Market Segmentation: Defining Your Target Market

Focusing your communication on your most profitable customers

Segmenting your target market

We only want to market to people who are most likely to be profitable customers, right?

Grouping these people based on their common characteristics and how they best respond to marketing would make it easier to communicate with them, right?

This process is called Segmentation. This blog explores how businesses can use market segmentation to reduce their marketing costs and get better results.

What is Market Segmentation?

Market Segmentation is the act of grouping or clustering together customers within a target market who share similar characteristics to give direction to marketing strategies to target these customers effectively. This process helps match customer wants and needs with the ability of your business to satisfy them.

Segments comprise consumer groups that are likely to respond similarly to marketing strategies, helping brands optimise their marketing, advertising and sales.

“Market Segmentation is… the artificial groupings of consumers constructed to help managers design and target their strategies.” (Wedel & Kamakura, 2012)

Just think about how many different personality types there are out there. They will all have unique buying patterns to try and understand. One brand or product will never appeal to everybody or have the ability to solve every person's problem.

You need to consider what customer groups are most profitable to your business and focus on understanding their needs and providing the best solution. Then allocate your attention and marketing resources.

It is essential to note the difference between customers and consumers. As defined by McDonald, Christopher, and Bass (2003):

“Let us start with the difference between customers and consumers. The term ‘consumer’ is generally interpreted to mean the final consumer, who is not necessarily the customer.

For example, parents who buy breakfast cereals are probably the intermediate customers, acting as agents on behalf of the eventual consumers (their families). In order to market cereals effectively, it is imperative that the marketer understands what the final consumers want, as well as what the parents want.”

Segmentation helps businesses divide their target markets into smaller and more manageable groups of customers. Segmenting their market can help companies make informed decisions on advertising, marketing and pricing, and new product development.

The information uncovered from the research for Segmentation can provide a new direction for innovation, based on providing a solution to customer needs.

Helping businesses focus their marketing efforts.

A message can also become blurred and lost if the size of a target audience is too large.

The broader their preferences, needs, desires and opinions become.

Businesses need to define precisely who their customers are. When we sort these customers into segments, they become easier to prioritise and become more economically manageable.

Businesses can target their marketing resources on the most promising opportunities and develop the right offer for those submarkets. Marketing this way becomes a lot more cost-effective than mass marketing.

Firms tailor communication with each customer group so they are more receptive to the message. Age or education, for example, could be a demographic characteristic.

One segment may be young people fifteen and under, and another age group could be over 50 years of age—video games, for example.

Marketing to people who grew up in the 1970s and 1980s playing video games would be drastically different from today's young person growing up with a smartphone in hand.

Being more focused on the customers we target allows us to cater to their specific wants, needs and desires. But it also allows a business to focus on its strengths.

One firm might be best suited towards one segment of the market, and another better suited to serve another group of customers. You will never be 'all things to all people'.

Segmentation also reduces the risk of unsuccessful marketing campaigns. Many businesses uneducated in marketing believe that they will "chuck something out there", hoping it will somehow reach the people most likely to be their customers, and it does not work.

Marketing tries to elicit a positive response. Research helps to understand our customers' wants and needs better and deliver them to them.

The importance of research

Knowing where your sales and profit is coming from is key to a business understanding their current market position and assessing potential markets to move into.

Research gives direction to marketing strategy and potential new product development if the study uncovers a market gap. Once we understand the market better, we aim to leverage this by optimising our marketing and sales processes.

Businesses can use quantitative research methods such as customer surveys and data analysis and qualitative research such as focus groups to market research to set their segmentation strategy. Interpret the results to create market segments unique to your brand.

Segmenting a marketplace

Businesses derive market segments from the diverse nature of customer motivations. Developing market segmentation strategies depend on the current market as perceived as a company.

Segments do not naturally occur naturally in the marketplace; instead, marketers define segments based on best-serving customers. This action takes an understanding of the basics of consumer behaviour.

Brands need to connect with their target customers through tailored communication that resonates with specific aspects of their lives. Here are four popular ways a business can segment its target market.

Geographic Segmentation

Businesses often target customers based on geography and location. E.g. The people of Hamilton, or maybe the whole of Australasia.

Characteristics of buyers, such as values and preferences, vary based on culture and location, so it is vital to recognise these subtle differences. Holidays and religious events differ in importance and the way the local people celebrate these holidays.

Languages change between continents, and we lose some things in translation. Geography and climate can change drastically within one country, such as the US, with tropical and freezing states. Therefore, swimsuits should not have the same marketing campaign across the whole country. Same with raincoats.

Demographic Segmentation

Characteristics of demographic Segmentation include age, gender, family background, religion, education, occupation and income.

Using demographics to segment customers is widely popular as a marketing strategy, and a market segment can contain a range of varying demographics.

For example, it could be females aged 15–25, with numerous siblings, low socio-economic background, and Christian religious beliefs from Latin America.

Age is a common variant that brands try to understand and communicate accordingly through the most relevant and practical tools. For example, you would not advertise a product targeted at B2B professionals aged 40–60 on TikTok, and LinkedIn would be the most logical communication tool or network.

Psychographic segmentation

The Segmentation of customers based on Psychographic variables focuses on subjective traits and behaviours, unlike Geographic and Demographic variables, which are objective and measurable.

The focus is on the intrinsic characteristics of customers. For example, a person who grows up on a farm works until they take it over from their parents, and they probably never get a university education.

They will be very different from a person who grew up in a big city, going to a private school, expecting to get a university degree in law or medicine.

Qualitative research is a powerful tool to understand our target customers; Interviews, surveys, and focus groups, for example, help us know subjective traits such as values, personalities, interests, attitudes, motivations, lifestyles, and opinions.

Behavioural Segmentation

Behavioural Segmentation is like psychographics because it is subjective but focuses on how customers react to marketing and go through their decision-making and buying process.

Their attitude towards brands and purchasing behaviour are examples of behavioural segmenting. Firms collect this kind of data through qualitative research. Talk to your customers and find out what makes them tick. You can also check online reviews.

Brand loyalty is an example of behavioural Segmentation. I used to always buy Sony electronics automatically without doing any research. Stereos, TV, phones, video game console, Walkman, Discman… The list goes on.

This loyalty to Sony was because I trusted in their products' quality from previous experiences. This consistent buying pattern is behaviour and something marketers work hard on to try and create.

Criteria to evaluate the effectiveness of market segments

Not all market segments will end being as profitable as hoped for a business. Wedel and Kamakura (2012) identify six criteria often used to evaluate a marketing strategy's effectiveness and profitability: Identifiability, Substantiality, Accessibility, Stability, Responsiveness and Actionability.

• Identifiability is the extent to which a business can recognise a distinct group of customers in the marketplace. Can we identify the customers in each segment based on variables we can measure?
• Substantiality identifies whether the target segment of the market is a large enough portion to justify targeting it. Is there enough of a return on investment? Micro-markets can become profitable because of lower marketing costs.
• Accessibility is the degree to which businesses can reach their designated segment through promotion and distribution. Can you get them with your message?
• The stability of market segments over time is vital to be the basis for a marketing strategy. If the segment you are targeting changes its behaviour during implementation, then this market segment is unlikely to be profitable to your business.
• Responsiveness of a market segment is when it responds favourably to your marketing. It is critical for any segmentation strategy that the unique marketing mix for each segment justifies the effort.
• Actionability of segments helps to guide specific marketing choices. Here the focus is on whether the customers in the segment and the marketing necessary to reach them and satisfy their needs is consistent with the firm's goals and strengths.

Segmentation Mistakes

A big mistake that businesses make when they segment their customers is becoming too niche with their segments. No matter how good your product or service is, you will not survive if few customers buy it. All market segments must be profitable.

When you start to research one of your segments to find out more about their needs, you can discover you do not have the resources or skills to take advantage of that opportunity.

Focus on the strengths of your business when setting your segmentation strategy. There may be opportunities out there, but you waste your time and money if you do not have the resources or skills to take advantage of them.

If there were an opportunity in the high-end luxury sports car market, KIA would not target that niche, as it is too dissimilar to their "bread and butter".

Keep up with trends and changes in behaviour from your customer base. Blockbuster had the opportunity to purchase Netflix 20 years ago for $50 million.

They said no.

Netflix is now worth almost $200 Billion. They should have seen where the video rental market was heading. Survey your customers from time to time and refresh your marketing strategies.

Final Words

In conclusion, this article explored what market segmentation is and how it aligns with its positioning and targeted marketing.

Knowing who the people are most likely to be profitable to our firm and knowing the best way to communicate with them means marketing has a higher conversion rate and is more cost-effective.

Thank you for reading.

If you enjoyed the content, you might find this article on Targeting useful.

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