then, based on the benefits from using the product, select criteria for forming a segment.
Stage 5. Target segment identification
Select the best targeted segments for your business among all the segments you’ve identified focusing on:
- feasibility of choosing this group of consumers;
- availability of sales channels;
- potential profit;
Stage 6. Marketing strategy development
Market segmentation will help you to interact with your target audience in a more purposeful way. You will be able to improve the product in accordance with the target audience requirements, develop personal offers for each segment, and select the most efficient marketing techniques.
Market segmentation criteria
There is no universal approach to market segmentation. Each company determines its own set of criteria for grouping the target audience.
The main criteria for identifying market segments are the following
- Demographic (gender, age, marital status, parental status)
- Social and economic (education, occupation, income)
- Geographic (city, region, country, language, climate)
- Psychographic (personality type, lifestyle, values)
- Behavioral (purchase frequency, brand loyalty)
- Life cycle stage (college graduation, marriage, starting a family)
- Generation theory (zoomers, millennials, generation X, baby boomers)
8 types of market segmentation
The market is divided into geographical units: a neighborhood, an urban district, a city, etc. A company may do business in one or several districts or in all at once, but it should take into account the different preferences of residents in different zones. For example, ice cream producers divide countries into regions based on average temperatures, and focus their marketing efforts on the hottest parts of the country.
- Region, country, city, district
- Population (residents of small, medium, and large towns and cities)
- Settlement status (cultural center, resort)
- Climate (temperature, air humidity)
- Probability of natural disasters (flood, earthquake, hurricane)
Demographics are the most popular audience segmentation factors, as they are easy to measure and can explain consumer behavior well.
So, for example, there are men’s and women’s clothing, cosmetics, and magazines. Even cigarette manufacturers launch separate product lines for women. Those products have a nice aroma and aesthetic packaging. With the growing number of female drivers, “female” car models started to appear.
Toys and baby goods manufacturers create separate products for children 0–6 months old, 6–12 months old, 1–3 years old, 3–6 years old, etc.
- Marital status
- Family size
- Parental status
- Religious beliefs
- Race and nationality
Social and economic segmentation
This type of segmentation is based on the consumers’ lifestyle, values and interests. It reflects the goals and motives behind the purchase. While behavioral segmentation tells us that women aged 25–35 buy bamboo fiber underwear, psychographic segmentation says that they do it because bamboo leaves a smaller carbon footprint.
- Personality type
- Views on innovation
- Opinion leaders and idols
- Attitude towards local producers
Behavioral segmentation is based on the buying decision process. For example, companies make different offers during the holidays and the rest of the year. This approach also factors in the brand perception. For instance, young people and athletes choose Jordan and Air Max sneakers, while the older generation prefers New Balance. Many companies adapted their products for those under lockdown orders during the pandemic: they launched home delivery and gave free access to entertainment content.
- Places of purchases
- Purchase frequency
- Benefits that clients receive
- Attitude towards the product
- Reasons for purchasing
- Product expectations
- Willingness to make a purchase
Firmographic segmentation (for B2B companies)
- Company size
- Number of in-house employees
- Number of branches and representative offices
- Network branching
- Form of ownership
- Form of management
- Intended use of goods
- Principle of use
- Product price
- Market influence
- Market positioning
- Product quality
- Preferred sales channels
- Marketing focus
Examples of market segmentation
Tesla car manufacturer case study
|Type of segmentation||Segmentation criteria||Tesla target customer segment|
|Geographic||Region Density||America, Europe, Asia Urban, Rural|
|Demographic||Gender Age Occupation Income||Most males and some female 30+ Employees, professionals, manager High|
|Psychographic||Social class Lifestyle||Middle and Upper class Environment friendly, Explorer, and Aspirer|
|Behavioral||Loyalty Benefits sought|
|Hard and Softcore loyal with some Switchers Environmentally friendly with long-term cost-effectiveness Determine and ambitious|
Adidas sportswear and footwear manufacturer case study
|Type of segmentation||Segmentation criteria||Adidas target customer segment|
|Geographic||Region Density||US and International Urban and Rural|
|Demographic||Gender Age Income||Males and Females 15–50 age group High|
|Psychographic||Social class Lifestyle||Upper-middle and Upper class Ambitious, resigned, succeeder, explorer, aspirer|
Benefits sought Personality
|Hardcore loyals, new users, potential users, switchers Comfort, quality, service, efficiency Determine and ambitious|
The resulting segments are tested for:
- Sustainability (the groups must remain unchanged for several years)
- Communication availability (the audience is available via one or more channels)
- Homogeneity (the clients are as similar to each other as possible within the segment, but are as different as possible from other segments)
- Profitability (purchasing power, frequency of purchases, transaction cycle)
- Competition (chances of winning the competition)
- Segment potential (segment stability in the long run, tendency for its reduction/growth)
- Segment feasibility (whether the company has the necessary resources and technologies to compete)
Common mistakes in market segmentation
- Breaking up the market into micro-segments. It is easier to tailor a product to meet the expectations of one large consumer group than ten small ones.
- Evaluating segments only by common distinctive features, without taking into account the purchasing power, audience’s interest in the product and demand. Regardless of the segment size, the consumers that are most interested in buying shall be considered first.
- Focusing on the segment image without considering the market dynamics. Lack of understanding that the market is constantly changing can play a trick on a marketing specialist.
- Not taking into account behavioral features in segmentation. Customers from different segments must behave differently, otherwise we will not be able to tailor the product to their needs.
- Not paying attention to the main goal, which is finding and attracting potential clients. Consumer groups are formed so as to attract relevant clients using different communication channels: offline, social media, marketplaces, landing pages, messengers.
- Not keeping in mind the real grounds for segmentation. If the goals are not clear, market segmentation turns into a useless ritual.
- Working with outdated data or using incorrectly collected information.
- Not conducting research to test hypotheses.
- Limiting to only general characteristics (gender, age, income).
Differences between B2C and B2B approaches to market segmentation
Client segmentation principles for B2C companies
- Who the customer is (demographics). The customer’s gender and age, education, occupation, marital status.
- Where the customer lives and comes from (geography). Country, town or city, district, and other significant geographic details, such as distance from the downtown.
- The customer’s likes and dislikes (psychography). The customer’s hobbies and values, social circle, lifestyle.
- Purchasing behavior (behavioral factor). If the customer buys a lot at once or goes shopping often but buys in small amounts, if they buy from local retailers or visit shopping malls, how often they experiment with shopping, if they follow experience or interest when shopping.
- Why the customer buys the product (what problem they solve). What bothers the customer, what would be the optimal product to solve the problem.
Client segmentation principles for B2B companies
- Where the company is located and operates (geography). Country, town/city, location specifics, logistics and communications.
- What the company does (type of activity and specifics). Production area and sales, ownership type, achievements, target audience, the values they promote.
- Business processes. Where it buys goods, who it sells them to, who its competitors are, what is its management strategy.
- Why it makes a purchase (what business problems it solves). Reasons for the client’s decreasing income, ways of optimization, sore spots.
12 market segmentation methods
A priori. Segmentation starts at the stage of research program development. The marketing specialist determines the target variable in advance for analysis in the context of other characteristics. One example is the study of the frequency of purchases in different demographic groups. The method is suitable for experienced researchers who already have an idea of possible segmentation criteria in a given market and can predict dependent variables.
A posteriori. Unlike the a priori method, the a posteriori method does not require the target variable to be specified in advance. Segmentation criteria are determined during data analysis (based on the online surveys and CRM system data). Segments are most often distinguished by demographic characteristics, consumer preferences and behavior. The task is to group consumers in such a way that would enable developing an optimal promotion strategy for each segment. The cluster analysis procedure is used to form segments.
Flexible. As part of the flexible approach, marketing specialists study consumer attitudes towards a proposed set of different product configurations. Flexible segmentation is based on a joint analysis procedure. The method allows you to analyze latent benefits and identify target consumer groups to launch a product. The disadvantages of the method include a complex implementation procedure and the susceptibility of the result to the product characteristics selected for analysis. In addition, the approach does not take into account the motives that underlie the choice of a particular product.
Psychographic (VALS). The method includes 8 psychographic client types based on common character traits:
- Innovators: active people with high self-esteem and developed sense of taste.
- Believers: supporters of the generally accepted points of view in the social, political, and religious aspects of society, they are guided by existing rules and well-known examples.
- Thinkers: intelligent people who value knowledge and want to learn as much as possible about the product.
- Achievers: active, goal-oriented, focused on success; purchases help them achieve their goals or highlight their status.
- Experiencers: energetic and creative people with a proactive attitude.
- Strivers: they try to always keep up with the people around them, follow the trends and make expensive purchases, even if they are short of money.
- Survivors: they buy only the things that they need most, count every penny, and the product price is their main selection criterion.
- Makers: they are similar to experiencers, but unlike them they do not seek new values and rely on the existing ones, aim at creation.
Business capability map. The technique allows you to determine the market segment a particular product focuses on, as well as to understand what product properties are demanded most in each of the segments. Data is collected through survey. First, a respondent is asked to assess the list of properties of an abstract product in terms of their importance when making a purchase decision. After that, one should evaluate how pronounced each of the previously listed properties is in a specific product model.
The result is two tables. In the first table, rows show the properties of an abstract product, the columns show consumer segments, and the cells show the average assessment of the property significance by each consumer segment. In the second table, the rows also contain the properties of the abstract product, the columns contain the models of a specific product, and the cells contain the degree of manifestation of the abstract property in this model.
Sherrington’s, or 5W’s method. To segment the audience using the 5W’s method, a marketing specialist should answer 5 questions about clients.
- Who? Who is your client?
- What? What does your client want to get?
- Why? What does the client need the product? What problems does the product help to solve?
- When? At what point does the client need the product?
- Where? Where do customers find your product?
Hunt’s Ladder method. The main idea of the method is that the client goes through 5 stages on the way to purchase.
Step 1. There is no problem. A person does not realize that they have a problem to be solved. Random information (in an article or a commercial) shows this problem.
Step 2. The problem is known. The person knows that there is a problem, but is not yet ready to take purposeful action to solve it.
Step 3. Comparison of opportunities. The person looks for ways to solve a problem, but not for specific products.
Step 4. Product selection. The person understands which product is best for solving their problem and is comparing different options.
Step 5. Purchase. The person has chosen a specific product and is looking for the best purchase option.
Based on this model, the audience is segmented according to the product awareness:
- never heard of the product, don’t know anything about its benefits;
- heard something about the product by chance, need more information;
- are choosing the best way to solve the problem;
- know exactly which product will solve their problem, but have not decided yet where they will buy it;
- have chosen the best option and are ready to buy.
Khramatrix. The method complements well the 5W’s method and bases upon 4 groups of features:
- geographic and demographic description of the audience;
- client behavior features;
- level of readiness to buy (the client is interested in purchase, is comparing the options, wants to try it, or is ready to buy);
- expected target action.
Lifetime Value. The method allows you to predict how much money the client will bring to the brand over the entire history of their cooperation. Based on average calculations, three categories of clients are distinguished: economy, standard, and VIP. Each segment has its own average LTV (Lifetime Value) and its own advertising budget for marketing.
RFM segmentation. It implies analyzing consumers activity and dividing them into three groups:
- Champions: regular active customers who bring the most profit to the website or company.
- Hibernating clients: spend average amounts regularly, but not too often.
- Lost clients: spend the least money and rarely.
This method is aimed at dealing with current clients. It will fit those who want to stir up the hibernating clients, return the lost ones, and increase the number of champions.
Market segmentation strategies
Mass marketing, or undifferentiated marketing. In this case, a universal approach is applied. Your goal is the average client. You focus not on differences but on common features that cover all segments. This strategy is most often utilized by the manufacturers of everyday essentials, such as drinks, food, household chemicals, etc.
It helps build a strong brand. In doing so, you save time and money by scaling and standardizing your marketing communications. However, such strategy may not produce the desired result due to the growing variability in the clients’ needs and expectations.
Differentiated marketing. This strategy implies tailoring your promotion strategy to match your clients’ similarities and differences. By increasing your marketing expenses, you will be able to increase ROI of your advertising campaigns through meeting the clients’ needs in a more accurate way. This method is often applied by companies that offer multiple tariff plans or product lines. For example, Uber taxi service offers several tariff plans depending on the car class: UberX, Uber Select, Uber Pool, Uber Black, etc.
The main disadvantage of this strategy is the high cost of adapting the marketing set to different segments. You should also avoid hyper-segmentation: the more segments you have, the higher are the costs and the risk of competition between products.
Concentrated marketing. In this case, you focus all your efforts on one segment in order to meet its demand as much as possible. Your main competitive advantage is trusting long-term relationships with clients. This approach allows you to maximize profits but limits revenue. This strategy is mostly used by small businesses to counter industry giants.
One-to-one marketing, or relationship marketing. This approach focuses on a single client who later becomes a segment in its own. Modern digital marketing tools make it possible for you to collect bulk client data and make customized offers to the clients based on this data.