Updated: Dec 15, 2020
How can you serve the best market segment for your business model? What does market segmentation mean and how can you do it? How can you increase sales with market segmentation?
Keep reading to discover everything you need to know on identifying the best market segment and target audience.
Table of contents
WHAT MARKET SEGMENTATION MEANS
According to my professional experience, trying to sell a product or service without a target population in mind is one of the greatest mistakes a small business entrepreneur can make. Companies can’t serve effectively large, broad or diverse markets, because every group of consumers has different needs and wants.
Understanding consumer’s behavior is fundamental to develop the best #MarketingPlan: managers should figure out what makes a market segment different and unique. Marketing and management of Kotler and Keller states that:
Identifying and satisfying the right market segments is often the key to marketing success.
Defining a market segment
A market segment is represented by a group of consumers who have similar needs and wants. Accordingly, companies should focus on the industry that they have the greatest chance of satisfying.
A good market segment should be:
Identifiable (or differentiable). It should be possible to describe a segment according to descriptive characteristics (geographic, demographic and psychographic) or behavioral considerations (consumer responses to benefits, usage occasions or brands). Besides, applying distinct marketing mix to a segment should result in different outcomes;
Accessible. For example, you are an Iranian manufacturer of blank tapes and CDs, and want to export your products to the US. In this case, the market wouldn’t be accessible: CBP (US Customs and Border Protection) banned blank tapes and CDs from Iran and other countries like Cuba, Burma and Sudan (source: CBP - Merchandise from embargoed countries; info retrieved on 11/20/2019);
Substantial: large enough to allow companies to make profits;
Measurable: companies must be able to understand their market share and positioning as well as the segment size and purchasing power.
Michael Eugene Porter, a professor at Harvard Business School, has identified a five forces framework to understand the long-term attractiveness of a market or industry.
Market segmentation benefits and drawbacks
Segmentation allows companies to discover business opportunities and better understand their target audience.
They can tailor the marketing mix (according to a theory elaborated by Jerome McCarthy in 1960, the 7Ps of marketing mix are: Product, Price, Placement, Promotion, People, Process and Physical evidence) and offer products or services for specific needs and wants.
On the other hand, segmentation increases marketing costs. The continued personalization could lead to a proliferation of products and cause bottlenecks.
The raise of privacy sensitivity could also jeopardize segmentation efforts. The more a company personalizes its product or service, the more data it needs to shape consumer’s traits and preferences.
MARKET SEGMENTATION CRITERIA
As I mentioned before, some researchers try to define segments with a scheme of descriptive characteristics, while others study behavioral traits.
It’s now the time to analyze each criterion of market segmentation.
Geographic segmentation takes into consideration local communities and targets consumers according to specific areas or territories:
A popular leading strategy is grassroots marketing where companies target their message to small groups of individuals expecting them to spread it to a much larger audience. It starts from the ground up and is usually cost-effective: focusing on smaller-scale campaigns allows to concentrate efforts and contain budget.
Mastering the geographic segmentation criterion is fundamental for local businesses.
Although these are advantages, not all that glitters is gold.
A drawback is that local marketing increases manufacturing costs, logistical problems and reduces scale economies. Furthermore, brand perception can be compromised if different communities receive different product/service and message.
But this is the trade-off which marketers have to play with.
Demographic segmentation is usually easy to perform and aggregates people who often have similar needs and wants. It is also important for understanding the right media to reach out to those people. Examples of demographic variables could be:
Wants and abilities develop along with aging, so age and life-cycle are critical for marketing. Toothpaste firms usually offer three main product lines to target kids, adults and elderly. Pampers has divided its market into prenatal, newborn babies (0-5 months), babies (6-12 months), toddlers (13-23 months) and preschoolers (over 24 months).
Age and life-cycle can be tricky though. For example, Honda had recently launched a commercial campaign aimed at younger generations. But those who actually responded were baby boomers!
Another factor is life-stage which represents people’s major concern. Important events, like divorce, second marriage, taking care of an older relative, deciding to live with a roommate, buying a new home and so on, are great opportunities for marketers. They can seize them to help customers cope with their concerns.
Gender is also crucial, since men and women have different attitudes and behaviors.
Income is vastly used as a variable, but it rarely reflects the best customer for a given product. For instance, workmen were first to buy color television sets, because they were still cheaper than cinema or restaurant.
However, income segmentation allows companies to develop lines with different positioning to reach the corresponding income bracket.
People in the same demographic segment can express different psychographic traits, that’s why this science divides individuals according to:
One of the most powerful classification systems based on psychographic criteria is Strategic Business Insight’s (SBI) VALS framework. After responding to a questionnaire, people are classified in eight main groups.
Discover your VALS type by taking the survey on SBI’s website! VALS tests vary according to the specific culture, so the previous link is for the US VALS. If you come from another country, you may want to search for the relative VALS. Find out your type and read its explanation below.
VALS framework has mainly two dimensions: consumer motivation (horizontal) and consumer resources (vertical).
Individuals are inspired by one of the three primary motivations: ideals, achievement and self-expression. Knowledge and principles guide those who are motivated by ideals. People inspired by achievement seek products and services that show off their success to peers. Consumers motivated by self-expression pursue social/physical activity, array and risk.
People’s resources are determined by key demographics and personality traits like energy, self-confidence, intellectualism, novelty seeking, innovativeness, impulsiveness, leadership and vanity. Different levels of resources increase or decrease individuals’ motivation.
The four groups with higher resources are:
Innovators: outstanding, refined, active, confident people who are not afraid to lead. They have sophisticated tastes and value high-end niche products or services. They are the first to buy a product or service regardless of mainstream trends;
Thinkers: full-grown, fulfilled and contemplative people inspired by values, order, knowledge and responsibility. Their ideal product must be durable and functional;
Achievers: individuals with a goal-oriented mindset who pursue a successful career and take care of their family. They prefer upscale products to exhibit success to their peers. They purchase services or goods when they start being trendy or buzzing;
Experiencers: young, passionate, spontaneous people who look for variety and adventure. They are willing to spend money on fashion, entertainment and social activities.
Instead, the remaining four groups with lower resources are:
Believers: traditional, ordinary people with solid beliefs. They prefer local products and are loyal to brands which they are familiar with;
Strivers: fashionable and outgoing consumers with limited financial resources. They prefer trendy imitations of high-end products;
Makers: realistic, concrete, self-sustaining people who like to work with their hands. They search for local products with a practical or functional purpose;
Survivors: idle elderly afraid of change and loyal to their favorite firms.
People have different attitudes and expectations from products or services. Behavioral segmentation allows to divide consumers according to the:
One of the techniques of behavioral segmentation allows grouping consumers according to their needs and benefits expected from a product. For instance, the benefits sought could be:
Another is according to the role played by a consumer during the decision to buy. There are mainly four roles: initiator, influencer, decider, buyer and user.
Let’s say that Janet is organizing the birthday party of her son, Alex. She tells her husband to buy a video-game as a gift (initiator). Her husband interviews Alex’s friends to find out the actual trends in the video-game industry (influencers). After this consultation, the husband finally buys the video-game (buyer). After the birthday party, Janet discovered that the video-game was such a perfect gift that now also Alex's brother plays with it (users).
Buyer readiness is very interesting for a digital marketer, because it is related to the marketing funnel and nowadays, almost all digital marketing activities take into consideration consumer’s awareness stages. In the image below, I’ve reproduced a funnel example from Kotler and Keller.
The two marketing funnel examples have different conversion rates. The funnel of Brand B performs better than Brand A. Marketers can use this intel to understand when customers drop and optimize every stage of buyer readiness.
If we put together different types of behavioral segmentation we can make a more comprehensive lookout of a target market. The image below represents an example of behavioral segmentation breakdown.
Situational segmentation identifies groups of customers according to the occasion of product/service usage. It marks a specific usage time during a consumer’s life. For instance, the occasion that triggers air travel is connected to business, vacation or family.
Situational criterion helps expand product usage and its main key points are:
Time dedicated to the purchase;
Reasons for buying.
While marketers evaluate and select market segments, they should consider the overall industry attractiveness (Porter’s five forces) and company's objectives and assets. In this way, they will be driven to identify the best segment and target. The image below shows the main four segmentation strategies.
Full market coverage (or undifferentiated segmentation strategy)
This approach applies a single marketing mix to the entire market. It means a business tries to serve all consumer groups with the products or services they might need.
In the undifferentiated segmentation strategy or mass marketing, a company goes after the whole market with one offer, ignoring segment differences. Such a strategy requires huge capital and usually, only big corporations can achieve it (Microsoft, General Motors, Coca-Cola...).
A full market coverage approach is appropriate when consumers’ preferences are not so relevant and the industry doesn’t manifest natural segments. It leads to standardization which in turn determines lower costs or higher margins. However, the increasing proliferation of marketing communication channels make it difficult and expensive to reach a mass audience.
Multiple segments specialization (or differentiated segmentation strategy)
A business can specialize in a product or service and target different segments that have similar traits. For instance, smartphones manufacturers don’t target only those who need to communicate (make calls and send messages), but also enthusiasts of photography and music (just think of the powerful cameras and speakers).
Companies can also specialize in a market serving multiple needs of a specific group of people.
A multiple segments specialization approach allows businesses to diversify risks. That’s why it can be called differentiated segmentation strategy: each single market segment has its own marketing mix.
Single segment concentration (or concentrated segmentation strategy)
With this model, organizations target a single market segment and become experts in that industry. They study and apply a single marketing mix to a given segment: concentrated segmentation strategy.
A company acquires deep knowledge of consumers’ needs and easily gains a strong market presence. Marketers can additionally divide the industry in sub-segments and attack a specific niche.
Individual marketing (one-to-one marketing)
Thanks to Artificial Intelligence (AI) and Machine Learning, it is possible to create personalized purchasing experiences. For example, HubSpot’s clients can create tailored web pages according to the specific prospect who is visiting the website at a certain time.
Organizations can also create tools, platforms or interface that users can use to personalize their product or service.
Nevertheless, customization is very difficult to achieve for complex products or services and may raise the price by more than the customer is willing to pay.
Sometimes, digital marketers don’t actually understand the value of personalization. This is the reason why I want to end with a quote of Dan Jack, Head of Email and SMS at British Gas:
Personalization - It is not about first/last name. It’s about relevant content.
Market segmentation is fundamental to increase sales and achieve marketing objectives: it directs efforts and assets to the relevant target audience.
What segmentation strategy is your company adopting? What are the challenges that you had to overcome to compete in your industry? I can’t wait to know your experience in the comments below!