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.

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.

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.

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:

The advantage of demographic segmentation is that it is easy to collect. Government sources, including the UK Office of National Statistics and the US Bureau of Labor Standards, provide household, income, education and health data for marketing strategy and business goals. Companies have also developed apps that track more granular demographic data for contact tracing and travel patterns. Surveys also reveal the specific demographics of a target market instead of available research data sources and uncover actionable insights.

After using demographics for market segmentation, marketers can use this same information for customer segmentation. Using demographics and behaviours, they can identify:

When combined with behaviour traits and other variables, demographic segmentation provides valuable insights to understand which specific customers within their target market will buy products and better understand how to reach them with the right marketing messages.

Psychographic segmentation divides people into groups based on their personality, lifestyle, social status, activities, interests, opinions and attitudes. Psychographics are an excellent complement to demographics because they identify the motivations behind why people make particular choices.

Companies use psychographics for market segmentation to understand:

Marketers collect psychographic information using three types of survey questions.

Open-ended questions that use a qualitative approach including a question such as “What is your biggest challenge with…?” will provide a deeper understanding of the respondent's problems.

Likert scale questions show how much the respondent agrees or disagrees with a statement, such as “strongly agree” to “strongly disagree”, letting marketers know how important the topic is to them.

Semantic differential scale questions ask people to rate a product, brand, company or other attributes, helping marketers understand their attitude.

Behavioural market segmentation describes specific steps in their ideal customer’s buying process, including what their ideal customers want, why they want it, the benefits sought and how they go about getting their needs met.

Behavioural segmentation is used to study B2C and B2B market segments. When companies understand why people buy, they can better target their marketing messaging. Behaviours can include:

Purchasing reason. Are buyers searching for the best price, excellent ratings, safety considerations or other criteria? What problem are they trying to solve?

Occasion or event.  Are consumers buying for a holiday or anniversary? Are B2B buyers trying to use up their budget before year-end? 

Product benefits. Is the buyer looking to purchase the latest technology or safest product, or be the first to buy the newest product?

Buyer’s journey stage. Does the buyer want information for a future purchase? Or are they looking to try out the brand for the first time? 

Engagement level. Is the buyer a die-hard fan looking for the latest product?

These are a few of the behaviours that buyers exhibit when they are purchasing products. When marketers know why consumers or businesses are buying their products, they can make it part of their marketing strategy to address those behaviours.

Geographic segmentation allows marketers to group people based on where they live, work or travel. The location has a significant influence on buying habits that marketers can use to develop their marketing messages.

Marketers use various geographic segmentation variables that include the country, region, county, town, climate zone or postcode. Culture and population density (urban or rural) are also crucial variables to include in their market research. These location variables will influence what problems people have in that region and how marketers can solve them.

An example of geographic segmentation is marketing plants based on the climate zone. Geraniums will be best for hot and sunny locations and blue spruce for places with a harsh winter. Knowing the geographic area's details helps marketers identify which plants, soil and gardening accessories will sell best in each climate. Here’s a similar example for a coffee company: knowing average temperatures can help marketers know when to market hot drinks vs. iced drinks at the local level.

Where a person lives can influence everything from their food choices to the car they drive. Cultural norms of the area influence their beliefs, causing them to choose one product over another. For instance, working in an office in a big city versus working from home will affect what they wear and what technology they use. Travel destinations also use geographic marketing to promote hotels, activities and restaurants in the area.

The benefit of geographic segmentation is that the data is relatively easy to collect through online data sources. Marketers can also hone their messaging to the target audience of a specific location or combine it with other segmentation variables, such as demographics, to build a complete profile of their target market.

Firmographic segmentation is to B2B marketers what demographics is for B2C marketers. Firmographics explain their business target market characteristics and include their industry, number of employees, legal status, company size, financial standing and other business-related variables.

A B2C market may have thousands of customers, but a B2B target market may have only a few large commercial companies in their target market. Firmographics provide information for marketers who want to understand companies' strengths and viability within their target market. They focus on their financial performance and growth trends to see whether the market segment is growing or experiencing a decline.

Firmographic data is available via online sources such as government websites, trade journals and other industry sources. Marketers also use surveys to collect specific data about their B2B target market. 

Firmographic data examples include:

Industry classification - UK Standard Industrial Classification (UK SIC) code.

Ownership and Legal Status - Ownership status, including sole proprietorships, limited liability corporations (LLCs), limited liability partnerships, private corporations and public shareholder-owned corporations. 

Years in Business - Years in business can be an indicator of financial strength and industry experience.

Number of Employees - The number of employees shows how large the company is. 

Location - Locations may include offices, manufacturing plants or shops. 

Customers and Products - What products the company makes or sells and who their target audience is.

Market Size - How large is their market, and who are their competitors.

Market segmentation is the basis for successful product concepts, launches, marketing messages, advertising and other critical marketing activities. Companies invest crucial resources into understanding their ideal customer’s problems to solve those challenges with valuable products and services.

After investing time and effort into market segmentation, what is the benefit for companies?

In 2019, Procter and Gamble, maker of consumer goods such as Fairy Liquid and Ariel, spent $10.7 billion (approx. £8.5 billion) on advertising, making them the No. 2 advertiser in the US. Who claimed the top spot? Amazon, which spent $11 billion (approx. £8.75 billion).

Companies spend billions of pounds on marketing and advertising when they know exactly who their audience is and what they want. Marketers now collect vast amounts of data on their target audience to ensure that their marketing messages appeal to the right customer, at the right time, for the right products.

Surveys are a great way to test marketing messages to see whether they resonate with the target audience. They start by creating a hypothesis about how they think their survey respondents will react. The survey results help them build better messages and more successful campaigns.

Companies have great ideas for new products, but they must determine whether those ideas solve a problem for their target audience. Without market segmentation, companies will waste time and effort on a product that sounds good but doesn’t sell.

Surveys help take the pulse of a target market. Within a few hours, companies can quickly find out whether:

Getting the correct answers from a well-defined target market helps companies focus on successful products that their audience will buy.

Trends change quickly. Social media can provide insights into new customer behaviours, but marketers don't know whether they are viable opportunities unless those behaviours are measured. 

Understanding the behaviour of a target market is the core of market segmentation. As new trends take hold, it is up to marketers to find out which ones are new opportunities and which ones will disappear overnight.

Marketers are responsible for identifying emerging customer problems, defining new marketing messages and testing new product concepts. To identify new opportunities, marketers need to frequently test their target audiences for new insights and verify whether customers still enjoy existing products.

For instance, millennials represent 25% of purchases, making them a critical group to watch for many marketers. They like technology, are the biggest spenders and are much more willing to switch brands than previous generations. If millennials are part of a target audience, staying engaged while keeping them loyal customers is a significant challenge.

Market segmentation contains a robust data set that includes customer data that other departments can use to help the company succeed. In B2B companies, the Marketing and Sales departments are often closely linked, with Sales depending on Marketing to generate qualified leads that drive greater revenue. The department in charge of pricing products also needs market and competitive data to correctly price products, helping them maintain a competitive edge. And no manufacturing division suddenly wants to work overtime because of a sudden need for 100,000 widgets to meet increased demand, so sharing buyer trends demand keeps production on track.

Market segmentation data is not meant just for the Marketing department. It should be shared so the entire company can serve its customers.

Companies want to do more than just sell products to their target audience. They want to establish a relationship with their customers so they keep buying from products. When customers know, love and continually buy a company’s products, they have created a brand trust.

Market segmentation identifies which audience is most likely to buy not just once but also to make future purchases. By creating a brand identity that customers appreciate, firms start to raise brand awareness and build a trusted relationship with their target market. They stay focused on that trust, creating marketing messaging, new products, valuable content and current information, creating a customer experience that keeps consumers and B2B clients returning for future purchases.

Apple iPhone users, Harley Davidson bike owners and Starbucks coffee drinkers are just a few examples of brand trust. These companies invested in their products and services to create die-hard fans of their products.

Target market segmentation helps marketers understand their ideal customers' problems and behaviours, creating solutions that build a long-term brand trust that benefits both parties.