Market Segmentation — Understanding Different Customer Needs

Published by: Mind Tools Content Team, January 2020.

Imagine that your organization owns a chain of high-end fitness clubs around the country. Obviously, your market includes anyone who’s interested in staying fit and healthy; however, you know that your consumer group is more complex than that.

For example, the people who use your club during the day are often stay-at-home parents who need childcare services while they exercise. There are many retired customers who have their own unique set of fitness needs. And the evening crowd largely consists of professionals who work full time and want a quick but intense workout.

The different members of your consumer group have their own priorities, wants and needs. So, how do you tailor your marketing to address all of them?

The answer lies in “market segmentation”: dividing your customer base into groups of people with similar needs. This means that you can meet each segment’s requirements in a more focused way.

In this article, we’ll take a deeper look at market segmentation, and we’ll discuss how you can use it to promote your products or services more effectively.

Why Use Market Segmentation?

Market segmentation is the process of dividing your target market into clearly defined subgroups of consumers who have common wants, needs and priorities. When you identify these segments, you can tailor your marketing strategies to meet these wants, needs and priorities in a cost-effective way.

This approach can boost sales significantly and allow you to command a higher price from customers, at the same time as increasing their loyalty and engagement. Even if you sell the same basic product to all subgroups, you can develop packages of add-on products and services that ideally suit each group.

In many cases, marketers intuitively understand who their subgroups are. However, a formal analysis is useful to ensure that you don’t overlook an important segment — particularly as products develop over time.

Market Segmentation Example

To understand how marketing segmentation can benefit you and your customers, let’s look at the fitness center example again.

You already know that your daytime users are mainly parents and retirees. To appeal to parents, you could advertise your family-friendly facilities in publications or on websites that they commonly read or visit. One option is to offer childcare services and fitness activities for older children while their parents work out. You might also offer a reduced price for this segment to boost attendance during the quieter afternoon period.

The next group — your retirees — have entirely different expectations and needs. For them, you might employ personal trainers who specialize in helping older adults keep fit, and you could offer special exercise classes during the day. You could advertise these on the radio, or in publications that retirees read. You could also offer lower-priced packages to encourage older people to come outside of the busier peak times.

You’d then likely change your marketing tactics to appeal to the evening crowd. For example, you could showcase cutting-edge machines that might interest your busy professionals, or you could make more personal trainers available in the evenings to customize workouts. You’d reach this group by text, on websites, or by putting marketing content on the social media channels they use. You could command a premium here, since the number of people using the clubs goes up in the evening.

How to Segment Your Market

When deciding how to segment your market, it’s important to analyze each group’s differences carefully to ensure that you’ve divided them appropriately.

• Accessible: are you able to reach the subgroup through cost-effective and practical marketing and distribution channels?
• Measurable: can you estimate each subgroup’s size easily, so that you can allocate marketing spend accordingly?
• Substantial: is the segment large, established and stable enough to justify its own marketing activity?
• Viable: can people within the subgroup afford your product, and will they see clear and desirable advantages of using it, compared with other products and services?

Tip:

Segments that represent small sections of an overall market are known as “niche markets.” Organizations may focus on these when their product’s price is high, or when the market is especially large. (Here, a segment representing only two percent of the total market may be big enough to sustain a good-sized business.)

You can consider four common bases when segmenting your market:

1. Geographical: country, language, region, state, cities, or neighborhoods.
2. Demographic: age, gender, occupation, income, or ethnicity.
3. Psychographic: lifestyle, values or interests.
4. Behavioral: what you use the product for, brand loyalty or the benefit you look for from the product.

For decades, these bases have formed the foundation of market segmentation. But, while they are still useful when developing a marketing strategy, it can be overly simplistic to divide people up into such broad categories.

Even when dividing consumers into narrower groups, such as by age, there can be significant differences among people of the same age in terms of their values, interests, geography, and behavior. Therefore, using this marketing strategy alone, without further segmentation or analysis, could waste time, money and resources.

Once you’ve decided how to divide your market, you can then design an appropriate marketing mix for each segment.

New Strategies to Segment a Market

Technology continues to add new business models that allow organizations to segment markets based on consumers’ behavior.

For example, online retail giant Amazon® advertises products to customers based on items that they have purchased in the past. Film streaming service Netflix™ recommends movies to users based on the ones that they have already expressed interest in. Both of these organizations track consumer purchases and activity, and segment their market based on actual behavior.

Cell phone technology has opened up many innovative ways to find new market segments. For example, organizations can now target consumers based on their actual locations, using their smartphones’ Global Positioning System technology, rather than through traditional methods of geographic segmentation.

Another strategy is product differentiation, which is something technology manufacturer Apple® uses with its iPhones. When Apple launches a new smartphone, it often offers a “luxury,” cutting-edge model that it can charge its early adopters a premium for. These particular consumers are a highly diverse group, but they will all spend more to have the newest phone first, from one of their favorite companies.

However, Apple typically keeps the previous generation of smartphones on sale as well. These less expensive products appeal to the company’s more cost-conscious customers, who get a great phone for a reduced price.

Key Points

Market segmentation aims to make your marketing more effective, and it can also show you how to serve your customers’ needs better.

It involves splitting your target market into groups of people who will likely respond in a similar, positive way to your marketing initiatives. To make it worthwhile, market segments should be accessible, measurable, substantial, and viable.

The main ways to divide a consumer market are on the basis of geography, demography, psychographic factors, and behavior. However, technology has opened up new and innovative ways to segment consumers more effectively.

Apply This to Your Life

Although people most commonly apply market segmentation to consumer product marketing, you can also use this concept to communicate more effectively with others. And, by applying its principles to your organization, you can “market” your ideas better, and increase the likelihood that people will find your ideas and initiatives appealing.

For example, imagine you want to promote a new project idea within your organization. You would want to change your message based on the priorities, wants and needs of the various members of your audience.

So, you’d emphasize the potential cost savings to the finance team, stress how it should lower the employee turnover rate to HR managers, and demonstrate to those who report to you how it could reduce their workload.

Next time you want to “sell” an idea internally, try out a segmented approach by tailoring your message to different parts of your audience. You’ll quickly find out how powerful this can be!

Mind Tools Content Team — Our mission is to develop and deliver the highest-quality content to help learners enjoy happy, successful careers, and contribute positively to the success of their organizations.