3.1 Segmentation strategies and variables
4 min read•august 15, 2024
is a crucial strategy for businesses to divide their target audience into distinct groups. By using demographic, geographic, psychographic, and behavioral variables, companies can tailor their marketing efforts to specific customer segments, increasing effectiveness and efficiency.
Effective segmentation requires balancing and specificity. Companies must evaluate based on , , and . By targeting the right segments, businesses can create personalized marketing strategies that resonate with their audience and drive long-term success.
Market Segmentation Bases
The Four Primary Bases
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- The four primary bases for market segmentation are demographic, geographic, psychographic, and behavioral variables
- Each basis contains multiple that can be used individually or in combination to divide a market into distinct customer groups
Demographic Segmentation
- divides the market based on measurable statistics of a population
- Key demographic variables include age, gender, income (household or individual), education level (high school, college degree), occupation (white collar, blue collar), and family life cycle stage (single, married, empty nester)
Geographic Segmentation
- considers where people live and how that influences their purchasing behaviors
- Geographic variables used include region (Northeast, Southwest), population density (urban, suburban, rural), climate (tropical, temperate, arctic), and urban vs. rural (metropolitan, small town)
Psychographic Segmentation
- groups customers according to their personality traits, values, attitudes, interests, and lifestyles
- This basis seeks to understand why customers buy products by examining their motivations, priorities, and preferences (adventurous, status-seeking, environmentally conscious)
Behavioral Segmentation
- looks at actual customer actions in the marketplace
- Key behavioral variables include (heavy user, light user), (loyal to one brand, switches between competitors), (always buys on sale, willing to pay premium), and (convenience, prestige, durability)
Segmentation Strategies: Demographics vs Psychographics
Data Collection and Measurability
- Demographic data is factual and more easily obtained from public records (census data) or research (customer surveys)
- Psychographic and behavioral data must be researched through surveys and interviews to determine customer traits (personality tests) and habits (purchase history analysis)
Applicability to Different Products
- Demographic strategies are effective when products appeal to a specific statistical group (baby products for new parents, retirement services for seniors)
- Psychographics are useful for more niche products that fit certain personalities (luxury brands for status-seekers, eco-friendly goods for environmentalists)
Segment Breadth and Precision
- Demographic and geographic strategies tend to define broader segments (all millennials, entire Midwest region)
- Psychographic and behavioral approaches can narrow down to more precise (tech-savvy millennials, Midwestern farmers)
Effectiveness of Segmentation Approaches
Matching Approach to Market Context
- Effectiveness of a segmentation approach depends on the specific market context, including the nature of the product, characteristics of target customers, and overall industry
- For widely-used products with broad appeal, like food staples (milk, bread) or gas, demographic and geographic segmentation may be sufficient to identify large, profitable segments
- Products with unique value propositions, like luxury goods (designer handbags) or specialized equipment (high-end cameras), benefit from psychographic and behavioral segmentation to zero in on the right niche segments
Adapting to Diverse vs. Homogeneous Markets
- In diverse industries with many competitors, like retail (department stores, online sellers), using all four bases to develop a multivariable segmentation strategy can uncover underserved micro-segments
- Segmentation is less effective in small, homogeneous markets where customers have similar attributes (industrial lubricants for auto manufacturers)
- Overly narrow segments in a limited market restrict growth by creating groups too small to be viable
Balancing Segment Size and Specificity
- Effective segmentation must balance segment size and specificity - large enough to be profitable but well-defined enough to be actionable
- Segments must be substantial enough to justify targeted product development, pricing, and promotional strategies
- Highly specific segments allow for precise personalization and tailoring of the marketing mix (custom products, niche advertising channels) to maximize relevance and response
Targeting Specific Segments: Feasibility and Profitability
Evaluating Segment Viability
- Not all market segments are equally viable as target markets
- Segments must be evaluated based on accessibility (can we reach these customers), responsiveness (will they react positively), current and future profitability (are they valuable enough), and overall fit with company strategy (does this align with our goals)
Profit Potential Factors
- Feasible segments are large and stable enough to generate satisfactory sales volume (substantial number of customers) and growth (increasing demand over time)
- Profit potential is a function of segment size (total number of customers), purchasing power (amount each customer can spend) and frequency (how often they buy)
Accessibility and Responsiveness Impact
- Segments must be accessible through available marketing channels and media (retail stores, e-commerce, social media ads), allowing the company to effectively reach and engage target customers
- Responsiveness gauges how favorably a segment will react to a company's offerings and marketing mix - highly responsive segments (strong interest in product benefits) have greater profit potential than indifferent ones
Alignment with Company Strategy
- Company fit assesses if pursuing a segment aligns with the company mission, values, resources and competitive position
- Misalignment risks brand credibility (luxury brand targeting budget shoppers) and inefficient resource use (small company overspending to reach a huge segment)
Long-Term Segment Attractiveness
- Profitable segments have a clear value proposition (meets a specific need), strong (high retention and referrals), and high (frequent, high-value purchases over many years)
- Serving profitable segments provides a worthwhile return on marketing investment (revenue gained exceeds cost to acquire and retain)
- depends on (number of direct competitors) and (portion of segment already using the product type)
- Underserved, growing segments (unmet needs with increasing demand) offer more upside than overserved, mature ones (many existing solutions for stable demand)
Key Terms to Review (30)
Accessibility: Accessibility refers to the ease with which different market segments can be reached and served by a company’s products or services. It highlights the importance of ensuring that a company's offerings are available and attractive to targeted groups, which ultimately drives customer engagement and satisfaction. Accessibility can also influence segmentation strategies, as businesses must consider how to effectively reach various demographic, geographic, and psychographic segments.
Behavioral Segmentation: Behavioral segmentation is the process of dividing a market into distinct groups based on consumer behaviors, such as purchasing habits, brand loyalty, product usage, and responses to marketing campaigns. This type of segmentation helps businesses understand their customers better, allowing for more targeted marketing strategies that resonate with specific consumer needs and preferences. By analyzing behaviors, companies can personalize their offerings and improve customer satisfaction.
Benefits Sought: Benefits sought refer to the specific advantages or outcomes that consumers desire when they purchase a product or service. Understanding these benefits helps businesses tailor their offerings to meet customer needs, which is crucial for effective segmentation strategies and identifying target markets. By focusing on the benefits sought, companies can differentiate their products and align their marketing efforts with consumer expectations, ultimately driving satisfaction and loyalty.
Brand Loyalty: Brand loyalty refers to the tendency of consumers to consistently choose a particular brand over others due to a strong emotional connection, trust, or positive experiences with that brand. This loyalty can significantly influence buying decisions and can impact how brands strategize their marketing and customer engagement efforts.
Competitive Intensity: Competitive intensity refers to the degree of competition within a market or industry, which influences businesses' strategies and performance. A high level of competitive intensity can lead to price wars, increased marketing efforts, and innovation as companies strive to differentiate themselves. Understanding competitive intensity is crucial for businesses when determining their segmentation strategies and identifying the variables that can impact their positioning in the marketplace.
Customer loyalty: Customer loyalty is the ongoing preference of a consumer to consistently choose a particular brand or company over others due to positive experiences, emotional connections, or perceived value. This loyalty leads to repeat purchases and can significantly impact a company's success by creating a stable customer base, reducing marketing costs, and driving referrals. Strong customer loyalty often results in higher customer lifetime value, making it crucial for businesses to implement effective retention strategies and understand their customer segments.
Customer Profiles: Customer profiles are detailed descriptions of a business's typical customers, incorporating demographic, psychographic, and behavioral information. These profiles help businesses understand their target audience better and tailor their marketing strategies to meet specific needs, preferences, and behaviors.
David Aaker: David Aaker is a prominent marketing scholar and author, best known for his work on brand management and brand equity. His theories have greatly influenced how businesses understand consumer behavior, particularly in terms of positioning and market segmentation. Aaker's insights help organizations evaluate their target markets, enhance brand loyalty, and utilize projective techniques and sentiment analysis to gain deeper consumer insights.
Demographic Segmentation: Demographic segmentation is the process of dividing a market into distinct groups based on demographic factors such as age, gender, income, education level, and family size. This approach allows businesses to tailor their marketing strategies and products to meet the specific needs and preferences of different demographic groups, ultimately enhancing customer engagement and satisfaction.
Geographic Segmentation: Geographic segmentation is the practice of dividing a market into distinct groups based on geographical criteria such as region, city, country, or climate. This approach allows businesses to tailor their marketing strategies to specific locations, taking into account the unique characteristics and preferences of customers in different areas.
Lifetime Customer Value: Lifetime Customer Value (LCV) is the total revenue a business can expect from a single customer throughout their relationship with the company. Understanding LCV is crucial as it helps businesses identify the long-term value of acquiring and retaining customers, allowing them to optimize marketing strategies and allocate resources effectively based on the profitability of different customer segments.
Long-term segment profitability: Long-term segment profitability refers to the sustained financial success and contribution of a specific market segment over an extended period. It involves evaluating the profitability of different customer segments by analyzing their behaviors, preferences, and lifetime value, which helps businesses prioritize and tailor their strategies accordingly to maximize profits while maintaining customer satisfaction.
Market Needs: Market needs refer to the specific requirements, desires, and problems that consumers expect products or services to fulfill. Understanding market needs is essential for businesses as it drives product development, pricing strategies, and marketing efforts, ensuring that offerings align with what customers truly value and are willing to pay for.
Market Saturation: Market saturation occurs when a product has become so widely available and popular in a market that further sales growth becomes difficult. This typically happens when most potential customers have already purchased the product, leading to a plateau in demand. Understanding market saturation is crucial for businesses as it influences segmentation strategies and variables, helping companies identify new opportunities or optimize existing offerings.
Market Segmentation: Market segmentation is the process of dividing a broad consumer or business market into smaller, more defined categories based on shared characteristics. This strategy allows marketers to tailor their products, messages, and marketing efforts to specific groups, ensuring that they meet the unique needs and preferences of different segments. By understanding these distinct groups, businesses can more effectively evaluate and select target markets that are most likely to respond positively to their offerings.
Micro-segments: Micro-segments are extremely specific sub-groups within a larger market that share very similar characteristics, preferences, or behaviors. They go beyond traditional segmentation by identifying smaller, more precise groups, allowing for highly tailored marketing strategies that cater to the unique needs and desires of each micro-segment. This approach leads to more personalized experiences for consumers and can drive higher engagement and loyalty.
Niche market: A niche market is a specific, defined segment of a larger market that has its own unique preferences, needs, or characteristics. It allows businesses to focus their marketing efforts on a smaller audience with specialized demands, enabling them to tailor products or services to meet those distinct requirements. This targeted approach can lead to increased customer loyalty and reduced competition within that specific segment.
Philip Kotler: Philip Kotler is widely recognized as the father of modern marketing, whose theories and practices have shaped how businesses approach marketing strategies. His work emphasizes the importance of understanding customer needs, segmenting markets, and selecting target markets to effectively reach consumers. Kotler’s contributions also highlight the cultural and social factors that influence customer behavior and advocate for innovative approaches to gather and apply customer insights.
Price sensitivity: Price sensitivity refers to the degree to which the price of a product affects consumers' purchasing behaviors. It's an important concept for understanding how changes in price can influence demand, customer preferences, and ultimately market segmentation. By assessing price sensitivity, businesses can tailor their pricing strategies to different segments of consumers, ensuring they meet the specific needs and willingness to pay of each group.
Profit Potential Factors: Profit potential factors are the various elements that influence a company's ability to generate profit from its offerings in the market. These factors can include market demand, competitive landscape, pricing strategies, customer segments, and the effectiveness of marketing efforts. Understanding these elements is essential for businesses to optimize their strategies for different segments and maximize profitability.
Profitability: Profitability is the ability of a business to generate more revenue than its expenses, resulting in a profit. It is a crucial indicator of a company's financial health and operational efficiency, providing insights into how effectively a business is utilizing its resources. Understanding profitability is essential for evaluating segmentation strategies, as different market segments may yield varying profit margins based on consumer preferences and spending behaviors.
Psychographic segmentation: Psychographic segmentation is a marketing strategy that divides consumers into groups based on their psychological traits, including values, interests, lifestyles, and personality traits. This approach goes beyond traditional demographic factors like age or income and helps businesses understand the motivations and preferences of their target audience, allowing for more tailored marketing efforts and product offerings.
Responsiveness: Responsiveness refers to the ability of a business or organization to react promptly and effectively to customer needs, preferences, and feedback. This quality is essential for building strong relationships with customers, as it fosters trust and satisfaction, ultimately leading to customer loyalty and positive word-of-mouth. When organizations demonstrate high levels of responsiveness, they can better tailor their offerings to meet the specific demands of different customer segments.
Segment Breadth: Segment breadth refers to the range or variety of customer segments that a company targets within its overall market strategy. It highlights the number of distinct groups that are defined based on specific characteristics, allowing businesses to tailor their marketing efforts and products accordingly. A wider segment breadth may indicate a more diverse customer base and can lead to different marketing strategies to effectively engage each group.
Segment Size: Segment size refers to the number of potential customers within a specific market segment that share similar characteristics or needs. Understanding segment size helps businesses determine the potential profitability and viability of targeting a particular group, influencing marketing strategies, resource allocation, and product development decisions.
Segment Specificity: Segment specificity refers to the degree to which marketing strategies and tactics are tailored to meet the unique needs and preferences of distinct consumer segments. This approach recognizes that different groups within a market may have varying behaviors, attitudes, and motivations, necessitating customized marketing efforts to effectively reach and engage them.
Segment Viability: Segment viability refers to the potential of a market segment to be profitable and sustainable over time. It is essential for marketers to assess whether a segment has enough size, accessibility, and growth potential to justify investment and targeted marketing efforts. Evaluating segment viability ensures that businesses focus their resources on segments that are not only appealing but also capable of generating consistent revenue.
Segmentation Variables: Segmentation variables are characteristics or criteria used to divide a broader market into smaller, more manageable subgroups of consumers who share similar needs or preferences. These variables help businesses identify target markets and tailor marketing strategies effectively, enhancing customer engagement and satisfaction.
Target market: A target market is a specific group of consumers that a business aims to reach with its products or services. Identifying a target market helps companies tailor their marketing efforts, ensuring that they address the unique needs, preferences, and behaviors of potential customers. Understanding this group allows businesses to create effective customer personas and profiles, apply appropriate segmentation strategies, and personalize marketing initiatives to enhance customer engagement and drive sales.
Usage Rate: Usage rate refers to the frequency or volume with which a consumer uses a product or service over a specific period. This metric is crucial for understanding consumer behavior, as it provides insights into how often customers engage with a brand, which can influence marketing strategies and product development.