What is Market Segmentation? Common Types & Bases

Part I: What is Market Segmentation?

Every business must answer critical questions such as who is our customer and what do they want? How should we focus our marketing strategies? What gives us a competitive advantage? And, how do we turn potential customers into satisfied customers?

Although the answers to these questions may seem simple, companies sometimes struggle to answer them. This may be because people do not know what they want or because businesses are unaware of all the customer segments that are interested in their products. This is where market segmentation comes in. Market segmentation is the process of dividing a broad market into smaller, more specific groups of customers who share similar characteristics, needs, or behaviors. By identifying these distinct segments, companies can tailor their messaging, refine their products, and allocate resources where they will have the greatest impact, as the story of Howard Moskowitz demonstrates.

Howard Moskowitz: Chasing the Perfect Pepsi

Howard is an experimental psychologist, and, in the early 1970s Pepsi asked him to help create a new drink: Diet Pepsi. Pepsi wanted Howard to tell them how much sweetener should go into a Diet Pepsi for consumers to like it. So, Howard did what any scientist would do and set up a taste test.

After conducting a large experiment with potential customers who tried Diet Pepsi with varying amounts of sweetener, Howard reviewed the data. But there was a problem; the results were incoherent. There did not appear to be one level of sweetness people liked, but many levels of sweetness that were popular. Confused by the data, Howard set the project aside and moved on.

Then, several years later, while at dinner, Howard had a breakthrough. He realized that Pepsi had hired him to answer the wrong question. They wanted to know what the perfect amount of sweetener was to make Diet Pepsi a hit. What they should have asked was how to make Diet Pepsi attractive to as many different customer segments as possible. If they had asked this question, they would have seen that there are multiple groups of potential customers in the market and the taste test data was telling them that each niche market wanted a different kind of Pepsi.

This breakthrough was brilliant.

Using Howard's insight, Pepsi started to create products and marketing strategies that served each of their different customer segments. Doing so, offered Pepsi a competitive advantage and is why their product line today looks something like this:

Understanding the variability between people is the heart of market segmentation. When businesses engage in market segmentation, they take many different people and look for groups or clusters that share some trait, characteristic, or feature that is important . There are at least four ways to create groups based on shared characteristics: demographic segmentation, behavioral segmentation, psychographic segmentation, and geographic segmentation. Clustering consumers together with these methods yields a better answer to the question of: what do customers want?

4 Types of Market Segmentation: Definitions and Examples

When researchers segment a market, they must decide which characteristics of their customer base are most important. Some commonly used characteristics fall into broad groups.

Demographic Segmentation

Characteristics like people's age, occupation, education, income, marital status or family composition are demographic traits often used for market segmentation. When companies segment customers based on these characteristics, they aim to find groups of people who are interested in their products and the best way of speaking to these groups.

An Example of Demographic Segmentation: Marketing Men's Deodorant

Consider men's deodorant. Broadly speaking, it doesn't matter which brand a man purchases — the product has the same goal: keep underarms dry and odor-free.

However, men's deodorant isn't sold the same way to men of different ages. Axe body spray markets their product to appeal to teenagers, Old Spice does so in a way that might appeal to young men, and Dove markets in a way that might appeal to middle-aged men. Each of these marketing strategies are based on demographic segmentation.

Although demographic segmentation helps businesses identify potential customers, demographics alone are somewhat limited. Often businesses can refine their marketing efforts even further by combining demographic infromation with other variables like behavior or psychographic segmentaiton.

Behavioral Segmentation

People's behavior provides a rich basis for market segmentation. For example, imagine how you might market to someone if you knew their purchase history, how many times they visited your website, their motivations for considering a product, and how they feel about your company or your competitors. With this knowledge, the marketing messages start to write themselves.

An Example of Behavioral Segmentation: Boosting Engagement on Netflix

One of the most successful behavioral segmentation strategies in recent years comes from companies like Netflix. When people watch a show or engage with content, the company measures it and uses machine learning to predict similar content people may want to watch in the future. Such behavioral segmentation helps Netflix keep eyeballs on the screen and subscription dollars flowing across markets that stretch around the globe.

Psychographic Segmentation

Psychographic segmentation focuses on identifying aspects of people's personality, lifestyle, values, and psychological makeup that lead them to connect with a company or its products.

An Example of Psychographic Segmentation: Apple Picks A Winning Message

Perhaps one of the best illustrations of psychographic segmentation is Apple's “Think Different” campaign. When speaking about the campaign, Steve Jobs once said:

I think you had to really think differently when you bought a Mac. It was a totally different computer, worked in a totally different way, used a totally different part of your brain. And it opened up a computer world for a lot of people who thought differently … And I think you still have to think differently to buy an Apple computer.

The “Think Different” campaign was remarkable because of how well it spoke to the people interested in buying a Mac. Apple told its customers they were unique, independent, and creative. And, by speaking so directly to how these consumers wanted to see themselves, Apple persuaded them to all do the same thing, which was to buy a Mac (see image below).

Geographic Segmentation

Companies find niche markets in many ways, and sometimes it is as simple as looking at where people live. The country, state, city or region where people live sometimes informs a business about the kind of products and messages those people will be interested in.

Although it is easy to think of companies that slightly alter their advertising for different markets, the real strength of geographic segmentation occurs when a company so thoroughly enmeshes itself within the ethos of a region that it feels like a natural representation of the people who live there. For example, look at L.L. Bean.

An Example of Geographic Segmentation: L.L. Bean Builds a Brand in Maine

L.L. Bean is an outdoor clothing company that began in Maine in 1911. For more than 100 years, they built a reputation for rugged, well-made and durable outdoor clothing—the popularity of their duck boots is cultish. But, the story of L.L. Bean is unusual. Despite their reputation for quality goods, the company didn't open a store outside of Maine until the year 2000. And, even today, they are largely located in states in the Northeast, Midwest, and West — places with a reputation for cold weather and outdoor activity.

As L.L. Bean has grown, they have emphasized their roots. Many products have Maine in the name, are named after places in Maine, or are commonly used by people who live in Maine. In addition, L.L. Bean often produces catalogs with people engaged in outdoor activities, using (you guessed it) the beautiful backdrop of Maine. Even people who don't know much about L.L. Bean know it's connected to Maine.

In other words, the company's geographic segmentation has been so successful that in the minds of many people L.L. Bean is Maine and Maine is L.L. Bean.

Other Bases for Market Segmentation

Often, the most effective market segmentation combines several characteristics to zero in on niche groups of consumers.. In addition to the general characteristics listed above, businesses often segment the market based on factors directly relevant to the business and its relationship with its customers. The more fine-tuned the segmentation, the more directly the business can serve its customers.

7 Specific Forms of Market Segmentation

1. Needs-Based Segmentation

Needs-based segmentation is just what it sounds like — an attempt by a business to learn about the needs of its customers and to develop marketing that meets those needs.

2. Loyalty-Based Segmentation

How loyal are customers to you and your brand? Are they boosters, first-time users or loyal to one of your competitors? Segmenting based on brand loyalty is one way to learn what customers want.

3. Generational Segmentation

It's hard to argue that “kids today” are the same as older generations. Societies change and people grow up in different cultural environments. Sometimes, good marketing leverages generational differences to speak to different groups of consumers. However, generational segmentation carries a huge risk: alienation. Aggressively marketing to one generational group can lead other people to conclude that your product or service is not for them.

4. Cultural Segmentation

If your business operates internationally, it is important to consider whether culture affects people's interest in your products. If it does, understanding cultural differences and situating your business within different cultural contexts can be an especially effective form of market segmentation. 

5. Online Behavioral Segmentation

Online behavioral segmentation considers details of a users' online behavior such as their location, number of visits to your site, past transactions, level of engagement with your brand, and what kind of benefits they are seeking. Combining data from people's online behavior with other characteristics about them can be an especially effective way to segment a market and uncover customers' needs and wants.

6. Firmographic Segmentation

Firmographic segmentation is common in business-to-business marketing. Firmographic segmentation considers things about a company like its industry, size, recent performance and status as a way to know what the business needs. Similar to the way demographics are used to understand individual people, firmographics are used to understand business.  

7. Attitudinal Segmentation

People's attitudes can be used in marketing. However, when possible, it is better to market to people based on behavior rather than attitudes. This is because people's attitudes affect their behavior less often than most people expect.

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