Conducting a Segmentation

Determining Segmentation Variable(s)

Markets can be segmented primarily according to geographic, demographic, usage, and psychological segments—or a combination of the above.

Learning Objectives

Break down market segmentation variables

Key Takeaways

Key Points

  • Geography is probably the oldest basis for segmentation, and is often useful for marketers due to the amount of data available. However, there are drawbacks with focusing solely on geography.
  • Demographic segmentation is also useful for certain products. However, marketers should be aware that demographics tend to change with society, and thus be aware of these changes and respond to them accordingly.
  • Psychological segmentation, such as lifestyle and attitudinal variables, are also useful for particular types of products. However, obtaining information on such bases can often prove challenging.

Key Terms

  • geographic segments: Segmentation of consumers based on geographical factors such as location, weather, topography, population density, etc.
  • demographic segmentation: The division of the market into subsets based on characteristics of the population.
  • psychological segments: Segmentation of markets based on psychological influences, such as personality, lifestyle choices, and attitudinal variables.

Bases of Segmentation

There are many different ways by which a company can segment its market, and the chosen process varies from one product to another (see ). Also, since markets are very dynamic, and products change over time, the bases for segmentation must likewise change.

A table that shows bases for segmentation by choosing primary dimensions and breaking it down into consumer and industrial markets.

Bases for Segmentation: One way to segment markets is by consumer and industrial markets.

Geographic Segments

Regional differences in consumer tastes for products as a whole are well-known. Markets according to location are easily identified and large amounts of data are usually available. Also, many companies simply do not have the resources to expand beyond local or regional levels.

Closely associated with geographic location are inherent characteristics of that location: weather, topography, and physical factors such as rivers, mountains, ocean proximity, and population density.

Geography provides a convenient organizational framework. Products, salespeople, and distribution networks can all be organized around a central, specific location. However, there are drawbacks. Consumer preferences may bear no relationship to location. Other factors, such as ethnic origin or income, may overshadow location. The stereotypical Texan, for example, is hard to find in Houston, where one-third of the population has immigrated from other states. Another problem is that members of a geographic segment often tend to be too heterogeneous to qualify as a meaningful target for marketing action.

Demographic Segments

Demographics can be used to help companies develop products that meet current and future consumer needs. It can alert a company to a new segmentation, one that was not originally connected to the product. For example, women using power tools as home owners. Segmenting the consumer market by age groups is useful for several products. For example, the youth market (approximately 5 to 13) influences how their parents spend money, and when they make purchases on their own (e.g. toys and snacks). Presently, the senior market (age 65 and over) has grown in importance for producers of low-cost housing, cruises, and health care.

Gender has historically been a good basis for market segmentation. Many traditional gender-based boundaries are changing, and marketers must be aware of these changes. The emergence of the working woman, for instance, has made determining how the family income is spent more difficult. Thus, the simple classification of male versus female may be useful only if several other demographic and behavioral characteristics are considered. Income seems a better basis for segmenting markets as prices for a product increases. Income may also may uncover other buying behaviors.

Education affects product preferences and desired characteristics for certain products. Occupation is important: individuals who work in hard physical labor may demand a different set of products than a teacher or bank teller. Race, religion and national origin have also been associated with product preferences and media preferences.

Usage Segments

  • The heavy user is an important basis for segmentation. This approach is very popular, particularly in the beverage industry (e.g beer, soft drinks, and spirits).
  • Purchase occasion: determining the reason for an airline passenger’s trip, may be the most relevant criteria for segmenting airline consumers.
  • User status: communication strategies must differ when directed at different use patterns, such as nonusers versus ex-users, or one-time users versus regular users.
  • Loyalty: if companies can identify customer loyalty to their brand, and then delineate other characteristics these people have in common, they will locate the ideal target market.
  • Stage of readiness: potential customers may be unaware, aware, informed, interested, desirous, and intending to buy. If a marketing manager is aware of where the specific segment of potential customers is, he or she can design the appropriate market strategy to move them through the various stages of readiness.

Psychological Segments

Segmentation should recognize psychological as well as demographic influences. For example, Phillip Morris has segmented the market for cigarette brands by appealing psychologically to consumers in the following way:

  • Marlboro: the broad appeal of the American cowboy
  • Benson & Hedges: sophisticated, upscale appeal
  • Parliament: for those who want to avoid direct contact with tobacco

Attitudes of prospective buyers towards certain products influence their subsequent purchase of them. If people with similar attitudes can be isolated, they represent an important psychological segment.

Measurements of demographic, personality, and attitudinal variables are convenient measurements of less conspicuous motivational factors. People with similar physical and psychological characteristics may be similarly motivated. Motives can be positive (convenience), or negative (fear of pain). So marketers attempt to observe motivation directly and classify market segments accordingly.

Lifestyle segmentation has become very popular with marketers, because of the availability of measurement devices and instruments, and the intuitive categories that result from this process. Producers are targeting versions of their products and their promotions to various lifestyle segments. Lifestyle analysis begins by asking questions about the consumer’s activities, interests, and opinions. Research reveals vast amounts of information concerning attitudes toward product categories and user and non-user characteristics, which marketers can use in targeting their products.

Segmentation for B2B

B2B firms will segment their customers differently, due to different buying habits and procedures between businesses and end-users.

Learning Objectives

Analyze B2B marketing segmentation characteristics

Key Takeaways

Key Points

  • There are five major ways to segment the B2B market, including: type of customer, Standard Industrial Classification codes, end uses, common buying factors, and buyer size/geography.
  • SIC classification provides a useful way for marketers to segment the market.
  • By determining how the end-use of a product differs according to different users, the manufacturer can modify the product so that it appeals to different segments.
  • If the first four approaches are not useful, a marketer may still have success in segmenting by customer size and geography.

Key Terms

  • Standard Industrial Classification (SIC): A set of codes published by the United States government that classifies business firms by the main product or service provided.

B2B Segmentation

B2B firms sell not to ultimate consumers but to other businesses. While businesses and final consumers behave similarly at times, there are also several differences. Most business buyers view their function as a problem solving approach, and have formal procedures, or routines, for their purchasing.

A B2B marketer must be able to distinguish between the industries it sells to and the different market segments that exist in each of them. There are several basic approaches to segmenting organizational markets, including: type of customer, Standard Industrial Classification codes, end uses, common buying factors, and buyer size and geography.

Type Of Customer

Industrial customers can be classified into one of three groups:

  • Original equipment manufacturers (OEMs), such as Caterpillar machinery or Gibson guitars
  • End-users, such as farmers who use farm machinery produced by OEMs
  • After market customers, such as those who purchase spare parts for a piece of machinery

Similarly, industrial products can be classified into one of three categories, each of which is typically sold only to certain types of customers:

  • Machinery and equipment (e.g. computers, bulldozers) are end products sold only to OEM and end user segments.
  • Components or subassemblies (e.g. pistons, spark plugs) are sold to build and repair machinery and equipment, and are sold in all three customer segments.
  • Materials (e.g. chemicals, metals) are consumed in the end-user products, and are sold only to OEMs and end users.

Standard Industrial Classification

This approach employs the Standard Industrial Classification (SIC) codes published by the United States government. The SIC codes classify business firms by the main product or service provided. There are ten basic SIC industries which firms are classified into. Within each classification, the major groups of industries can be identified by the first two numbers of the SIC code (see example).

By using SIC codes, a marketer may identify the manufacturing groups that represent potential users of the products it produces and sells. takes the two digit classification and converts it to three-, four-, five-, and seven-digit codes.

A diagram that shows different SIC code classifications - basic industry (2 digits), major group (2 digits), industry group (3 digits), specific industry (4 digits), product class (5 digits), and product (7 digits).

SIC Classification: SIC codes have two-digit to seven-digit classifications.

End Uses

Industrial marketers may segment markets by looking at the different ways and situations in which a product is used. Here, the industrial marketer typically conducts a cost / benefit analysis for each end-use application. The manufacturer must ask: What benefits does the customer seek from this product?

For example, an electric motor manufacturer learned that customers operated motors at different speeds. After making field visits to gain insight into the situation, he divided the market into slow speed and high speed segments. In the slow-speed segment, the manufacturer emphasized a competitively priced product with a maintenance advantage, while in the high-speed market product, superiority was stressed. By determining how the end-use of the product differed according to different users, the manufacturer was able to modify the product, and the marketing of the product, to appeal to these different segments more effectively.

Common Buying Factors

Marketers may segment markets by identifying groups of customers who consider the same buying factors important. Five factors are typically found to be important in most industrial buying situations: product performance, product quality, service, delivery, and price. Identifying a group of customers who value the same buying factors as important is difficult, as industrial organizations’ and resellers ‘ priorities often change.

Buyer Size and Geography

If the previous approaches are not useful in a particular situation, market advantages may still be realized by segmenting based on account size or geographic boundaries. Sales managers have done this for years, but only recently have organizations learned to develop several pricing strategies for customers that are close and for those who are far away. Similarly, different strategies can be developed for customers of different sizes.

B2B Company Characteristics

B2B businesses operate and market their goods and services differently than B2C companies, due to the different nature of the purchase.

Learning Objectives

Differentiate between B2B, business to business and B2C, business to consumer characteristics

Key Takeaways

Key Points

  • The volume of B2B sales is much greater than that of B2C sales.
  • The purchase of B2B products is much risker than B2C products, because purchasing the wrong product or quantity, or at the wrong terms, can put the entire purchasing business at risk.
  • B2B companies behave differently when buying. Purchases are usually made by committee, and decisions are specification-driven.
  • B2B companies avoid mass media when promoting their brand, instead targeting their customers directly through trade shows, specialized magazines, etc.

Key Terms

  • B2B: Commerce transactions between businesses, such as between a manufacturer and a wholesaler, or between a wholesaler and a retailer.
  • B2C: The sale of goods and services from individuals or businesses to the end-user.

Transactions Between Businesses

B2B, or business-to-business, describes commercial transactions between businesses, such as between a manufacturer and a wholesaler, or between a wholesaler and a retailer. The volume of B2B transactions is much higher than the volume of B2C transactions, because in a typical supply chain there will be many B2B transactions involving sub components or raw materials, and only one B2C transaction, specifically sale of the finished product to the end customer. For example, an automobile manufacturer makes several B2B transactions such as buying tires, glass for windscreens, and rubber hoses for its vehicles. The final transaction, a finished vehicle sold to the consumer, is a single B2C transaction.

While almost any B2C product or service could also be a B2B product, very few B2B products or services will be used by consumers. For example, toilet paper, a typical B2C product, is a B2B product when sold to hotels. However, few people will buy a forklift for their private use.

an image of microchips of various sizes and colors

Microchips: A microchip is a classic B2B product. Electronic manufacturers buy microchips to put in their products. They sell the products to final consumers.

Differences between B2B and B2C

The main difference between B2B and B2C is who the buyer of a product or service is. The purchasing process is different in both cases. Below are some of the differences between the two types of purchase.

Risk

Buying one can of soft drink involves little money, and thus little risk. If the decision for a particular brand was not right, there are very few implications. The worst that could happen is that the consumer does not like the taste and discards the drink immediately. However, buying B2B products is much riskier. Purchasing the wrong product or service, the wrong quantity, the wrong quality, or agreeing to unfavorable payment terms may put an entire business at risk.

In international trade, delivery risks, exchange rate risks, and political risks exist and may affect the business relationship between buyer and seller. Strong brands imply lower risk of using them; buying unfamiliar brands implies financial risks. Products may not meet the requirements and may need to be replaced at high cost. There exists a performance risk, as there might be something wrong with an unfamiliar brand. When buying machinery or supplies for a company, peers may not approve the purchase of an unknown brand, thus posing a risk to a purchasing manager’s reputation.

Buying behavior in a B2B environment

Timescale

For consumer brands, the buyer is an individual. In B2B there are usually committees of people in an organization. Each of the members may have different attitudes towards any brand. In addition, each party involved may have different reasons for buying or not buying a particular brand. Since there are more people involved in the decision, and since technical details may have to be discussed in length, the decision-making process for B2B products is usually much longer than in B2C.

Brand Loyalty

Companies seek long-term relationships, as any experiment with a different brand will have impacts on the entire business. Brand loyalty in B2B is therefore much higher than in consumer goods markets. While consumer goods usually cost little in comparison to B2B goods, the selling process involves high costs. Not only is it necessary to meet the buyer numerous times, but the buyer may ask for prototypes, samples, and mock-ups. Such detailed assessment serves the purpose of eliminating the risk of buying the wrong product or service.

Brand Differentiation

B2B products are generally bought by a committee of buyers, and in many cases the purchases are specification driven. As a result, it is vital that brands are clearly defined and that they target the appropriate segment. Companies can use various strategies of differentiation, leveraging on the origin of the goods or the processes used in manufacturing them. Depending on the company’s history, the competitive landscape, occupied spaces and white spaces, there could be one or many strategies a company could use. Ultimately, a strong B2B brand will reduce the perceived risk for the buyer and help sell the brand.

Brand Promotion

B2B promotions work differently from B2C brand promotions. The former avoid mass market broadcasts and generally use media that can be targeted at a specific business audience, such as direct marketing distributed online or in trade magazines. B2B companies are also present where their potential customers are, at trade shows, exhibitions, and other trade-related events.

Evaluating Market Segments

Segmentation involves classifying people into homogeneous groupings and determining which of these segments are viable target markets.

Learning Objectives

Illustrate the purpose and method of evaluating market segments

Key Takeaways

Key Points

  • Market segmentation involves dividing a broad target market into multiple subsets of consumers with common desires and common applications for the product. Marketing campaigns are designed and implemented to target these specific customer segments.
  • This premise of segmentation holds that people can be most effectively approached by recognizing their differences and adjusting to them. By emphasizing a segmentation approach, the exchange process should be enhanced, since a company can more precisely match the needs and wants of the customer.
  • A company following a concentration strategy focuses on one specific market segment, allowing it to understand the segment and focus on it fully, lowering costs. A multisegment strategy targets multiple segments and thus a larger market, but incurs higher marketing costs.

Key Terms

  • market segmentation: The process of dividing a broad target market into subsets of consumers who have common needs or desires, as well as common applications for the relevant goods and services.

The Segmented Market

While product differentiation is an effective strategy to distinguish your brand from competitors, it also differentiates your own products from one another. For example, a company such as Franco-American Spaghetti has differentiated its basic product by offering various sizes, flavors, and shapes. The objective is to sell more product, to more people, more often. Kraft has done the same with their salad dressings; Xerox with its multitude of office products. The problem is not competition; the problem is the acknowledgment that people within markets are different and that successful marketers must respond to these differences (see for a recap of the different market approaches).

A table that shows how to define and approach markets - define the market (people, place, economic entity), types of markets (consumer, industrial, institutional, reseller), and approaching the market (undifferentiated market, product differentiation, and segmental market - based on strategies).

Markets: Because all markets are different, it is important to define and approach a market using certain steps.

This premise of segmenting the market theorizes that people and/or organizations can be most effectively approached by recognizing their differences and adjusting accordingly. By emphasizing a segmentation approach, the exchange process should be enhanced, since a company can more precisely match the needs and wants of the customer. While it is relatively easy to identify segments of consumers, most firms do not have the capabilities or the need to effectively market their product to all of the segments that can be identified. Rather, one or more target markets (segments) must be selected. In reality, market segmentation is both a disaggregation and aggregation process. While the market is initially reduced to its smallest homogeneous components (perhaps a single individual), business in practice requires the marketer to find common dimensions that will allow him to view these individuals as larger, profitable segments. Thus, market segmentation is a twofold process that includes:

  1. Identifying and classifying people into homogeneous groupings, called segments, and;
  2. Determining which of these segments are viable target markets.

In essence, the marketing objectives of segmentation analysis are:

  • To reduce risk in deciding where, when, how, and to whom a product, service, or brand will be marketed
  • To increase marketing efficiency by directing effort specifically toward the designated segment in a manner consistent with that segment’s characteristics.

Criteria for Segmenting

Market segmentation involves dividing a broad target market into subsets of consumers who have common needs (and/or common desires) as well as common applications for the relevant goods and services. These subsets may be divided by criteria such as age and gender, or other distinctions, such as location or income. Marketing campaigns can then be designed and implemented to target these specific customer segments. An ideal market segment meets all of the following criteria:

  • It is possible to measure.
  • It must be large enough to earn profit.
  • It must be stable enough that it does not vanish after some time.It is possible to reach potential customers via the organization’s promotion and distribution channel.
  • It is internally homogeneous (potential customers in the same segment prefer the same product qualities ).
  • It is externally heterogeneous, that is, potential customers from different segments have different quality preferences.
  • It responds consistently to a given market stimulus.
  • It can be reached by market intervention in a cost-effective manner.
  • It is useful in deciding on the marketing mix.

Segmentation strategies

There are two major segmentation strategies followed by marketing organizations: a concentration strategy and a multisegment strategy. An organization that adopts a concentration strategy chooses to focus its marketing efforts on only one market segment. Thus, only one marketing mix is developed. An organization that adopts a concentration strategy gains an advantage by being able to analyze the needs and wants of only one segment and then focusing all its efforts onthat segment. This can provide a differential advantage over other organizations that market to this segment but do not concentrate all their efforts on it. The primary disadvantage of concentration is related to the demand of the segment. As long as demand is strong, the organization’s financial position will be strong. If demand declines, the organization’s financial position will also decline.

The other segmentation strategy is a multisegment strategy. When an organization adopts this strategy, it focuses its marketing efforts on two or more distinct market segments. The organization does so by developing a distinct marketing mix for each segment. They then develop marketing programs tailored to each of thesesegments. Organizations that follow a multisegment strategy usually realize an increase in total sales as more marketing programs are focused at more customers. However, the organization will most likely experience higher costs because of the need for more than one marketing program.

Selecting Target Markets

Strategic targeting can optimize the return on investment by selecting the best segments in the market for return on investment.

Learning Objectives

Recognize the importance of segmentation and how to translate data into smart decisions

Key Takeaways

Key Points

  • Identifying optimal segments within the broader market can improve the efficiency of both paid and organic marketing initiatives.
  • Selecting the right segments relies heavily on good data. The first step is collecting as much information as possible on the industry, competition, key metrics, and consumers.
  • Once the data is collected, organizations must strategically query the data to identify correlations that are statistically significant. In the era of big data, this is more important (and more complex) than ever.
  • Once the optimal segments are identified, the organization can match their available resources with the opportunities in the market itself.

Key Terms

  • segmentation: The act of dividing a larger population or market into smaller groups.

Why Pursue Target Markets

The purpose of identifying various market segments within the broader market is to refine the targeting of paid and organic advertising. Simply put, it’s best to narrow down an organization’s targeting to the individuals most likely to be interested in the product or service. These groups of interested consumers within the broader market is usually referred to as a target market, and should be a much more strategic place to invest capital in terms of marketing distribution.

This chart visualizes the concept of a target market within the context of a broader market.

Target Market: A target market is part of a served available market. Both of these markets are part of the total available market.

How To Select Targeted Groups

Organizing Data

To start, the organization should collect as much data as possible on the industry, competition, consumer behavior, and expected growth trajectories. Once enough data is collected, it’s useful to frame the targeting strategy by querying the data using the right questions. Some things to consider include:

  • How big is each segment?
  • What are the demographic, psychographic, behavioral, and geographic characteristics of each segment?
  • Which segments have the competition and/or our organization already captured?
  • Where is the highest growth potential?
  • Which market is most closely aligned with the organization’s brand and/or operating philosophy?
  • Is is practically feasible to enter where the ideal segment is (i.e. geographically)?

While there are countless other questions to ask, which will vary by industry and situation, understanding these basic concepts can quickly simplify the segmentation decision.

Visualizing data queries to understand how consumer groups look relative to various metrics is a useful technique in building clusters and segments.

Visualizing Segments: Visualizing data queries to understand how consumer groups look relative to various metrics is a useful technique in building clusters and segments.

Selecting A Segment

At this point, with the available market data at hand, it’s fairly simple to assess internal resources and external opportunities to optimize the marketing plan. The key here is to get the greatest return on marketing spend by strategically selecting the appropriate channels and using the ideal messaging to reach the selected segment.