Marketing experts often recommend that a company segment its markets to help grow its business. So, what is “market segmentation,” what are the benefits of doing it, and how do you do it? In this blog, we’ll discuss segmentation in consumer markets; in a subsequent article, we’ll address the business market.

Market Segmentation – Definition & Benefits

Market Segmentation is the process of dividing a market into smaller, distinct sub-markets (or “segments”) of buyers who share common characteristics. It’s used to identify groups of consumers who are likely to have similar needs and, therefore, buy similar products. Once a company is able to identify a number of unique groups of consumers (“market segments”) in its markets, it can develop specific products or services which will better satisfy their needs than a generic product would. The typical result of this analysis is to allow the company to sell more to each market segment, and the overall market, than it could by selling a single product to all segments!

The Process – How To Segment

There are a number of different methods for segmenting consumer markets:

1. Geographic – by country, state, county, zip code, or another geographic unit
2. Demographic – by age, income, gender, marital status, education, occupation, ethnicity, family life cycle, or related factors
3. Psychographic – based on individuals’ values, attitudes and lifestyles (for example, sports enthusiasts or health conscious individuals) and personality types (for example, High Achievers or Innovators in the VALS segmentation framework )
4. Behavioral– based on a person’s knowledge of, attitudes towards, use of, and response to a product or service (for example, heavy vs. low users of a product or individuals with a strong loyalty to a brand)

The Demographic Method is the most important, and frequently used, segmentation method because shared age and income levels have been shown to be closely related to purchasing behavior. In addition, a further refinement added a geographic dimension to this methodology – since research has shown that people of similar financial means tend to live in the same neighborhoods.

This hybrid approach is known as Geo-demographic Segmentation. It pairs income, age, and education or occupation with consumers’ residences and has proved to be a powerful predictor of consumer purchasing behavior. Much of this data is available from US Census surveys and private marketing database vendors (for example, Dun & Bradstreet or InfoUSA) for very specific geographic units such as zip codes or Census tracts.

A Case Study

Let’s look at an example of how to use market segmentation in a consumer market. One of our clients asked our firm to investigate the market size for selected consumer products in an urban market on the East Coast. Using US Census data from 2000 and 2010, as well as a 5 year forecast from a market research vendor, we were able to identify the market segments which were likely buyers of the company’s products and estimate the size and growth of these segments.

We used demographic factors (age, household income, household size, ethnicity, and education) to segment the market. Then, we sub-divided it into groups of consumers sharing these characteristics, for example, “young single professionals” or older married “empty nesters.” We further sub-divided these groups by income levels. Our client used this market segmentation to develop new, or modify existing, products to satisfy the unique needs of these consumer segments. At the time of this publication, the company is preparing to launch a marketing program in this new market to sell a range of related products.

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Gene Principato, President
The Marketing Difference LLC
Tel.: 856-465-7372