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5 types of market segmentation and how to use them

“Any customer can have a car painted any colour that he wants, so long as it is black.” Henry Ford

In the early days of marketing, companies offered products that were easy to manufacture without much concern for a customer’s needs. In 1909, black paint dried the fastest, so that was the colour of the car that all buyers purchased.

Today, marketers realise that customers have diverse needs. To identify what customers want, marketers have learned to divide people into market segments based on their demographics, behaviours, location, purchasing habits and other factors that influence their buying patterns.

Market segmentation is the process of dividing a broad population into subgroups according to certain shared factors. These groups may have common demographics (age, gender, etc.), geographic location, attitudes, behaviours or a combination of similar characteristics.

A consumer may belong to multiple market segments. For instance, a female may be a millennial (gender and age demographic), living in a rural area (geographic location), who likes to buy her food locally (purchasing habit) from companies with a solid humanitarian ethic (attitude). 

Businesses perform market research to create market segments that include multiple variables. Their challenge is to find potential customers, known as their target market, who combine shared factors, making them the group that is most likely to buy their products and services.

Marketers use different segmentation strategies depending on their goals. The goal of market segmentation is to identify a target market or group of people.  Market segmentation will have greater emphasis on the geographic market segments (e.g. metro areas, media markets, counties, regions, countries).  Consumer segmentation is used to find out the behaviours and attitudes of those groups. Customer segmentation divides the existing customer base into separate groups. While the methods for study design, data collection and analysis are similar, they focus on different aspects of segmentation.

Find out within minutes with SurveyMonkey Consumer Segmentation.

The goal of market segmentation is to develop detailed profiles of each market segment. Once these segments are clearly defined, marketers choose the segments with the highest potential of buying their products and services.

To achieve that goal, marketers go through a three-step process that clarifies who people are and why they buy products.

  • Segment. Marketers divide the market into categories based on shared traits.
  • Target. They choose the market or target who are most likely to buy their products.
  • Position. Marketers conduct research into which product, price, promotion and place combinations will attract customers to buy their products.

Sound easy? Large companies spend millions of pounds researching markets to find the right target market that will increase a successful product's chances. Each market will probably have other companies who sell similar products, so research on competitors and their products is essential.

Once marketers isolate their target audience, they must define what is different about their product? Is it better, faster, cheaper or more advanced than competitive products? To answer that question, marketers should understand their target audience's problems and how they can creatively solve those problems. Companies create a competitive advantage for themselves through product differentiation, helping their products and services stand out as solutions for buyers’ issues.

Graph of key drivers

Why should companies use the market segmentation process and focus on how to solve customer problems? According to research, over 30,000 new products are launched each year and 95% of them fail. By identifying a target market, isolating their problems and creating a product that solves those problems, marketers have a higher probability of success over their competitors.

Companies use different approaches to segment their markets. Here are three examples:

No segmentation.  Companies use mass marketing to sell their products to everyone, using an undifferentiated strategy. For example, commodities such as salt or generic items with many substitutes may not spend much effort segmenting their market.

Few segments. Firms may use one or more narrowly defined target markets to create a highly focused niche market for specialised products. Example: exclusive high-fashion apparel, handmade art or customised machinery parts.

Thousands of segments. Known as hyper-segmentation, marketers can customise a one-to-one marketing approach for each customer to develop a long-term relationship. For example, personalised services such as hair salons and online retailers such as Amazon offer personalised recommendations based on purchase history.

Market segmentation is the first step for successful product marketing. Whether companies are marketing to consumers or businesses, market segments help companies better understand their customers’ problems and solve them.

There are many ways to segment markets to find the right target audience. Five ways to segment markets include demographic, psychographic, behavioural, geographic and firmographic segmentation.

Demographic segmentation assumes that people with common characteristics will have similar lifestyle patterns, tastes and interests that will influence their purchasing habits. Demographics are often combined with other segmentation approaches to develop target markets with the greatest likelihood of buying their products.

Demographics include factors such as age, gender, occupation, income and education. Surveys are one way to collect demographic information and may consist of these questions: