4.6 - Market Segmentation
The definition of market segmentation
Market segmentation involves dividing a broader market into smaller groups of customers who share similar characteristics or needs. This allows businesses to identify and focus on specific segments, tailoring their products or services to meet those particular requirements more effectively.
Business approaches to market segmentation
Businesses adopt various strategies when using market segmentation, depending on their size, resources, and goals. These approaches help them decide how to position their products in the market.
Strategies businesses use for segmentation:
- Focusing on one segment - Some businesses specialise in a single product aimed at one specific group, such as a luxury watchmaker targeting high-income professionals.
- Targeting multiple segments - Other businesses develop a range of products to appeal to different groups, like a car manufacturer offering budget models for families and premium vehicles for executives.
- Appealing to the mass market - Certain businesses aim their products at almost all consumers, for example, a soft drink company marketing its beverages to people across various ages and backgrounds.
Methods of market segmentation
Markets can be segmented using different criteria, enabling businesses to understand and target customer groups more precisely. The main methods include geographical, demographic, and psychographic approaches.
Geographical segmentation
This method divides the market based on location, as customer preferences often differ depending on where they live.
- Needs vary by climate, such as warm clothing for cold regions like northern Europe compared to lightweight fabrics for tropical areas.
- Regional variations within a country, like rural versus urban settings, influence product demand – for instance, sturdy boots for countryside residents versus compact appliances for city dwellers.
Demographic segmentation
Demographic segmentation categorises customers using measurable population characteristics, such as age, gender, or income.
Segmentation by age:
- Different age groups require tailored products, from toys for children to retirement services for those over 65.
Segmentation by gender:
- Products are often designed specifically for men or women, including items like grooming products or fashion accessories.
Segmentation by income:
- Businesses target groups based on earnings, with high-end brands focusing on wealthy customers and value retailers appealing to those with lower budgets.
Segmentation by social class and socio-economic groups:
Social class refers to the classification of people based on factors like economic status and prestige. Socio-economic groups further divide people according to occupation and employment status.
| Social grade | Description | Occupational category | Percentage of UK population |
|---|---|---|---|
| A | Upper middle class | Higher managerial or professional roles | 5% |
| B | Middle class | Intermediate managerial or professional roles | 10% |
| C1 | Lower middle class | Supervisory, clerical, or junior professional roles | 20% |
| C2 | Skilled working class | Skilled manual workers | 35% |
| D | Working class | Semi-skilled or unskilled manual workers | 18% |
| E | The poor | Pensioners, casual workers, or long-term unemployed | 12% |
Segmentation by ethnic origin:
- As populations become more diverse, businesses cater to cultural differences, offering products that align with various ethnic backgrounds.
Segmentation by religion:
- Religious beliefs influence needs, such as specific dietary requirements like halal meat for Muslim consumers or kosher foods for Jewish customers.
Psychographic segmentation
Also known as lifestyle segmentation, this approach groups customers based on their interests, values, and behaviours, going beyond basic demographics.
- It addresses how people with similar backgrounds might still have different preferences, such as adventure sports gear for thrill-seekers or sustainable goods for environmentally aware individuals.
- Businesses target these groups through specialised media or products, like premium kitchenware for cooking enthusiasts.
Benefits of market segmentation
Segmenting markets helps businesses operate more effectively by aligning their offerings with customer needs, leading to several advantages.
Advantages for businesses using segmentation:
- Better meeting customer needs - Products can be customised for specific groups, improving satisfaction.
- Higher revenue through pricing strategies - Different prices can be set for segments, such as premium rates for luxury services versus budget options.
- Increased loyalty - Specialised products build stronger customer relationships, encouraging repeat business.
- Efficient marketing - Resources are focused on receptive audiences, reducing waste.
- Expanded product range - Businesses can offer varied items to multiple segments, broadening their market reach.
Business size and segmentation
Market segmentation is valuable for businesses regardless of their scale, though the way it is applied often differs between small and large operations.
How small businesses use segmentation
Smaller firms typically focus on a niche segment to compete effectively, such as a local bakery targeting health-conscious customers with organic products.
How large businesses use segmentation
Bigger companies often address several segments simultaneously, using diverse product lines or brands to capture a wider audience, like a global electronics firm offering entry-level and high-end devices.