What is Market Segmentation? Common Types & Bases

Aaron Moss, PhD

By Aaron Moss, PhD, Cheskie Rosenzweig, MS, & Leib Litman, PhD

Part I: What is Market Segmentation?

Every business must answer several critical questions: Who is our optimal customer? What messages must we communicate to our customers? What are the primary attributes of a company that our customers want to do business with? What products/services do our customers want? What are the optimal ways to reach our prospective customers?

Although these questions may seem simple, companies and researchers often struggle to answer them. Finding out what people want is complicated. Sometimes, people do not know what they want; additionally, businesses may be unaware of all the audiences that are interested in their products. And, sometimes, businesses make assumptions that lead them to ask the wrong questions. Take, for example, the story of Howard Moskowitz.

Howard Moskowitz: Chasing the Perfect Pepsi

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

After conducting a large experiment in which people tried Diet Pepsi, all with different amounts of sweetener, Howard reviewed the data to see which version was the most popular. But there was a problem; the results were incoherent. There did not appear to be one “most popular” level of sweetness, but rather many different levels of sweetness that people liked. Howard was confused. Unable to answer the question, he set the project aside and moved on.

Then, several years later, while sitting in a diner, Howard had a breakthrough. He realized that, to paraphrase Malcolm Gladwell, the problem with Pepsi’s experiment was that they were looking for the perfect Pepsi when they should have been looking for multiple perfect Pepsis.

This breakthrough was brilliant.

What Howard realized was that Pepsi and every other food company in the 1970s looked at their market as one large, monolithic mass of humanity. Yet, what Howard saw in his messy data was variability. Pepsi considered everyone who drank Pepsi the same and, therefore, believed people should want the same drink (i.e., the perfect Pepsi). Howard, however, looked at the variability in people who drank Pepsi and realized that what people really wanted were different drinks (i.e., the perfect Pepsis), which is why Pepsi’s product line today looks something like this:

Capturing and understanding the variability between people is the heart of market segmentation. When businesses engage in market segmentation, they take many people and look for groups or clusters that share some trait, characteristic, or other feature that is important to them as consumers (see image below). By identifying different clusters of consumers, businesses can tailor their products, advertising, communication, and engagement to people’s needs and wants. The result is a much 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 target audience are most important. Some commonly used characteristics fall into a few 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 engage in demographic segmentation, they aim to find groups of people that are interested and uninterested in their products and the best way of speaking to these groups.

An Example of Demographic Segmentation: Positioning Men’s Deodorant

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

However, men’s deodorant isn’t sold the same way to all men. Axe body spray markets their product in a way that might appeal to teenagers, Old Spice in a way that might appeal to young men and Dove in a way that might appeal to middle-aged men. The marketing of these brands is based on demographic segmentation.

Although demographic segmentation helps businesses identify groups worth engaging, demographics alone are somewhat limited. Businesses can often speak much better to their customers when demographic insights are combined with other variables like behavior or psychographics.

Behavioral Segmentation

People’s behavior provides a rich basis for market segmentation. For example, imagine how you might market to someone if you knew details such as their purchase history, how many times they have visited your website, what their motivation is for considering a product, and how they feel about your company and your competitors. With knowledge of these details, the 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 a user watches or buys content on Netflix, the company records 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.

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’s 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.”

What made the “Think Different” campaign remarkable was how well it spoke to the sort of people interested in buying a Mac computer. Apple told its customers they were unique, independent, and creative people. And, by speaking to how their target market wanted to see themselves, Apple persuaded many people to all do the same thing: buy a Mac (see image below).

Geographic Segmentation

Where people live can be used as a basis for market segmentation. 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 comes to feel 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 almost exclusively 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 throughout the years, they have emphasized their roots in Maine. 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. From a marketing perspective, that’s gold.

Other Bases for Market Segmentation

Often, the most effective market segmentation combines several characteristics to zero in on thin slices of a businesses’ target audience. In addition to the general characteristics listed above, businesses often seek to segment the market based on several 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, marketing can leverage 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 about a variety of topics can be used to market to them. However, when possible, it may be preferable to market based on behavior rather than attitudes, as the link between behavior and attitudes is often weaker than people expect. 

CloudResearch gives you the tools to conduct effective market segmentation. Our Prime Panels platform has more than 50 million participants worldwide allowing you to target demographics important to your business. Conduct an online focus group or build a survey and let CloudResearch help you find participants and execute the study. Or, you can use our team of expert researchers to help with your project. We have the knowledge and skill to conduct market segmentation and cluster analysis. Using our Managed Research service, our team will work with you to understand your target audience and what is important to them. Learn more by getting in touch with us today.

Continue Reading: A Guide to Market Segmentation

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