What is the term used to describe the process of dividing an entire market up into different customer segments or bases?

To be useful, segments must be measurable, substantial, accessible, differentiable, and accountable.'

- Philip Kotler

Market segmentation divides the market into different subgroups. A market segment consists of a group of customers who have similar needs and wants. It is the marketer's goal to identify the appropriate subgroups of consumers. Since segmentation is so important to marketing strategy, let's take a look at why that is.

Segmentation definition

Segmentation is the process of dividing a market into groups of consumers that share similar characteristics and attributes.

The market is defined by the group of people who would potentially be interested in your products or services. They are people with wants and needs, as well as the ability and willingness to buy products and services.

It is possible to segment markets based on descriptive characteristics like demographics or geographic location. Another type of segmentation involves looking at the different types of behaviour demonstrated by a consumer group.

Types of segmentation

Figure 1 below shows the four different types of segmentation.

Demographic segmentation

Demographic segmentation includes dividing your market into different subgroups based on demographic factors.

It is quite common for marketers to segment based on demographics, as demographic factors are often associated with the wants and needs of consumers. Demographic factors are also relatively easy to measure. For example, measuring someone's age is easier than measuring their values.

Popular demographic variables used to segment markets are:

• Age: consumers' wants and needs change with their age.

  Many toothpaste brands have different lines of products for children and adults.

• Income: segmenting based on income is popular for certain industries like cosmetics, automobiles, or financial services.

  Car manufacturers often have a wide range of cars available for customers to choose from, whereas some cars are specifically targeted towards high-income individuals.

• Family size: family size also impacts the purchase decisions of customers.

  A couple with four children is more likely to buy a 7 seater car, as opposed to a couple with one child.

• Gender: gender differentiation has been used by marketers for a long time when it comes to goods like clothing or cosmetics.

  Women's shower gels or deodorants tend to be packaged in lighter and softer coloured bottles, whereas the same products for men are packaged in dark coloured bottles.

• Occupation: segmenting based on occupation divides the market into groups based on their job function or seniority. This is popular in business to business (B2B) markets, which try to sell their product or service by targeting individuals who have the authority to make purchase decisions for their business.

  The CEO of a company will have the authority to purchase new software for the company, whereas an intern will most likely not.

Geographical segmentation

Geographic segmentation involves dividing the market into geographical groups like countries, states, cities, or neighbourhoods.

Geographic segmentation can be a useful tool for marketers, as certain customers from different parts of a country could have different wants and needs. For example, people who live in rural areas of a country might have different needs than those living in large cities. It is also possible that people living in different parts of the world will have different needs due to the climate of their country.

People living in the Alps want effective winter tires for colder months. On the other hand, winter tires will not be one of the needs of consumers living in Jamaica.

Psychographic segmentation

Psychographic segmentation is a technique in which consumers are divided based on psychological traits that influence their purchase patterns.

In psychographic segmentation, consumers are divided into groups based on psychological and personality traits, values, or lifestyle. Sometimes people in the same demographic group can exhibit different psychographic traits. Psychographic segmentation takes into consideration the 'how' and 'what' people do in their lives. Psychographic segmentation is beneficial to organisations, as it helps them understand consumers' thought processes.

Dividing your customer base into subgroups based on their opinion or values on a certain topic or their lifestyle (food habits, daily activities).

Behavioural segmentation

In behavioural segmentation, marketers divide consumers into subgroups based on their behaviour when making purchase decisions.

This could be based on their knowledge of, attitude toward, usage of, or response to a product or service.

There are four ways you can approach this topic:

• Occasions: we can separate groups of customers based on occasions. Do they use the products every day, week, month, year, etc.? Based on these occasions we can understand when customers develop a need, purchase, and use a product. For example, air travel is influenced by occasions related to business or holidays.

• User status: here, consumers can be categorised into potential users, first-time users, regular users, ex-users, and non-users.

• Usage rate: we can segment customers into light, medium, or heavy users. As a business owner, you would most likely want to attract heavy users of your product or service.

• Loyalty: you can usually split your customer base into four different groups based on the loyalty factor:

  • Hardcore loyals: stick to one brand only

  • Split loyals: are loyal to a few brands at a time

  • Shifting loyals: those that change their loyalty from one brand to another

  • Switchers: are not loyal to any specific brand

Benefits of market segmentation

Market segmentation is a very useful marketing tool for businesses. Segmentation can guide businesses in making appropriate market strategies by gaining useful insight into consumers.

Here are some of the main advantages of market segmentation.

• Better customer understanding.

• Insight into consumer behaviour, buying habits, and purchase patterns.

• Allows organisations to understand consumer needs.

• Helps organisations create and strengthen brand loyalty.

• Helps organisations come up with effective marketing campaigns to target specific groups of consumers.

• Allows organisations to form an appropriate marketing strategy.

• This leads to better insights that help organisations form effective forecasts and budgets.

• Helps organisations optimise their pricing and product features to attract more customers.

• This can lead to increased revenues and profitability.

Market segmentation example

Imagine you are a marketing manager at Coca-Cola. You interview some of your customers, talk to your sales team, and look at previous sales data. Based on this data you find out that it would be most effective to create multiple customer segments.

Demographically, you segment customers based on family size. You find that you can divide customers into different groups - individual buyers who tend to purchase small cans of Coca-Cola, smaller families who tend to purchase large bottles of Coca-Cola, and larger families who tend to purchase family packs or value packs of Coca-Cola.

Psychographically, you segment your customers based on lifestyle. Here, you find that there are customers who have busy lifestyles, who occasionally purchase cans of Coca-Cola from an office vending machine as a quick caffeine boost during the day. You also notice that there are customers who purposefully go to the shop in search of Coca-Cola products.

Behaviourally, you segment your customers based on loyalty. Here you find that there are hardcore loyals who only drink Coca-Cola when it comes to soft drinks. You also notice that there are shifting - loyal customers who used to drink Coca-Cola but now drink Pepsi. Finally, you can also group some customers into the 'switchers' category - they are not loyal to any soft drink brand.

Segmentation - Key takeaways

• Market segmentation divides the market into different subgroups.
• A market segment consists of a group of customers who have similar needs and wants.
• It is the marketer's goal to identify the appropriate subgroups of consumers.
• It is possible to segment consumers based on demographic, geographic, psychographic, and behavioural factors.
• There are many benefits to segmenting a market, as it allows managers to understand their customer base better based on their behaviour, needs, and purchase patterns.
• It also allows marketers to come up with effective marketing strategies.

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