Market Segmentation Meaning, Definition, Types, Process, Importance, Challenges

Table of Contents:

• Market Segmentation Meaning
• Market Segmentation Definition
• Requirements for Effective Market Segmentation
• Types of Market Segmentation
• Process of Market Segmentation
• Importance of Market Segmentation
• Challenges in Service Market Segmentation
• Targeting of Service Market Segmentation
• Basis of Targeting Market Segmentation
• Targeting Strategies
• Guidelines for Selecting Target Market

Market Segmentation Meaning

Market segmentation divides the total market for goods or services into several smaller groups, wherein members of each group share similarities regarding the factors that influence demand. As an element of marketing strategy, market segmentation recognizes the wisdom of specializing in meeting the needs of a specific market segment rather than attempting to cater to all demographics.

Market segmentation aims to identify specific user groups and then pursue them with tailored products or services supported by appropriate marketing mix strategies. Effective market segmentation requires specific qualities that enable specialized marketing approaches. Market segments must be measurable, accessible and sizable. Marketers should be able to measure the size and purchasing power of the segment and it should be possible for them to reach the segment through a distribution system and communication. Additionally, The segment must have enough members to generate profitable volume.

Market Segmentation Definition

According to Philip Kotler, “Whenever a market for a product or service consists of two or more buyers, the market is capable of being segmented, that is divided into meaningful buyer groups. The purpose of segmentation is to determine differences among buyers which may be consequential in choosing away them or marketing to them”.

According to William J. Stanton, “Market segmentation consists of taking the total heterogeneous market for a product and dividing it into several sub-market or segments, each of which tends to be homogeneous in full significant aspects”.

Requirements for Effective Market Segmentation

To profit from market segmentation, the different segments must meet specific requirements:

1) Measurable Segment: It should be possible to measure the size of each market segment.

2) Actionable: Segmentation variables are essential tools for marketers to develop effective marketing programs that effectively attract and serve potential customers.

3) Accessibility: Each distinct segment should be easily reachable and accessible for appropriate action.

4) Substantial Size: The segment should be large enough for the marketer to invest profitably in product or service development. Thus, the anticipated demand size must justify the cost of creating a unique service and the investment.

5) Distinctiveness: Each segment should be internally homogeneous, sharing common qualities among all its members while being distinct and different from any other segment.

Types of Market Segmentation 

The service organization should use an approach that subdivides the market into groups differing in distinct fashions regarding their preferences. Some principal segmentation alternatives are as follows:

1. Geographic Segmentation
2. Demographic segmentation
3. Psychographic Segmentation
4. Volume Segmentation
5. Benefit Segmentation

1) Geographic Segmentation

Market segmentation divides the market according to geographic units. They can divide consumers based on countries, regions, states, cities, and towns. A firm may decide to market different products or services in certain areas and not in others.

For example, a bank practices geographic segmentation when deciding on the location of a new branch. Since a bank clearly cannot have locations everywhere, it must carefully allocate its resources to meet business goals. This is achieved by locating the new branch offices in high-potential geographic market areas.

2) Demographic Segmentation

Demography involves the study of people in the aggregate, encompassing population size, age, sex, income, occupation, and family lifecycle.

For example, a bank establishes an executive banking group tailored explicitly for accountants, doctors, and HRD professionals.

Demographic segmentation is extensively utilized in banking, tourism, and attractions. Many tourism marketing stereotypes are based on demographic segmentation. For instance, museums are generally perceived as catering to older individuals, while theme parks are geared towards the young. Shopping is often considered a favoured activity among women, while men are presumed to prefer sightseeing and other attractions are described as family-oriented.

3) Psychographic Segmentation

While geographic and demographic variables have traditionally been the major factors for segmenting markets, there may also be significant psychographic differences, such as social class, personality, and lifestyle, among individuals within a given geographic or demographic group.

Psychographic segmentation categorizes markets into different segments based on consumers’ social class, lifestyles, or personality profiles.

For example:

1. A bank might identify the “young professional on the fast track” as the prime market for credit card sales.
2. A bank may focus on conservative consumers who aim to safeguard their savings by marketing 5-year compulsory deposit schemes. 

In psychographic segmentation, the market is divided based on the following characteristics:

i) Lifestyle

This segmentation is a more recent method of identifying aspects of people’s lives that affect their buying behaviour.  It involves asking participants to agree or disagree with a series of statements typically ranging from twenty to twenty-five pages in length, related to their interests, activities, and opinions (AIO statements). By analyzing their responses, marketers can determine and identify unique consumer segments. If consumer groupings exist, the marketer has a lifestyle profile of the consumers within each group.

Marketers gain a better understanding of consumers’ lifestyles, how the purchase of a product aligns with consumers’ lifestyles, what additional products they might purchase, and what types of advertising themes might appeal to them. Merchants such as Stuarts Department Stores, which target low-income demographics, know their customers’ lifestyles, including their shopping habits and preferences. For example, these merchants understand that these people only buy seasonal items once the weather improves.

Marketers conduct several studies to understand consumer lifestyles, how a product or service fits the lifestyles, and what promotional themes might appeal to the lifestyle segment.

Interestingly, people’s lifestyles influence all their decisions as consumers as they try to develop a lifestyle that reflects how they want to be seen and reinforces how they see themselves.

For example, customers’ decisions on which tourist spot to go to are just as much a part of this as the clothes they buy, the motorcars they drive, and the magazines they read. However, some critical considerations of the lifestyle types relevant to the attraction are health-conscious and environmentally aware.

ii) Social Class

The distinct characteristics and desires of people across various social classes make social class a valuable basis for market segmentation in industries such as furniture, liquor, cars, financial services, hotels, clothing, and leisure activities. Retailers frequently use the social class as a means of segmenting their markets. For example, prestige department stores cater to the upper classes, whereas discount department stores and retailers like Family Dollar tend to target the lower class.

Marketers use social class as a segmentation strategy to tailor product features, furnish stores, design advertisements, and develop other marketing elements to appeal to people in targeted social classes. For example, the General Wine and Spirits Company has used the ad slogan “What the rich give, the wealthy get” to promote its Royal Salute Scotch whiskey.

iii) Personality

When marketers segment markets based on personality variables, they aim to offer brands whose images or “brand personalities” will resonate with the identified consumer personalities.

Typical breakdowns in personality traits include competitive, compulsive, gregarious, extroverted, authoritarian, ambitious, and aggressive tendencies. Banks that promote themselves as approachable and instruct their customer service personnel to address customers by their first names are trying to attract friendly and outgoing individuals. Some cosmetics marketers and mutual funds cater to individuals with a more aggressive investment approach.

Although some studies have suggested a link between several personality characteristics and buyer behaviour, many studies’ results have not been conclusive. Nevertheless, some marketers try to divide markets based on personality, believing that personality does influence the products and brands individual consumers choose.

4) Volume Segmentation

Marketers segment final and organizational consumers based on usage rate, expenses, and brand loyalty. Among these, they distinguish segments based on volume.

Segments under volume segmentation include:

1. Heavy usage (also known as heavy half),
2. Medium usage,
3. Light usage,
4. Non-users.

The heavy usage segment comprises the consumer group that accounts for a large proportion of goods or sales relative to the market size. In many businesses, a small proportion of customers (say 20%) generate a large proportion of sales (say 80%). This is called the Pareto Principle.

5) Benefit Segmentation

Benefit segmentation is the process of grouping consumers into market segments based on the different benefits sought from the product. For example, in the desktop publishing market, Apple offered graphics-oriented hardware and software, which provided the benefit of accessible type settings to users in the ordinary business environment.

A bank might target the segment that seeks the benefit of speed and convenience. This bank may promote its telephone loan service, promising same-day approval.

Process of Market Segmentation

The process of Market Segmentation involves following the steps:

1) Identify Bases for Segmenting the Market

Market segments are formed by grouping customers who share common characteristics that are meaningful in designing, delivering, promoting, or pricing the service. Standard segmentation bases for consumer markets include demographic segmentation, geographic segmentation, psychographic segmentation, and behavioural segmentation. Segments may be identified based on one of these characteristics or a combination. For example, fitness classes are offered at 5 A.M. and 5:30 P.M. for adults who work from 8 A.M. to 5 P.M.

2) Develop Profiles of Resulting Segments

Once the segments have been identified, it is critical to develop their profiles. These profiles usually involve demographic characterizations or psychographic or usage segments in consumer markets. In this stage, it is essential to understand how and whether the segments differ from each other in terms of their profiles. If the segments are not distinct, the benefits derived from segmentation, that is, accurately identifying customer groups, will not be fully realized.

3) Develop Measures of Segment Attractiveness

The existence of customer segments does not automatically validate a firm’s decision to target them. Segments must be evaluated in terms of their attractiveness. The size and purchasing power of the segments must be measurable so that the company can determine the potential return on investment in marketing and relationship costs associated with the group. The chosen segments must also be easily accessible, and advertising or marketing channels must exist that enable the company to reach the customers in the segments effectively.

4) Select the Target Segments

Based in part on the evaluation criteria, the services marketer will select the target segment or segments for the service. The firm must decide if the segment is large enough and trending toward growth. Market size will be estimated, and demand forecasts will be completed to determine whether the segment provides strong potential.

Competitive analysis, including evaluating current and potential competitors, the relative power of buyers and suppliers, and substitute products and services, will also help finalize target segments. Finally, the firm must decide whether serving the segment is consistent with the company’s goals and available resources.

5) Ensure that the Target Segments are Compatible

This step, of all the steps in the segmentation strategy, is arguably more critical for service companies than goods companies. Because services are often performed in the presence of the customer, the services marketer must be sure that the customers are compatible.

If, during the non-peak season, a hotel chooses to serve two incompatible segments, for example, families attracted by discounted prices and college students on their spring break, they may find that the two groups need to merge better.

It may be possible to manage the segments to prevent direct interaction with each other. However, failure to do so may negatively influence each other’s experiences, ultimately harming the hotel’s future business.

Importance of Market Segmentation

The importance of market segmentation is outlined as follows:

1) Customized Services: Services can be tailored to meet customers’ specific needs, ensuring maximum satisfaction.

2) Multiple Choices: Customers are provided with various service options and corresponding price ranges, allowing them to select what best fits their budget.

3) Optimal Distribution Channel: Considering both cost and efficiency factors, the most suitable distribution channel can be utilized.

4) Cost Effectiveness: By focusing on serving a particular segment or niche, investments in resources, marketing, production facilities, etc., can be minimized, thereby increasing the return on investment.

Challenges in Service Market Segmentation

The significant challenges of service market segmentation are as follows:

1) Indistinguishable Services

Various services may be indistinguishable in product form yet differ widely in market share. Therefore, no concept of differentiation among services is needed to explain market success.

2) Different Market Segments

Markets are not composed of segments with distinct wants because consumers of one service also use other services. The same consumer may utilize services in different market segments for various occasions or changes. Hence, segmentation does not imply that those within a segment consume services only in that segment.

3) Problem in Reaching the Chosen Segment

Another challenge with segmentation is knowing how to reach the chosen market segment. This is especially difficult when a service firm uses lifestyle categories to select a market segment. Lifestyle characteristics are particularly challenging to identify and locate, leading to ineffective advertising and promotion, which can be very costly.

4) Expensive Process

Market segmentation can be expensive for both the service provider and the marketer. From a marketing perspective, the marketer must develop different marketing mixes for various segments, which can be time-consuming and costly.

5) Failing to Fulfill the Needs of Potential Customers

By targeting a specific market segment, service firms risk failing to meet customers’ needs outside of their chosen segment. This could lead to potential customers being ignored through an emphasis on segmentation, making it more difficult for a service firm to attract a broader market.

6) Noticing Changes within the Segment

To successfully target their chosen market segment, service firms must notice, recognize, and adapt to any changes within the segment. Every market in the world is fluid and dynamic, and if a service firm assumes its market segment will remain loyal to its services, it could spell disaster.

Targeting of Service Market Segmentation

Targeting follows market segmentation as a natural step. It is defined as estimating and comparing the previously identified segments to select one or more segments that yield the best results for the business. The chosen segments should be the most profitable for the company and help deliver superior value to the selected customer base.

Targeting is an essential part of marketing because of its ability to group customers with similar needs and serve them even at individual levels. Lately, however, targeting has been exposed to criticism on ethical grounds due to its intense focus on specific customer groups without considering aspects like product harmfulness and consumer vulnerability.

Basis of Targeting Market Segmentation

Marketers use several criteria to evaluate market segments for targeting. The various criteria used are as follows:

1) Segment Size and Growth Potential

The size of the different segments in the market should be compared based on their present capacity and future potential. For example, an educational institution should collect current data for full-time, part-time, and distance education students, then compare the data based on their ability to earn profits for the institution to choose its target segment. On the other hand, if the segments are not large enough or currently not profitable, the institution should further identify which segment has high growth potential, as it would be greatly beneficial in the long run.

2) Structural Attractiveness

The company must also analyze the major structural factors that greatly affect the long-run attractiveness of market segments.

For example, a market segment becomes less attractive when saturated with strong, aggressive competitors. The existence of many actual or potential substitute products, whether currently available or potentially entering the market, may limit prices and the profitability that can be earned in a specific segment. The influence of buyers’ bargaining power also impacts the attractiveness of a market segment.

Buyers with strong bargaining power compared to sellers will try to force prices down, request additional services, and set competitors against one another, ultimately impacting the profitability of sellers. A segment may be deemed less attractive if it is significantly impacted by powerful suppliers who can control the prices, quality and quantity of goods and services being acquired.

3) Company Objectives and Resources

The evaluation of a segment alone, based on its size, growth potential, and structural attractiveness, needs to be revised when choosing the target segment. The segment’s features must match the company’s objectives and resources.

A segment should align with the company’s goals regarding its growth potential and structural attractiveness, and the company should possess the human, financial, and other resources necessary for effective operation in the segment.

For example, an airline that aims to serve the business class and to top the list in the business traveller segment nationally and internationally should have the necessary resources to serve the needs of business travellers. It might need to have the requisite number of trips between business destinations and the ability to operate smoothly during peak business hours and at similar facilities.

Targeting Strategies

Service providers can use any of the following three strategies. The alternative targeting strategies is explained as follows:

1) Undifferentiated Marketing

Undifferentiated marketing also known as mass marketing or mass customization, is a strategy in which a company ignores market segment differences and targets the whole market with a single marketing offer without differentiating between various customer groups.

It focuses on an essential buyer need rather than on buyer differences. It designs the service and a marketing program to appeal to the broadest number of users.

This strategy is also known as broad or standardization. The firm offers the same product to different market segments in this strategy. It uses the exact pricing, communication, and distribution strategies.

2)  Differentiated Marketing

Differentiated marketing involves a firm operating in several market segments and designing programs for each segment. General Motors does this when it says it produces cars for every “purse, purpose, and personality.”

This strategy is also known as selective marketing. It is just the opposite of the strategy mentioned above. Here, the firm differentiates its products to meet diverse segment needs and expectations of various market segments.

With this approach, the business will identify two or more specific consumer groups that are likely to become loyal customers. The marketing efforts will focus primarily on building strong relationships with the identified consumers by appealing to them in ways that are relevant to characteristics such as location, age, gender, economic status, and other shared attributes that are widely shared among that group of consumers.

For example, an airline that differentiates its products into three classes: first class, business class, and economy class. Each of these classes is targeted at a specific segment whose needs are different from the others.

3) Concentrated Marketing

A third market-coverage strategy, concentrated marketing, is especially appealing when company resources are limited.

Rather than pursuing a small portion of a large market, the firm focuses on a large portion of one or a few specific segments or niches. In today’s digital age, the low cost of setting up shop online makes it even more profitable to serve niche markets, no matter how small they seem. Concentrated marketing provides an excellent way for small new businesses to establish a strong presence in the market against more significant, more resourceful competitors.

Through concentrated marketing, firms achieve strong market positions in the segments and niches they serve because of their excellent knowledge of the segments’ needs and the exceptional reputation they acquire. They also benefit from various operating economies because they specialise in distribution, production, and promotion. 

If the segment is well chosen, firms can earn a high rate of return on that investment. At the same time, concentrated marketing involves higher-than-normal risks. The particular market segment can turn sour. Or larger competitors may choose to enter the same market segment.

Guidelines for Selecting Target Market

The target market is a specific group of people the company will focus on while selling a product or service. A marketer should keep a few essential things in mind when choosing a market because making the right decision will determine the success of a product and service.

A product or service must be geared towards a particular segment’s needs and affordability. If the company chooses the wrong segment of consumers to target, it will find that these people are not interested in what it has to sell to them.

There are millions of products and services out there in the market today. Each one is geared to serve a particular need. This need may be a relatively large one that prevails among a large section of the consumer market, such as cell phone companies, or it may be a relatively select portion of this target market, such as the cigar-smoking consumer. The company must determine the profile of such a consumer and see where its marketing efforts should be focused.

As soon as the company defines its product, it can start researching its target market segment. The following are a few things marketers should keep in mind while determining who fits the description of a target market:

1) Target Certain People

If the service provides a solution to a specific problem, the company can consider the people who usually face this problem. For example, pest control services.

2) Affordable Service

The financial status and lifestyle of the target market should allow them to afford the service to solve the problem.

3) Targetable

A target market should be easily reachable. The company should be able to find these people and communicate with them through various means.

For example, country club members, golf club members, or readers of a particular newspaper or publication. Once it can determine where its target market consumers are going, targeting them through marketing and advertising will be much simpler.

4) Track Record of Consumers

The targeted consumer should also have a track record of spending money on the product and service. Not only that, but they should also have a good track record with their financial transactions, such as a good credit report, the ability and willingness to endorse new products and services, and a sound, stable, and consistent financial situation.

5) Estimating the Demand

Marketers also need to determine whether there is enough demand for their product. Some target markets are enormous and target millions of people. Marketers should ensure that there are plenty of consumers in the target market, as not all of them will convert into paying customers. Going by the safe and average percentage that does convert, there should be enough to make the business viable.

6) Market Research

Defining a target market depends on the product, the market’s needs, and a specific profile for an ideal client. Marketers must decide on physical locations and other factors such as age, gender, and income sector. There are a lot of statistics available on demographics today. They can do extensive research on the behaviour patterns of a certain segment of society when it comes to shopping or buying a particular product.