How can you identify what’s the best market segment for your unique business model? What is the purpose of market segmentation and how can you do it best? How does segmentation help with increasing sales?

Read the full blog to find out everything you need to know about these questions.

In our previous blog, we discussed why we need to profile customers and the different kinds of profiles such as Demographic profiling, Geographic profiling, Psychographic profiling and Behavioural profiling.

You can read the full blog here.

In this blog, we will focus on what market segmentation means, the market segmentation criteria and various segmentation strategies.

You may be wondering what the difference is between customer profiling and customer segmentation.

Customer profiling means defining the ideal customers of a business, based on their unique characteristics. This includes information on their behaviour patterns, demographics, interests and geographic location. You can define your customer profile by creating buyer personas (which are semi-fictional characters of your different ideal customers)

Customer segmentation means splitting your existing customers into specific subgroups. Each of these specific smaller groups has unique characteristics based on information collected from existing data. The data may have been gathered through email marketing, CRM tools, advertising campaigns, etc.

In short, customer profiles are the kind of customers a business needs to be successful with its business strategy. On the other hand, customer segments are existing customers that are grouped in a way that opportunities and red flags can be quickly identified.

Identifying and satisfying the right market segments is the key to marketing success.

Defining a market segment

A market segment is a set of customers who have similar wants and needs. Accordingly, companies should focus on the groups that they have the highest chance of satisfying.

A good market segment should be:

• Identifiable (or differentiable): It should be possible to describe a segment according to descriptive characteristics (geographic, demographic and psychographic) or behavioural considerations (consumer responses to benefits, usage occasions or brands). Applying different marketing strategies to each segment will result in different outcomes.
• Accessible: Each segment needs to be able to be reached and communicated with on an efficient basis. You should be able to distribute your product to your chosen segment. For example, a shop based in Delhi is unlikely to get a large number of customers from Bangalore. In this instance, the shop will have to reassess its chosen segment or think about solutions to help accessibility such as selling to customers through the internet.
• Substantial: Your segment should be large enough to allow companies to make profits.
• Measurable: Businesses should be able to understand their positioning and market share as well as the purchasing power and segment size.

Michael Porter, a professor at Harvard Business School, has identified a five forces framework to understand the long-term attractiveness of a market or industry. They are known as Porter’s 5 Forces:

1. Competitive Rivalry
2. Supplier Power
3. Buyer Power
4. Threat of Substitution
5. The threat of New Entry

These forces include the number and power of a company’s competitive rivals, potential new market entrants, suppliers, customers, and substitute products that influence a company’s profitability. Five Forces analysis can be used to guide business strategy to increase competitive advantage.

Market Segmentation Criteria

Some researchers try to define segments with a scheme of descriptive characteristics, while others study behavioural traits.

Let us analyse each criterion of market segmentation.

• 1. Geographical criterion

Geographic segmentation takes into consideration local communities and targets consumers according to specific areas or territories:

• Country;
• Region;
• City/suburbs;
• Climate.

A popular leading strategy is grassroots marketing where companies target their message to small groups of individuals expecting them to spread it to a much larger audience. It starts from the ground up and is usually cost-effective: focusing on smaller-scale campaigns allows to concentrate efforts and contain budget.

Mastering the geographic segmentation criterion is fundamental for local businesses.

Although these are advantages, it is not all roses.

The main issue is that localised marketing increases logistical problems, and manufacturing costs, and reduces scale economies. Moreover, brand perception can be compromised if different communities receive different products/services and messages.

But this is the trade-off that marketers have to consider.

• 2. Demographic criterion

Demographic segmentation aggregates people who have similar wants and needs and is usually straightforward. It is important to understand what kind of media should be used for each segment. Demographic variables could be:

• Age;
• Gender;
• Job position;
• Employment status;
• Income;
• Family;
• Social class.

Wants and abilities keep changing with age, which is why knowing the age and life cycle is crucial for marketers. For example, Diaper brands divided their products into prenatal, newborn babies (0-5 months), babies (6-12 months), toddlers (13-23 months) and preschoolers (over 24 months).

Age and life-cycle can be tricky sometimes. For example, Honda had a commercial campaign aimed at the younger demographic. However, the response was mostly from the baby boomers!

Another factor is people’s life stages. Monumental events such as weddings, divorces, second marriages, getting a new job, buying a house etc. are times that marketers can leverage.

Income segmentation allows businesses to develop product categories with unique positioning to reach the corresponding income bracket.

• 3. Psychographic criterion

People in the same demographic segment can express different psychographic traits, this segmentation is known as psychographic segmentation:

• Personality;
• Aptitude;
• Values;
• Lifestyle.

A very powerful classification system based on psychographic criteria is the VALS framework. In this, people are classified into eight main groups according to their responses to a questionnaire.

The VALS framework has two main dimensions:

1. Consumer motivation (horizontal)
2. Consumer resources (vertical)

Three primary motivations for individuals are ideals, achievement and self-expression. Those who are motivated by ideals are guided by knowledge and principles. Those inspired by achievement tend to seek products and services that show off their success. Consumers motivated by self-expression seek social & physical activity, risk and array.

An individual’s resources are established by key demographics and personality traits like self-confidence, intellectualism, energy, innovativeness, novelty seeking, vanity, impulsiveness and leadership. A person’s motivations are determined by different levels of resources.

Here are the different groups that individuals can be categorised as based on their motivation and resources:

Innovators: They stand out, and are refined, active and confident people who love to lead. They tend to value high-end niche products/services and have sophisticated tastes. They are the first ones to purchase a product/service even if it is not a mainstream trend.

Thinkers: They are contemplative individuals inspired by order, values, responsibility and knowledge. For them, the ideal product is functional and durable.

Achievers: They are goal-oriented people who take care of their families and pursue successful careers. They tend to purchase upscale products to exhibit success to their peers. It is seen that once goods become trendy, then achievers purchase them.

Experiencers: They are passionate, young and spontaneous individuals that are variety-seeking and adventurous. They tend to spend more on entertainment, fashion and social activities.

The next four groups are those with lower resources:

Believers: They are traditional, regular individuals with well-established beliefs. They tend to prefer local products/services and are loyal to brands that are familiar to them.

Strivers: They are fashionable and outgoing individuals with limited financial resources. They tend to buy popular imitations of high-end products/services.

Makers: They are self-sustaining individuals with realistic, concrete beliefs. They are people who enjoy working with their hands. They seek local products that are practical and functional.

Survivors: They are those that are afraid of change and tend to be loyal to their favourite brands.

• 4. Behavioural criterion

Individuals have unique expectations and attitudes toward products/services. Behavioural segmentation enables us to segregate customers according to the:

• Use;
• Loyalty;
• Buyer readiness.

One of the approaches of behavioural segmentation enables us to group consumers based on their needs and the benefits they expect from a product. For example, the benefits sought could be:

• Discounts;
• Purchasing time;
• Specific service.

Another approach is segregating customers according to the role played by a customer during the purchase decision. They are primarily five roles:

1. Initiator
2. Influencer
3. Decider
4. Buyer
5. User

Buyer readiness is extremely useful for a marketeer as it pertains to the marketing funnel. In today’s digital era, tracking customer stages is easy and common. Almost all digital marketing activities take into consideration these stages. In the image below, we have reproduced a funnel example from Kotler and Keller.

These two marketing funnel examples have different conversion rates. Brand B’s funnel performs better than Brand A. Marketeers could use this information to better understand when customers drop and optimise every stage of buyer readiness.

By putting together different types of behavioural segmentation we can have a more comprehensive view of the target market. The image below is an example of behavioural segmentation from Marketing and Management by Kotler and Keller.

• 5. Situational criterion

In situational segmentation, we identify different groups of consumers according to the occasion of product/service usage. It marks a specific usage time during a consumer’s life. For instance, the occasion that triggers international travel is linked to business, family or vacation.

Situational criterion helps expand product usage and its main key points are:

• Time dedicated to the purchase;
• Social circumstances;
• Physical circumstances;
• Reasons for Buying

Conclusion:

Market segmentation is essential for increasing sales and achieving marketing objectives: it directs a firm’s resources and efforts to the ideal target audience.

For the accurate execution of these strategies, market research is needed to validate one’s propositions.

Aeon offers syndicated research and competitive intelligence collected across 20 cities in India. Leverage the power of market research to help identify growth opportunities in your business. Contact us to find out more.