What is Market Segmentation?
In marketing, customers (to include potential customers) are segmented into groups based on characteristics. These customers can consist of individuals, groups, or organizations. Customers are grouped into segments to assist a business with applying a defined marketing mix strategy based on the specific characteristics of the group. There are three primary categories used to group consumers:
1) Geographic
2) Demographic
3) Psychographic
Each area has sub-characteristics to help narrow down specific details related to the customer. Additionally, think of each category as an additional layer. For example, geographic segmentation is a view of the market from a satellite, demographics is a view of the customer from a helicopter, and psychographic segmentation is a view of the customer with a camera; an up close and personal image.
Geographic Segmentation
Geographic segmentation refers to the geographic area of the customer. This can be a specific region in a country, state, or city. Some additional data points that are relevant to a geographic area are: market size, density, and climate. Market density refers to the number of people per unit of land (i.e. 1,000 people per square mile). Climate refers to the weather, and weather is important due to how it impacts customer needs and buying decisions. For example, in cold weather people want sweaters and jackets, and in warm weather they want shorts and T-shirts.
Demographic Segmentation
Demographic segmentation begins the process of identifying basic customer characteristics of a group of customers. These basic characteristics are:
1) Age
2) Gender
3) Income
4) Education
5) Ethnicity
6) Family Life Cycle
While age in itself seems intuitive, there is a lot of insight offered by each age group, as each group has its own approach to making buying decisions, backed by a lot of statistical analysis. Age segments include: newborn, infant, children, teens, young adults (Gen Y), adults (Gen X), baby boomers, and senior citizens. There are a lot of statistics out there for who (male/female) has a greater propensity to buy specific products. Based on this data, product positioning should be directed at the appropriate gender to maximize profit potential.
Income segmentation generally receives a lot of attention when it comes to marketing. While it may be intuitive, statistics show that households that earn more spend more. There is a strong correlation between income and spending, and with greater income there is a greater percentage of income spent. For example, according to a Nielson study families that make more than $100k are two times more likely to spend money at warehouse stores compared with households that earn $20k or less. With income there are additional peripheral expectations. What this means is, as you move up the income "hierarchy" customers will have different expectations, such as expectations related to levels of customer service.
As enthnicity implies, segmenting a market based on ethnicity allows marketing professionals to cater to an ethnic groups specific expectations. Different cultures, or ethnicities, carry varying expectations. With each ethnicity there are specific traits and expectations that influence buying decisions. For example, African Americans make up approximately 15% of the US population. A company that fails to addresss their specific needs not only overlooks 15% of the population, but they aren't addressing the unique needs of this community.
The family life cycle is a demographic segment that groups customers based on where they are in a "family." This area is ever-changing, but it is important to know that pending where the consumer is in the family life cycle, there are implicit characteristics that are associated with their buying behavior. In the 1950's a large percentage of the adult population was married, however, today about 50% of the adult population is in a married household. This distinction carries numerous implied differences in buying behavior, decisions, and needs. For example, in the 50's, because of the large percentage of population that was married, it made sense to market mortgages to married households as this would capture the majority of the population. However, because a majority of todays population isn't married, marketing campaigns need to address other specific characteristics... that is, unless a company is specifically marketing to a married family.
It's important to note, while this article seeks to address the main characteristics, to include secondary subsets, of market segmentation, there are additional peripheral implications that are associated with each subset. What this means is, as you identify a specific subset of characteristics about your customer, there are studies out there that capture buying habits associated with these subsets. In marketing it is important to identify specific characteristics, but to fully capture buying habits of these characteristics further detail is needed to ensure the full scope is recognized and that the marketing mix strategy is adequately addressing the needs (and expectations) of the customers that fall under the umbrella of these subset segments.
Psychographic Segmentation
Psychographic characteristics of a customer is a result of digging deeper into the customer profile. Demographics is a view of the customer from 100 yards away... psychographics is an up close and personal view of the customer; the intimate specific details. Psychographic characteristics are the specific traits of a customer and these traits are typically based on: 1) personality, 2) motives, 3) lifestyles, and 4) geodemographics. Personality specifically refers to the customer traits, attitude, and their habits. Motives are the psychological influencers that impact buying decisions; such as emotions. Lifestyle seeks to segment customers based on how they spend their time, their beliefs, and socioeconomic variables (i.e. education and income).
Geodemographics is a very refined subcategory that seeks to segment customers based on a subset of subset characteristics. For example, geodemographics looks at a specific neighborhood and then groups customers based on geographic, demographic, and psychographic characteristics. Really it only makes sense to do this sort of analysis when the population has a high density (i.e. in a city such as New York or Los Angeles).
Additional Segmentation
In addition to the above groups, markets can be segmented based on benefit and usage. When looking at segmenting a market based on benefit, marketing efforts are directed at the benefits the customer seeks from buying a particular product or service. By understanding the specific benefit the customer is seeking, a unique message can be tailored to those customers addressing the specific benefit. Usage is a subset category based on buying frequency. Is the customer a loyal customer, a one-off, a medium or heavy user? A loyal customer is less likely to be influenced by small price changes, whereas a one-off customer will be heavily influenced (especially if the price is going up).
Understanding how to segment the market is only part of the process. There are significant and extensive studies that have been done that drill even further into the details of each of these segments; many seeking to understand the psychology behind the buying behaviors and decisions of each segment. Market segmentation seeks to address the "who, what, when, and where"... but it doesn't fully address the why, which is one of the most important questions in marketing.