Market segmentation is a staple of quality research. It is one of the few techniques that is used universally across all businesses across all industries to better understand the opinions, needs, motivations and behaviours of consumers worldwide. Because of its universal applicability, we’ve created this guide to fully explore the concept, types and use cases of market segmentation.
In this guide, we'll discuss:
- The history of market segmentation
- What is market segmentation?
- The importance of segmentation in marketing
- Types of market segmentation
- - Demographic segmentation
- - Behavioural segmentation
- - Geographic segmentation
- - Psychographic segmentation
- Segmentation and business strategy
- Common market segmentation mistakes
- Examples of segmentation in action
This is one of our longer articles, so if you’re looking for something specific then you can use the quick navigation links above to jump to each section of the guide.
The History of Market Segmentation
Market segmentation is a practice that has been around since before the first documented emergence of market research in the 1920s, with evidence reporting the use of market segmentation as early as the 1820s (Wedel & DeSarbo, 2000). However, it become a profound trend in the 1950s where segmentation wasn’t only based on demographic information such as age, income and education, but also psychographic data such as lifestyle as well, all “made possible by communication devices and television which brought brand messages directly into the home with unprecedented drama and immediacy” (Tedlow, 1996).
The segmentation that emerged in the early 1800s and was written about in the 1900s is different from the segmentation that takes place today. Tedlow’s book The Story of Mass Marketing in America perfectly outlines the progression from the basic demographic segmentation all the way through its evolution to more complex segmentation that involved psychographic segmentation. However, in the years after Tedlow’s book was published, segmentation practices have evolved yet again to become even more complex and detailed.
Market segmentation, according to Dolnicar, Grun, and Leisch in their book Marketing Segmentation Analysis, “is one of the key building blocks of strategic marketing” and “is essential for marketing success”. With this renewed focus of market segmentation on marketing, it has become harder for stakeholders to see its benefits for wider business strategies - and there are many.
With chances to better understand customers on a deeper level than simple demographic information, market segmentation lights the way to newly insightful and directly influential data that has more applicability than ever before; a statement that is supported by Dolnicar et al. as they explain that “market segmentation offers to opportunity to think and rethink, and leads to critical new insights and perspectives.”
Market Segmentation Definition
So, what exactly is market segmentation?
At its most basic level, market segmentation is the process of dividing a customer or consumer base into segments based on a variety of common factors to better understand how different their behaviours, motivations, and opinions are when travelling along a customer journey. The segment created can be based on a singular criterion or a blend of criteria to gain the optimal market segment for research.
It is important to note at this point that a singular consumer can belong to many different market segments at the same time, and just because they are a part of one segment doesn’t at all make them like the others who belong to the same segment. This contextual variety is important to recognise, and will definitely influence the insights at the end of the research experience.
Demographic information has traditionally been a stakeholder’s segmentation tactic of choice, however, there are many more ways to segment customers and consumers that will help insight teams build a better database of research participants, help marketers create better campaigns, and enable stakeholders to enact transformational strategies that drive success.
While most discussions surrounding market segmentation have been typically focussed on its applications to the creation of better marketing and advertising campaigns and strategies, segmentation can be used for many more business ventures besides, from guiding market research to influencing all business strategies on a wider scale.
"Our customers have now become hugely involved with what we’re doing both today and tomorrow.”
Head of Performance & Insight, Curo
The Importance of Market Segmentation
This information is vital to businesses as they craft their own customer journey and map their business strategies for the future. The more accurate the data is as they endeavour to complete these important tasks, and the more the insights are used within key decision-making processes, the better equipped the business is to cater to their customers’ needs - and the more successful they will become as a result.
This will also impact a business’ longevity. As of 2020, according to research carried out by D. Clark of Statistica, the average lifespan of a company on the S&P’s 500 Index was around 21 years, which has decreased significantly from 1965’s 32 years and is projected to decrease even further by 2030 to just 17 years. If stakeholders are to protect themselves and their venture, and give the business enough life to continue on past the average and distinguish themselves as successful, then they must arm themselves with the knowledge to do so. The knowledge that comes from understanding their own customer base, their future customers, and their target audience will help businesses to grow sustainably and prepare for evolution in the future.
Marketers especially believe that market segmentation has had a strong impact on the success of business endeavours, with “85% of some 30,000 new product launches have been reported to fail because of inadequate market segmentation” (Christensen, Cook, and Hall; 2005).
Benefits
The benefits of market segmentation are many for businesses that utilise it well. For instance, through market segmentation stakeholders can:
- Improve strategic direction and enhance business focus
- Differentiate the brand from that of their competitors, and gain more ground in their industry
- Improve business relevance to their customers and overall performance
- Inform product development strategies to refine current and future products and services on offer to customers
- Spot new opportunities for innovation and stand out amongst the crowd
- Inform business decisions with relevant and accurate insights on a daily basis
- Create stronger marketing campaigns – from tailored ads to converting quality leads
- Identify successful endeavours and weak points in a variety of strategies
- Build deeper customer affinity/connections – boosts retention and relationships
And this is just to name a few. Dolnicar et al. explain that “At the most general level, market segmentation forces organisations to take stock of where they stand, and where they want to be in the future.” This is something businesses should be doing anyway, but market segmentation especially can provide a great insight into what is successful and what needs rethinking.
Competition analysis, for example, is a key beneficiary of market segmentation analysis, as this type of research can uncover which brands they are aware of, interact with frequently and why. It can be hard for one business to measure its own success against that of another because most stakeholders keep their business information as private as they can (particularly the data that records weaknesses and missing opportunities). Market segmentation is another way of measuring success without internal data, through the eyes of the customers.
Guiding the strategic direction of the brand is a vital role for many stakeholders, and each team within the brand will contribute to that success. So using market segmentation data to influence key decisions across the company and help teams work more efficiently towards that shared goal is crucial. Market segmentation helps all teams better align by understanding exactly who they are catering to, why they are working as they are, and how they can improve processes to make themselves more efficient when it comes to working towards their goals.
Building deeper connections with the identified segments will greatly boost the connection customers feel towards the brand, and encourage them to return time and again whenever the customers need them. This could involve personalised communications, bespoke offers, or even an invite to the brand's research panel or community, which makes them feel like they're more involved than the average customer and can make a difference to the brand itself.
Types of Market Segmentation
There are four common types of market segmentation that most insight professionals and stakeholders see on a regular basis.
Demographic Segmentation
This is the first and most common type of segmentation method. Demographic segmentation is where insight teams separate a customer base, consumer base or target market into groups based on practical data such as location, age, education, occupation, income status, marital status, political identity, religion, and more.
By mapping these data points and splitting up customers into groups based on these, stakeholders have a basic way of identifying and catering to key demographic segments. Demographic segmentation definitely still has a place in market segmentation strategies, because there will always be commonalities between age groups and those who live in similar locations and share occupations - the experiences they endure together are what define them, but there are experiences that transcend demographic data, and that needs to be factored into the decision-making process too.
There are more complicated demographic datasets such as political identity that do work to include more dynamic segmentation tactics. While there will be certain age groups and locations they identify with one or the other, there will be anomalies to account for. There are young Tories and older Labourites, there will be those that support the Green party and Liberal Democrats, and those that support the Monster Raving Loony party - each because they identify with the ideals held within that party. There will be those that refuse to engage with politics entirely for their own reasons, and the only thing in common with them all is that they transcend demographic segmentation. So more detail is needed to truly understand and cater for the customer needs of all segments.
"End to end, [our] study really hit the nail on the head, and we now have a lot of great data to work off in future research studies.”
Research and Insights Manager, The Caravan and Motorhome Club
Behavioural Segmentation
With our ideas and opinions informed by actions and experiences, it’s no wonder that behavioural segmentation is one of the most popular methods to use after demographic data.
This is the line between psychology and business - behavioural segmentation involves sorting people into groups based on the actions they take, the opinions they hold, the less tangible data that takes a little more time and effort to figure out than demographic data. A customer’s buying behaviour, the time and budget they typically spend within that brand and the attitudes they exhibit online and in-person are all examples of behavioural data that can be used to group people together.
Using behavioural science of economic techniques, brands can understand how different segments form relationships, view institutions, communicate, and the motivations behind all of it. This is incredibly useful information that stakeholders can use to inform a wide variety of business strategies including marketing, communications, operations, and new product development.
Geographic Segmentation
This is more commonly dissolved into the demographic segmentation method but is worth a stand out on its own purely for the opportunities it affords stakeholders. It works on the principle that people that live in the same area, or around about the same area, have the same experiences that form a shared set of opinions, needs, wants, and have cultural considerations that brands need to take into account.
Now, this could be on a small scale, as in the same town or district, or on a much larger scale such as the same country or continent. This larger-scale works on a more general basis by identifying the patterns, experiences, and behaviours of the general population - which is a good place to start for any brand looking for opportunities to expand into a new country, for example. The smaller scale will be better for a deeper dive into the behaviours of a certain region or subsection of the country to identify whether certain cities or towns would be a good place to expand the brand into.
Psychographic Segmentation
This is commonly confused with behavioural segmentation, but actually is a great subset that works to define customers lifestyles according to compatibility with the brand (similar values and interests, etc.). It is easier than ever before to use psychographic segmentation to find, attract and recruit both customers (for brands) and research participants (for insight teams).
Consumers use casual social media platforms such as Facebook, Instagram, Reddit and TikTok to broadcast their interests and connect with others based on those interests. Brands can use these platforms to identify and pursue their target market, understand their current customer base and run research to deepen their understanding. This line of segmentation decries the use of traditional demographic data and unites groups of consumers or customers under the banner of value and shared interests; arguably a better base for a deeper connection than demographics such as age.
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| There are many types of segmentation to choose from, but how do we decide which one is right to use at a certain time? |
Others include:
While these four are the most commonly used form of market segmentation, there are other methods that can be used for different purposes.
- Value Segmentation is based on the transactional worth of their customers or target market. This means customers will be based on data recording the amount of money they spend with the brand or in general within the industry the brand is situated in, and are ranked by the value they assign to products and services, those they think are greater are those they will be willing to spend more money on.
- Firmographic Segmentation classifies customers based on shared company or organisation attributes. This is typically used by business-to-business (B2B) organisations, identifying potential customers through the businesses they interact with and organisations with the customer base they keep. The data that comes from this type of segmentation is typically that of revenue, location, size, and more.
- Generational Segmentation may be the one most people are familiar with, through articles such as ‘Why Millennials Buy Less’ and ‘Why Gen Z are Sustainably-Minded’. Using generational divides to categorise the general consumer based on the perceived shared experiences, preferences and ideologies. But users of this type of segmentation as with demographic segmentation must beware, not everyone is the same and there is a danger to generalise and push certain consumers away because of it.
- Lifestyle Segmentation is different from psychographic segmentation and is centred on segmenting people based on the stage of life they are currently living. The stages of life are defined by the cultural and societal standards of the country, but typically they include education, marriage, and starting a family. It is based on the assumption that people at different stages of life have different priorities and needs, and so brands using this type of segmentation may use this to cater to those needs.
- Seasonal Segmentation is similar to lifestyle segmentation in that, as people go through different seasons, they will also have different needs. Seasons impact purchase behaviour as much as major events do; the winter season will see an increase in fuel consumption as well as gift buying for the large religious and commercial holidays (think Christmas and Black Friday) that occur at this time of year. Summer will see more experience- and souvenir-based purchases as people take advantage of the good weather to go on holiday.
Inserting Market Segmentation into Business Strategies
Now that we understand the history and methodologies of market segmentation, it’s important to know how to integrate market segmentation into business and research strategies. Because market segmentation is the gateway to true knowledge on the customer base and target market (which are not necessarily one and the same), market segmentation fits in well to support both types of strategies.
“We work hard to use everything customers tell us, to make sure we are delivering exactly what they need.”
Head of Insight, Lowell
When creating a market segmentation strategy, stakeholders and insight teams need to analyse the market and their current customer base and make sure they know exactly what customers they have, who their target audience is (if these two overlap), and the rest of the industry-related consumer population. This market analysis will be something done on a regular basis in most successful firms, even if only to reaffirm their own competitive standing within the industry, but can help answer other questions like:
- Who are my customers?
- What are my customers’ shopping and buying habits?
- How large is my target market?
- How much are potential customers willing to pay?
- What are my competitors’ strengths and weaknesses?
- What have their challenges and successes been?
The first step of a market segmentation strategy will identify the current customer base through classic market research techniques such as surveys, focus groups, and even passive data collection techniques that record customer activity every time they communicate with the business.
Once stakeholders have a good understanding of the current customer base, then it’s time to use those same market research tools (barring the customer-specific passive data collection processes) to understand the brand’s target audience. This requires a deep understanding of the brand strategy at the present moment, the products and services the business has to offer, and the image they’re projecting into the world.
Now with both customer base and target market identified, the best way to segment them will become clear. It will depend a lot on the business objectives stakeholders are working towards: for example, if it is to move into a new industry then a mixture of segmentation tactics are best implemented to cover a broad range of future strategic decision-making processes - simple demographic segmentation will help businesses keep track of their customers and target audience, and psychographic and behavioural segmentation will aid in deeper decision-making processes such as tailoring products and services to their specific needs.
Once segmentation processes are in place, there might be many opportunities that stakeholders never thought about before but are ready to take advantage of with these new insights. Creating customer or buyer personas for both the customer base and target market (ideal customers) will help with this process, as continual research into this topic will help the gap between the two close.
Aligning the customer base with the target audience will take time, but it’s worth it. This will require a series of testing processes to make sure the brand fits in with the target market without alienating the current customer base. The key is to evolve and grow without leaving anyone behind if possible, and the way to do that will be to take the long road, keep reviewing and evaluating the state of the business, industry, market and the relevance of each party within the transaction.
Market Segmentation Mistakes
Now, there are many things market segmentation can help brands to do, but only when the segmentation is done right. There are a number of mistakes that stakeholders make when it comes to discovering and actioning segmentation data, such as:
- Making segments too small - While there are a number of segmentation methods that allow for the deep understanding of very specific individuals and groups, creating segments that are too small and too specific will only serve the immediate situation at hand rather than many that may come into being. Creating a larger, but still relevant segment will help insight teams harness more data and create more insights that can truly serve the business more times than just one.
- Sticking too rigidly to the original segment - an inevitable fact is that the business and the industry it operates in will change, as such the segmentation methodology applied and the segments created because of it will need to change too. The segment a business starts with will not be the one they end with, so all stakeholders need to make sure they evaluate and review the success and relevance of their market segments at regular intervals to make sure they still serve the firm’s needs.
- Not letting the customers in segments, and the segments themselves as a whole, evolve - this leads off the warning of sticking too rigidly to a particular segment. Just as people are wont to do, customers will change and may not be a relevant part of your segment for as long as you’d imagine. In the review of the segments, make sure to keep an eye out for these customers who are no longer a part of the original definition of the target market. Ask why. Are they not relevant anymore? Or is the business not evolving as quickly as its customers? Does the definition of target market need redefining?
Examples of Market Segmentation in Action
Smart brands will use a mixture of segmentation tactics to get the best understanding of their customer base and target market.
Coca Cola
As a global brand, Coca Cola employs a couple of segmentation methods to make sure their target audience and customer base align. The soda manufacturer uses demographic segmentation to refine their target market, as they aim to cater primarily to a younger audience of 15-25 years olds.
But the different demographic segments of their customer base present their own discrepancies, differing levels of disposable income for treats such as fizzy drinks and interests in the products Coca Cola offers. With their global operation and renown, the firm also uses geographic segmentation to make sure they are catering to all who enjoy their products.
Skincare and Beauty Industry
The skincare and beauty industry employs all of the different types of segmentation because they have to create different products for different people depending on their skin type, their preferences, their routines, the season they’re living through and many more factors that it’s hard to name them all at once. This industry has a range of concerns they need to take into account when delivering the right product and experience for their customers.
Demographic segmentation is more of a crucial method for this industry, as skin types and their needs will alter with age. The skin’s reaction to the local weather and the beauty standards will alter with the location and culture, so geographic segmentation is needed to make sure the brand’s products are relevant. Psychographic segmentation will help identify customers with similar interests when it comes to the level of makeup they are versed in and the skincare routines employed. Lifestyle segmentation will help brands to make sure they cater to those with different lifestyles that will inevitably impact their skincare and beauty routines (cost vs income, outdoors vs indoors routines and occupations, etc.).
Walmart
Walmart is a special kind of US store that caters to all ages and demographics as much as possible, but even with the target market of ‘everyone’, there are still scenarios that segmentation tactics can help a brand to achieve its goal. Walmart uses a combination of geographic, demographic, behavioural and psychographic segmentation techniques to get a good grasp on who their target audience is, who their customers are, and how they can better attract more customers.
The firm pays particular attention to younger consumers to try and build a sense of brand loyalty within that demographic so they will remain customers for a longer-term basis. With a combination of low prices and an effective social media strategy, this desire is proving to be effective thus far.
Nike
Nike implements a number of segmentation techniques from demographic to behavioural and many in between. While they have a general target audience of ‘all athletes’, they have also more precisely defined each segment of athletes so they can better cater to each individual subset of sport.
Nike uses demographic, geographic, psychographic, socioeconomic, and behavioural segmentation to make sure they meet customer needs, understand the level of loyalty and frequency of purchase of each subgroup and design the right products the first time around. They use Demographic for both age- and gender-targeting but also for lifecycle-targeting too, drawing on influences from lifestyle segmentation there too. This is then further informed by psychographic and geographic segmentation that then combines their lifestyle with their interests and behaviour to create a unique ‘feeling’ when they interact with the brand and lead customers to interact more.
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| All brands use market segmentation at some point, and many of the successful ones use a blend of segmentation methods to truly understand their target market. |
Lego
The Lego Group use two key segmentation strategies to categorise their customers, target market, and the rest of the consumer population; they use behavioural and value-based segmentation depending on the level of contact they have with the individual. Lego then takes this data and segment people into buyer personas based on purchase and usage rates:
- ‘Lead Users’ are people who LEGO actively engage with on idea generation processes such as product design.
- Their ‘1:1 Community’ are comprised of people whose names and addresses Lego know.
- Lego’s ‘Connected Community’ are people who have bought LEGO and have also been to either a LEGO shop or a LEGO park.
- ‘Active Households’ are people who have bought LEGO in the last 12 months.
- ‘Covered Households’ are people who have bought LEGO once in their lifetime.
- Lastly, ’All Households’ are those people who have never bought or interacted with LEGO products.
The first three personas are those they have the most contact with and have a hand in actively guiding the brand in the right direction. The latter three are those that have the least communication and interaction with the brand and present an opportunity for Lego to grow their customer base.
The Fashion Industry
One of the most common segmentation strategies all fashion brands use is Seasonal Segmentation. It is described as the “bread and butter” of fashion and is the most obvious to see in-store and online. This is incredibly useful for most fashion brands and doesn’t really involve much customer communication outside of the more specific clothing design process, as we can safely assume (supported by a lot of data) that most people like to cover up in warmer clothes in the winter and wear lighter clothes in the summer.
The customer input that is necessary will come into the design stage, what clothing material do they want most this next season, what colours will they wear, and what style do they particular find suits them? These questions will gain a wide variety of answers, and this is where another segmentation process will come into play to help brands narrow down the most important data coming from their specific target audience.
