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What Is Market Segmentation?

  • How It Works
  • Determining Your Market Segment
  • Limitations
  • Market Segmentation FAQs

The Bottom Line

  • Marketing Essentials

Market Segmentation: Definition, Example, Types, Benefits

marketing segmentation term paper

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marketing segmentation term paper

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.

Key Takeaways

  • 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.

Investopedia / Matthew Collins

Understanding Market Segmentation

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

  • Homogeneity , or common needs within a segment
  • Distinction , or being unique from other groups
  • 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).

Types of Market Segmentation

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

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

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

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

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.

Psychographic Segmentation

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).

How to Determine Your Market Segment

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?

Benefits of Market Segmentation

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.

Limitations of Market Segmentation

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.

Examples of Market Segmentation

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.

Why Is Market Segmentation Important?

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.

What Are the Types of Market Segmentation?

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.

What Are Some Market Segmentation Strategies?

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.

What Is an Example of Market Segmentation?

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.

PubsOnline. " Millennials and the Takeoff of Craft Brands ."

Crypto.com. " Fortune Favors the Bold ."

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Market Segmentation Analysis pp 3–9 Cite as

Market Segmentation

  • Sara Dolnicar 4 ,
  • Bettina Grün 5 &
  • Friedrich Leisch 6  
  • Open Access
  • First Online: 20 July 2018

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3 Citations

Part of the Management for Professionals book series (MANAGPROF)

This chapter explains the purpose of marketing and marketing planning, clarifies the difference between strategic marketing and tactical marketing, highlights the asymmetry between the two areas, and outlines the role of market segmentation within strategic marketing. Market segmentation is defined, and the benefits and costs of committing to a market segmentation strategy are discussed.

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1 Strategic and Tactical Marketing

The purpose of marketing is to match the genuine needs and desires of consumers with the offers of suppliers particularly suited to satisfy those needs and desires. This matching process benefits consumers and suppliers, and drives an organisation’s marketing planning process.

Marketing planning is a logical sequence and a series of activities leading to the setting of marketing objectives and the formulation of plans to achieving them (McDonald and Wilson 2011 , p. 24). A marketing plan consists of two components: a strategic and a tactical marketing plan. The strategic plan outlines the long-term direction of an organisation, but does not provide much detail on short-term marketing action required to move in this long-term direction. The tactical marketing plan does the opposite. It translates the long-term strategic plan into detailed instructions for short-term marketing action. The strategic marketing plan states where the organisation wants to go and why. The tactical marketing plan contains instructions on what needs to be done to get there.

This process is much like going on a hiking expedition (Fig. 1.1 ). Before starting a hike, it is critically important to organise a map, and figure out where exactly one’s present location is. Once the present location is known, the next step is to decide which mountain to climb. The choice of the mountain is a strategic decision; it determines all subsequent decisions. As soon as this strategic decision is made, the expedition team can move on to tactical decisions, such as: which shoes to wear for this particular hike, which time of day to depart, and how much food and drink to pack. All these tactical decisions are important to ensure a safe expedition, but they depend entirely on the strategic decision of which mountain to climb.

figure 1

Strategic and tactical marketing planning. (Modified from McDonald and Morris 1987 )

Preparations for the mountain climbing expedition are similar to the development of an organisational marketing plan. The strategic marketing plan typically identifies consumer needs and desires, strengths and weaknesses internal to the organisation, and external opportunities and threats the organisation may face. A explicitly states an organisation’s strengths ( S ), weaknesses ( W ), opportunities ( O ), and threats ( T ). As such, the SWOT analysis outlines one side of the matching process: what the supplier is particularly suitable to offer consumers.

The other side of the matching process – consumer needs and desires – is typically investigated using market research . Despite the heavy reliance of market research on survey methodology, a wide range of sources of information are available to explore, and gain detailed insight, into what consumers need or desire, including qualitative research involving focus groups and interviews, observational and experimental research.

Once organisational strengths have been established, potential interference by external factors has been assessed, and consumer needs and desires have been thoroughly investigated, two key decisions have to be made as part of the strategic marketing planning process: which consumers to focus on (segmentation and targeting ), and which image of the organisation to create in the market (positioning ). These decisions are critical because they determine the long-term direction of the organisation, and cannot easily be reversed.

Only when it has been decided which group of consumers (market segment) the organisation is going to cater for, and how it will present itself to the public to appear most attractive to this target segment, does work on the tactical marketing plan begin. Tactical marketing planning usually covers a period of up to one year. It is traditionally seen to cover four areas: the development and modification of the product in view of needs and desires of the target segment (Product) , the determination of the price in view of cost, competition, and the willingness to pay of the target segment (Price) , the selection of the most suitable distribution channels to reach the target segment (Place) , and the communication and promotion of the offer in a way that is most appealing to the target segment (Promotion) .

The tactical marketing plan depends entirely on the strategic marketing plan, but the strategic marketing plan does not depend on the tactical marketing plan. This asymmetry is illustrated in Fig. 1.2 using the mountain expedition analogy. Strategic marketing is responsible for identifying the most suitable mountain to climb. Tactical marketing is responsible for the equipment: the quality of the walking shoes, food, water, a raincoat. As long as the strategic marketing is good, the expedition leads to the right peak. Whether tactical marketing is efficient or not only determines how comfortable (top right hand quadrant in Fig. 1.2 ) or uncomfortable (bottom right hand quadrant in Fig. 1.2 ) survival is. If, however, the strategic marketing plan is bad, tactical marketing cannot help. It only affects if the wrong mountain – and with it organisational failure – is reached quickly (top left hand quadrant in Fig. 1.2 ) or slowly (bottom left hand quadrant in Fig. 1.2 ).

figure 2

The asymmetry of strategic and tactical marketing. (Modified from McDonald and Morris 1987 )

The combination of good strategic marketing and good tactical marketing leads to the best possible outcome. Bad strategic marketing combined with bad tactical marketing leads to failure, but this failure unfolds slowly. A faster pathway to failure is to have excellent tactical marketing based on bad strategic marketing. This is equivalent to running full speed up to the wrong mountain. Good strategic marketing combined with bad tactical marketing ensures survival, albeit not in a particularly happy place.

To conclude: the importance of strategic and tactical marketing for organisational success is asymmetric. Good tactical marketing can never compensate for bad strategic marketing. Strategic marketing is the foundation of organisational success.

2 Definitions of Market Segmentation

Market segmentation is a decision-making tool for the marketing manager in the crucial task of selecting a target market for a given product and designing an appropriate marketing mix (Tynan and Drayton 1987 , p. 301). Market segmentation is one of the key building blocks of strategic marketing. Market segmentation is essential for marketing success: the most successful firms drive their businesses based on segmentation (Lilien and Rangaswamy 2003 , p. 61). Market segmentation lies at the heart of successful marketing (McDonald 2010 ), tools such as segmentation […] have the largest impact on marketing decisions (Roberts et al. 2014 , p. 127).

Smith ( 1956 ) was the first to propose the use of segmentation as a marketing strategy. Smith defines market segmentation as viewing a heterogeneous market (one characterised by divergent demand) as a number of smaller homogeneous markets (p. 6). Conceptually, market segmentation sits between the two extreme views that (a) all objects are unique and inviolable and (b) the population is homogeneous (Saunders 1980 , p. 422). One of the simplest and clearest definitions is that used in a newsletter by Grey Advertising Inc. and cited in Haley ( 1985 , p. 8): market segmentation means cutting markets into slices. Ideally, consumers belonging to the same market segments – or sets of buyers (Tynan and Drayton 1987 ) – are very similar to one another with respect to the consumer characteristics deemed critical by management. At the same time, optimally, consumers belonging to different market segments are very different from one another with respect to those consumer characteristics. Consumer characteristics deemed critical to market segmentation by management are referred to as segmentation criteria.

The segmentation criterion can be one single consumer characteristic, such as age, gender, country of origin, or stage in the family life cycle. Alternatively, it can contain a larger set of consumer characteristics, such as a number of benefits sought when purchasing a product, a number of activities undertaken when on vacation, values held with respect to the environment, or an expenditure pattern.

An ideal market segmentation situation – for the simplest case of two product features – is illustrated in the left hand panel of Table 2.3 on page 19. The x -axis shows the number of desired features of a mobile telephone, and the y -axis shows the price consumers are willing to pay. Here, three market segments exist: a small segment characterised by wanting many mobile telephone features, and being willing to pay a lot of money for it; a large segment containing consumers who desire the exact opposite (a simple, cheap mobile phone); and another large segment in the middle containing members who want a mid-range phone at a mid-range price. This example illustrates Smith’s definition of market segmentation with each of the segments representing one homogeneous market within a larger heterogeneous market.

The example also illustrates why market segmentation is critical to organisational success. A mobile phone company attempting to offer one mobile phone to the entire market is unlikely to satisfy the needs of each of those segments; and unlikely to develop an image in the marketplace that is distinct and reflects an offer desirable to consumers. Rather, tactical marketing efforts may be wasted because the mobile phone company fails to cater for any of the homogeneous market segments. Selecting one market segment, say the high-end, high-price segment, and offering this segment the exact product it desires, is more likely to lead to both high short-term sales (within this segment), and a long-term positioning as being the best possible provider of high-end, high-price mobile telephones.

Such an approach is referred to as a concentrated market strategy (Croft 1994 ). A concentrated strategy is attractive for organisations who are resource-poor, but are facing fierce competition in the market. Concentrating entirely on satisfying the needs of one market segment can secure the future for such an organisation. It does, however, come at the price of the higher risk associated with depending on one single market segment entirely. An alternative approach, if the capabilities of the organisation permit it, is to pursue a differentiated market strategy, and produce three telephones, one for each segment. In such a case, all aspects of the marketing mix would have to be customised for each of the three target segments. A differentiated strategy is suitable in mature markets (Croft 1994 ) where consumers are capable of differentiating between alternative products. Product variations can thus be customised to meet the needs of a number of market segments. When an organisation decides not to use market segmentation, it is effectively choosing to pursue an undifferentiated market strategy, where the same product is marketed using the same marketing mix to the entire market. Examples of undifferentiated marketing include petrol and white bread; they are not particularly targeted at any group within the marketplace. Such an approach may be viable for resource-rich organisations, or in cases where a new product is introduced (Croft 1994 ), and consumers are not yet able to discriminate between alternative products.

3 The Benefits of Market Segmentation

Market segmentation has a number of benefits. At the most general level, market segmentation forces organisations to take stock of where they stand, and where they want to be in future. In so doing, it forces organisations to reflect on what they are particularly good at compared to competitors, and make an effort to gain insights into what consumers want. Market segmentation offers an opportunity to think and rethink, and leads to critical new insights and perspectives.

When implemented well, market segmentation also leads to tangible benefits, including a better understanding of differences between consumers, which improves the match of organisational strengths and consumer needs (McDonald and Dunbar 1995 ). Such an improved match can, in turn, form the basis of a long-term competitive advantage in the selected target segment(s). The extreme case of long-term competitive advantage is that of market dominance , which results from being best able to cater to the needs of a very specific niche segment (McDonald and Dunbar 1995 ). Ideal niche segments match the organisational skill set in terms of their needs, are large enough to be profitable, have solid potential for growth, and are not interesting to competitors (Kotler 1994 ). Taking market segmentation to the extreme would mean to actually be able to offer a customised product or service to very small groups of consumers. This approach is referred to as micro marketing or hyper-segmentation (Kara and Kaynak 1997 ). One step further leads to what Kara and Kaynak ( 1997 ) refer to as finer segmentation where each consumer represents their own market segment. Finer segmentation approaches are becoming more viable with the rise of eCommerce and the use of sophisticated consumer databases enabling providers of products and services to learn from a person’s purchase history about what to offer them next.

A marketing mix developed to best reflect the needs of one or more segments is also likely to yield a higher return on investment because less of the effort that goes into the design of the marketing mix is wasted on consumers whose needs the organisation could never satisfy anyway. For small organisations, it may be essential for survival to focus on satisfying very distinct needs of a small group of consumers because they simply lack the financial resources to serve a larger market or multiple market segments (Haley 1985 ).

Market segmentation has also been shown to be effective in sales management (Maier and Saunders 1990 ) because it allows direct sales efforts to be targeted at groups of consumers rather than each consumer individually.

At an organisational level, market segmentation can contribute to team building (McDonald and Dunbar 1995 ) because many of the tasks associated with conducting a market segmentation analysis require representatives from different organisational units to work as a team. If this is achieved successfully, it can also improve communication and information sharing across organisational units.

4 The Costs of Market Segmentation

Implementing market segmentation requires a substantial investment by the organisation. A large number of people have to dedicate a substantial amount of time to conduct a thorough market segmentation analysis. If a segmentation strategy is pursued, more human and financial resources are required to develop and implement a customised marketing mix. Finally, the evaluation of the success of the segmentation strategy, and the continuous monitoring of market dynamics (that may point to the need for the segmentation strategy to be modified) imply an ongoing commitment of resources. These resource commitments are made under the assumption that the organisation will benefit from a return on this investment. Yet, the upfront investment is substantial.

In the worst case, if market segmentation is not implemented well, the entire exercise is a waste of resources. Instead of leading to competitive advantage, a failed market segmentation strategy can lead to substantial expenses generating no additional return at all, instead disenfranchising staff involved in the segmentation exercise.

It is for this very reason, that an organisation must make an informed decision about whether or not to embark on the long journey of market segmentation analysis, and the even longer journey of pursuing a market segmentation strategy.

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Sara Dolnicar

Johannes Kepler Universität Linz, Linz, Oberösterreich, Austria

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Universität für Bodenkultur Wien, Vienna, Wien, Austria

Friedrich Leisch

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Dolnicar, S., Grün, B., Leisch, F. (2018). Market Segmentation. In: Market Segmentation Analysis. Management for Professionals. Springer, Singapore. https://doi.org/10.1007/978-981-10-8818-6_1

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