Segmentation: Identifying Target Markets

The importance of market segmentation lies in acknowledging that people within markets are different, requiring marketers to respond to these differences by identifying and classifying consumers into homogeneous groupings (segments) and determining which segments are viable target markets. Market segmentation involves dividing a broad target market into subsets of consumers who have common needs or desires, allowing for more precise matching of the product or service to customer needs. The criteria for segmenting include being possible to measure, large enough to earn profit, stable, reachable via promotion and distribution channels, internally homogeneous, externally heterogeneous, and responsive to market stimulus. Two major segmentation strategies are concentration (focusing on one market segment) and multisegment (targeting multiple segments). By selecting the right target markets, organizations can optimize their return on investment.

Conducting a Segmentation
Determining Segmentation Variable(s)
Markets can be segmented primarily according to geographic, demographic,
usage, and psychological segments—or a combination of the above.
Learning Objectives
Break down market segmentation variables
Key Takeaways
Key Points
 Geography is probably the oldest basis for segmentation, and is often
useful for marketers due to the amount of data available. However,
there are drawbacks with focusing solely on geography.
 Demographic segmentation is also useful for certain products. However,
marketers should be aware that demographics tend to change with
society, and thus be aware of these changes and respond to them
accordingly.
 Psychological segmentation, such as lifestyle and attitudinal variables,
are also useful for particular types of products. However, obtaining
information on such bases can often prove challenging.
Key Terms
 geographic segments:Segmentation of consumers based on
geographical factors such as location, weather, topography, population
density, etc.
 demographic segmentation:The division of the market into subsets
based on characteristics of the population.
 psychological segments:Segmentation of markets based on
psychological influences, such as personality, lifestyle choices, and
attitudinal variables.
Bases of Segmentation
There are many different ways by which a company can segment its market,
and the chosen process varies from one product to another (see ). Also, since

markets are very dynamic, and products change over time, the bases for
segmentation must likewise change.
Bases for Segmentation
Primary
dimension Consumer market Industrial market
Characteristics
of person or
organization
Geography, age, sex,
race, income, life
cycle, personality,
lifestyle
Industry (SIC), location,
size, technology,
profitability, legal,
buying situation
Purchase
situation
Purpose, benefits,
purchase approach,
choice criteria, brand
loyalty, importance
Volume, frequency,
application, choice
criteria, purchasing
procedure, importance
Geographic Segments
Regional differences in consumer tastes for products as a whole are well-
known. Markets according to location are easily identified and large amounts
of data are usually available. Also, many companies simply do not have the
resources to expand beyond local or regional levels.
Closely associated with geographic location are inherent characteristics of
that location: weather, topography, and physical factors such as rivers,
mountains, ocean proximity, and population density.
Geography provides a convenient organizational framework. Products,
salespeople, and distribution networks can all be organized around a central,
specific location. However, there are drawbacks. Consumer preferences may
bear no relationship to location. Other factors, such as ethnic origin or
income, may overshadow location. The stereotypical Texan, for example, is
hard to find in Houston, where one-third of the population has immigrated
from other states. Another problem is that members of a geographic
segment often tend to be too heterogeneous to qualify as a meaningful
target for marketing action.
Demographic Segments
Demographics can be used to help companies develop products that meet
current and future consumer needs. It can alert a company to a new
segmentation, one that was not originally connected to the product. For
example, women using power tools as home owners. Segmenting the
consumer market by age groups is useful for several products. For example,
the youth market (approximately 5 to 13) influences how their parents spend
money, and when they make purchases on their own (e.g. toys and snacks).

Presently, the senior market (age 65 and over) has grown in importance for
producers of low-cost housing, cruises, and health care.
Gender has historically been a good basis for market segmentation. Many
traditional gender-based boundaries are changing, and marketers must be
aware of these changes. The emergence of the working woman, for instance,
has made determining how the family income is spent more difficult. Thus,
the simple classification of male versus female may be useful only if several
other demographic and behavioral characteristics are considered. Income
seems a better basis for segmenting markets as prices for a product
increases. Income may also may uncover other buying behaviors.
Education affects product preferences and desired characteristics for certain
products. Occupation is important: individuals who work in hard physical
labor may demand a different set of products than a teacher or bank teller.
Race, religion and national origin have also been associated with product
preferences and media preferences.
Usage Segments
 The heavy user is an important basis for segmentation. This approach is
very popular, particularly in the beverage industry (e.g beer, soft drinks,
and spirits).
 Purchase occasion: determining the reason for an airline passenger’s
trip, may be the most relevant criteria for segmenting airline
consumers.
 User status: communication strategies must differ when directed at
different use patterns, such as nonusers versus ex-users, or one-time
users versus regular users.
 Loyalty: if companies can identify customer loyalty to their brand, and
then delineate other characteristics these people have in common, they
will locate the ideal target market.
 Stage of readiness: potential customers may be unaware, aware,
informed, interested, desirous, and intending to buy. If a marketing
manager is aware of where the specific segment of potential customers
is, he or she can design the appropriate market strategy to move them
through the various stages of readiness.
Psychological Segments
Segmentation should recognize psychological as well as demographic
influences. For example, Phillip Morris has segmented the market for
cigarette brands by appealing psychologically to consumers in the following
way:
 Marlboro: the broad appeal of the American cowboy

 Benson & Hedges: sophisticated, upscale appeal
 Parliament: for those who want to avoid direct contact with tobacco
Attitudes of prospective buyers towards certain products influence their
subsequent purchase of them. If people with similar attitudes can be
isolated, they represent an important psychological segment.
Measurements of demographic, personality, and attitudinal variables are
convenient measurements of less conspicuous motivational factors. People
with similar physical and psychological characteristics may be similarly
motivated. Motives can be positive (convenience), or negative (fear of pain).
So marketers attempt to observe motivation directly and classify market
segments accordingly.
Lifestyle segmentation has become very popular with marketers, because of
the availability of measurement devices and instruments, and the intuitive
categories that result from this process. Producers are targeting versions of
their products and their promotions to various lifestyle segments. Lifestyle
analysis begins by asking questions about the consumer’s activities,
interests, and opinions. Research reveals vast amounts of information
concerning attitudes toward product categories and user and non-user
characteristics, which marketers can use in targeting their products.
Segmentation for B2B
B2B firms will segment their customers differently, due to different buying
habits and procedures between businesses and end-users.
Learning Objectives
Analyze B2B marketing segmentation characteristics
Key Takeaways
Key Points
 There are five major ways to segment the B2B market, including: type
of customer, Standard Industrial Classification codes, end uses,
common buying factors, and buyer size/geography.
 SIC classification provides a useful way for marketers to segment the
market.
 By determining how the end-use of a product differs according to
different users, the manufacturer can modify the product so that it
appeals to different segments.

 If the first four approaches are not useful, a marketer may still have
success in segmenting by customer size and geography.
Key Terms
 Standard Industrial Classification (SIC):A set of codes published by
the United States government that classifies business firms by the main
product or service provided.
B2B Segmentation
B2B firms sell not to ultimate consumers but to other businesses. While
businesses and final consumers behave similarly at times, there are also
several differences. Most business buyers view their function as a problem
solving approach, and have formal procedures, or routines, for their
purchasing.
A B2B marketer must be able to distinguish between the industries it sells to
and the different market segments that exist in each of them. There are
several basic approaches to segmenting organizational markets, including:
type of customer, Standard Industrial Classification codes, end uses,
common buying factors, and buyer size and geography.
Type Of Customer
Industrial customers can be classified into one of three groups:
 Original equipment manufacturers (OEMs), such as Caterpillar
machinery or Gibson guitars
 End-users, such as farmers who use farm machinery produced by OEMs
 After market customers, such as those who purchase spare parts for a
piece of machinery
Similarly, industrial products can be classified into one of three categories,
each of which is typically sold only to certain types of customers:
 Machinery and equipment (e.g. computers, bulldozers) are end products
sold only to OEM and end user segments.
 Components or subassemblies (e.g. pistons, spark plugs) are sold to
build and repair machinery and equipment, and are sold in all three
customer segments.
 Materials (e.g. chemicals, metals) are consumed in the end-user
products, and are sold only to OEMs and end users.

Standard Industrial Classification
This approach employs the Standard Industrial Classification (SIC) codes
published by the United States government. The SIC codes classify business
firms by the main product or service provided. There are ten basic SIC
industries which firms are classified into. Within each classification, the major
groups of industries can be identified by the first two numbers of the SIC
code (see example).
By using SIC codes, a marketer may identify the manufacturing groups that
represent potential users of the products it produces and sells. takes the two
digit classification and converts it to three-, four-, five-, and seven-digit
codes.
SIC Classification: SIC codes have two-digit to seven-digit classifications.
End Uses
Industrial marketers may segment markets by looking at the different ways
and situations in which a product is used. Here, the industrial marketer
typically conducts a cost / benefit analysis for each end-use application. The
manufacturer must ask: What benefits does the customer seek from this
product?
For example, an electric motor manufacturer learned that customers
operated motors at different speeds. After making field visits to gain insight
into the situation, he divided the market into slow speed and high speed
segments. In the slow-speed segment, the manufacturer emphasized a
competitively priced product with a maintenance advantage, while in the
high-speed market product, superiority was stressed. By determining how
the end-use of the product differed according to different users, the
manufacturer was able to modify the product, and the marketing of the
product, to appeal to these different segments more effectively.

Common Buying Factors
Marketers may segment markets by identifying groups of customers who
consider the same buying factors important. Five factors are typically found
to be important in most industrial buying situations: product performance,
product quality, service, delivery, and price. Identifying a group of customers
who value the same buying factors as important is difficult, as industrial
organizations’ and resellers ‘ priorities often change.
Buyer Size and Geography
If the previous approaches are not useful in a particular situation, market
advantages may still be realized by segmenting based on account size or
geographic boundaries. Sales managers have done this for years, but only
recently have organizations learned to develop several pricing strategies for
customers that are close and for those who are far away. Similarly, different
strategies can be developed for customers of different sizes.
B2B Company Characteristics
B2B businesses operate and market their goods and services differently than
B2C companies, due to the different nature of the purchase.
Learning Objectives
Differentiate between B2B, business to business and B2C, business to
consumer characteristics
Key Takeaways
Key Points
 The volume of B2B sales is much greater than that of B2C sales.
 The purchase of B2B products is much risker than B2C products,
because purchasing the wrong product or quantity, or at the wrong
terms, can put the entire purchasing business at risk.
 B2B companies behave differently when buying. Purchases are usually
made by committee, and decisions are specification-driven.
 B2B companies avoid mass media when promoting their brand, instead
targeting their customers directly through trade shows, specialized
magazines, etc.

Key Terms
 B2B:Commerce transactions between businesses, such as between a
manufacturer and a wholesaler, or between a wholesaler and a retailer.
 B2C:The sale of goods and services from individuals or businesses to
the end-user.
Transactions Between Businesses
Microchips: A microchip is a classic B2B product. Electronic manufacturers buy microchips to put
in their products. They sell the products to final consumers.
B2B, or business-to-business, describes commercial transactions between
businesses, such as between a manufacturer and a wholesaler, or between a
wholesaler and a retailer. The volume of B2B transactions is much higher
than the volume of B2C transactions, because in a typical supply chain there
will be many B2B transactions involving sub components or raw materials,
and only one B2C transaction, specifically sale of the finished product to the
end customer. For example, an automobile manufacturer makes several B2B
transactions such as buying tires, glass for windscreens, and rubber hoses
for its vehicles. The final transaction, a finished vehicle sold to the consumer,
is a single B2C transaction.
While almost any B2C product or service could also be a B2B product, very
few B2B products or services will be used by consumers. For example, toilet
paper, a typical B2C product, is a B2B product when sold to hotels. However,
few people will buy a forklift for their private use.
Differences between B2B and B2C
The main difference between B2B and B2C is who the buyer of a product or
service is. The purchasing process is different in both cases. Below are some
of the differences between the two types of purchase.

Risk
Buying one can of soft drink involves little money, and thus little risk. If the
decision for a particular brand was not right, there are very few implications.
The worst that could happen is that the consumer does not like the taste and
discards the drink immediately. However, buying B2B products is much
riskier. Purchasing the wrong product or service, the wrong quantity, the
wrong quality, or agreeing to unfavorable payment terms may put an entire
business at risk.
In international trade, delivery risks, exchange rate risks, and political risks
exist and may affect the business relationship between buyer and seller.
Strong brands imply lower risk of using them; buying unfamiliar brands
implies financial risks. Products may not meet the requirements and may
need to be replaced at high cost. There exists a performance risk, as there
might be something wrong with an unfamiliar brand. When buying
machinery or supplies for a company, peers may not approve the purchase
of an unknown brand, thus posing a risk to a purchasing manager’s
reputation.
Buying behavior in a B2B environment
Timescale
For consumer brands, the buyer is an individual. In B2B there are usually
committees of people in an organization. Each of the members may have
different attitudes towards any brand. In addition, each party involved may
have different reasons for buying or not buying a particular brand. Since
there are more people involved in the decision, and since technical details
may have to be discussed in length, the decision-making process for B2B
products is usually much longer than in B2C.
Brand Loyalty
Companies seek long-term relationships, as any experiment with a different
brand will have impacts on the entire business. Brand loyalty in B2B is
therefore much higher than in consumer goods markets. While consumer
goods usually cost little in comparison to B2B goods, the selling process
involves high costs. Not only is it necessary to meet the buyer numerous
times, but the buyer may ask for prototypes, samples, and mock-ups. Such
detailed assessment serves the purpose of eliminating the risk of buying the
wrong product or service.

Brand Differentiation
B2B products are generally bought by a committee of buyers, and in many
cases the purchases are specification driven. As a result, it is vital that
brands are clearly defined and that they target the appropriate segment.
Companies can use various strategies of differentiation, leveraging on the
origin of the goods or the processes used in manufacturing them. Depending
on the company’s history, the competitive landscape, occupied spaces and
white spaces, there could be one or many strategies a company could use.
Ultimately, a strong B2B brand will reduce the perceived risk for the buyer
and help sell the brand.
Brand Promotion
B2B promotions work differently from B2C brand promotions. The former
avoid mass market broadcasts and generally use media that can be targeted
at a specific business audience, such as direct marketing distributed online
or in trade magazines. B2B companies are also present where their potential
customers are, at trade shows, exhibitions, and other trade-related events.
Evaluating Market Segments
Segmentation involves classifying people into homogeneous groupings and
determining which of these segments are viable target markets.
Learning Objectives
Illustrate the purpose and method of evaluating market segments
Key Takeaways
Key Points
 Market segmentation involves dividing a broad target market into
multiple subsets of consumers with common desires and common
applications for the product. Marketing campaigns are designed and
implemented to target these specific customer segments.
 This premise of segmentation holds that people can be most effectively
approached by recognizing their differences and adjusting to them. By
emphasizing a segmentation approach, the exchange process should be
enhanced, since a company can more precisely match the needs and
wants of the customer.

 A company following a concentration strategy focuses on one specific
market segment, allowing it to understand the segment and focus on it
fully, lowering costs. A multisegment strategy targets multiple
segments and thus a larger market, but incurs higher marketing costs.
Key Terms
 market segmentation:The process of dividing a broad target market
into subsets of consumers who have common needs or desires, as well
as common applications for the relevant goods and services.
The Segmented Market
While product differentiation is an effective strategy to distinguish your
brand from competitors, it also differentiates your own products from one
another. For example, a company such as Franco-American Spaghetti has
differentiated its basic product by offering various sizes, flavors, and shapes.
The objective is to sell more product, to more people, more often. Kraft has
done the same with their salad dressings; Xerox with its multitude of office
products. The problem is not competition; the problem is the
acknowledgment that people within markets are different and that
successful marketers must respond to these differences (see for a recap of
the different market approaches).
Because all markets are different, it is important to define and approach a
market using certain steps.
1. Defining the market
 the market is people
 the market is a place
 the market is an economic entity
2. Types of markets
 consumer markets
 industrial markets
 institutional markets
 reseller markets
3. Approaching the market
 the undifferentiated market (market aggregation)
 product differentiation
 the segmented market
 strategies: concentration, multisegment

This premise of segmenting the market theorizes that people and/or
organizations can be most effectively approached by recognizing their
differences and adjusting accordingly. By emphasizing a segmentation
approach, the exchange process should be enhanced, since a company can
more precisely match the needs and wants of the customer. While it is
relatively easy to identify segments of consumers, most firms do not have
the capabilities or the need to effectively market their product to all of the
segments that can be identified. Rather, one or more target markets
(segments) must be selected. In reality, market segmentation is both a
disaggregation and aggregation process. While the market is initially
reduced to its smallest homogeneous components (perhaps a single
individual), business in practice requires the marketer to find common
dimensions that will allow him to view these individuals as larger, profitable
segments. Thus, market segmentation is a twofold process that includes:
1. Identifying and classifying people into homogeneous groupings, called
segments, and;
2. Determining which of these segments are viable target markets.
In essence, the marketing objectives of segmentation analysis are:
 To reduce risk in deciding where, when, how, and to whom a product,
service, or brand will be marketed
 To increase marketing efficiency by directing effort specifically toward
the designated segment in a manner consistent with that segment’s
characteristics.
Criteria for Segmenting
Market segmentation involves dividing a broad target market into subsets of
consumers who have common needs (and/or common desires) as well as
common applications for the relevant goods and services. These subsets
may be divided by criteria such as age and gender, or other distinctions,
such as location or income. Marketing campaigns can then be designed and
implemented to target these specific customer segments. An ideal market
segment meets all of the following criteria:
 It is possible to measure.
 It must be large enough to earn profit.
 It must be stable enough that it does not vanish after some time.It is
possible to reach potential customers via the organization’s promotion
and distribution channel.
 It is internally homogeneous (potential customers in the same segment
prefer the same product qualities ).
 It is externally heterogeneous, that is, potential customers from
different segments have different quality preferences.

 It responds consistently to a given market stimulus.
 It can be reached by market intervention in a cost-effective manner.
 It is useful in deciding on the marketing mix.
Segmentation strategies
There are two major segmentation strategies followed by marketing
organizations: a concentration strategy and a multisegment strategy. An
organization that adopts a concentration strategy chooses to focus its
marketing efforts on only one market segment. Thus, only one marketing
mix is developed. An organization that adopts a concentration strategy gains
an advantage by being able to analyze the needs and wants of only one
segment and then focusing all its efforts onthat segment. This can provide a
differential advantage over other organizations that market to this segment
but do not concentrate all their efforts on it. The primary disadvantage of
concentration is related to the demand of the segment. As long as demand is
strong, the organization’s financial position will be strong. If demand
declines, the organization’s financial position will also decline.
The other segmentation strategy is a multisegment strategy. When an
organization adopts this strategy, it focuses its marketing efforts on two or
more distinct market segments. The organization does so by developing a
distinct marketing mix for each segment. They then develop marketing
programs tailored to each of thesesegments. Organizations that follow a
multisegment strategy usually realize an increase in total sales as more
marketing programs are focused at more customers. However, the
organization will most likely experience higher costs because of the need for
more than one marketing program.
Selecting Target Markets
Strategic targeting can optimize the return on investment by selecting the
best segments in the market for return on investment.
Learning Objectives
Recognize the importance of segmentation and how to translate data into
smart decisions

Key Takeaways
Key Points
 Identifying optimal segments within the broader market can improve
the efficiency of both paid and organic marketing initiatives.
 Selecting the right segments relies heavily on good data. The first step
is collecting as much information as possible on the industry,
competition, key metrics, and consumers.
 Once the data is collected, organizations must strategically query the
data to identify correlations that are statistically significant. In the era of
big data, this is more important (and more complex) than ever.
 Once the optimal segments are identified, the organization can match
their available resources with the opportunities in the market itself.
Key Terms
 segmentation:The act of dividing a larger population or market into
smaller groups.
Why Pursue Target Markets
The purpose of identifying various market segments within the broader
market is to refine the targeting of paid and organic advertising. Simply put,
it’s best to narrow down an organization’s targeting to the individuals most
likely to be interested in the product or service. These groups of interested
consumers within the broader market is usually referred to as a target
market, and should be a much more strategic place to invest capital in terms
of marketing distribution.

Target Market: A target market is part of a served available market. Both of these markets are part
of the total available market.
How To Select Targeted Groups
Organizing Data
To start, the organization should collect as much data as possible on the
industry, competition, consumer behavior, and expected growth trajectories.
Once enough data is collected, it’s useful to frame the targeting strategy by
querying the data using the right questions. Some things to consider include:
 How big is each segment?
 What are the demographic, psychographic, behavioral, and geographic
characteristics of each segment?
 Which segments have the competition and/or our organization already
captured?
 Where is the highest growth potential?

 Which market is most closely aligned with the organization’s brand
and/or operating philosophy?
 Is is practically feasible to enter where the ideal segment is (i.e.
geographically)?
While there are countless other questions to ask, which will vary by industry
and situation, understanding these basic concepts can quickly simplify the
segmentation decision.

Visualizing Segments: Visualizing data queries to understand how consumer groups look relative to
various metrics is a useful technique in building clusters and segments.

Selecting A Segment
At this point, with the available market data at hand, it’s fairly simple to
assess internal resources and external opportunities to optimize the
marketing plan. The key here is to get the greatest return on marketing
spend by strategically selecting the appropriate channels and using the ideal
messaging to reach the selected segment.
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