Market segmentation

Market segmentation is the process of dividing a larger market into smaller groups of consumers who share similar needs and wants. Each group is called a market segment, and a segment is always a group of customers with something in common, not one individual shopper.

A target market is the customer group a business decides to serve with its product or service. Once a market has been split up, a business chooses the segment it can serve best and aims its product and its marketing at those people.

Why businesses target a segment

No single product can suit every shopper. A drink that is cheap enough for a student, sweet enough for a young child and low in sugar for a gym-goer will probably please nobody. Focusing on one group lets a business understand that group's needs properly and build something that fits closely.

Segmentation also protects the marketing budget. An advert reaches whoever sees it, so a business aiming at everyone pays to reach thousands of people who would never buy. Narrowing the target means money goes on customers who are likely to say yes.

For example, Bright Bags sells backpacks. Rather than one plain bag for everyone, it sells sturdy 20-litre bags with padded laptop sleeves for 11 to 16 year olds who carry a laptop to school, and advertises on the video apps they use. Shoppers wanting a leather briefcase would not buy one, so the business does not pay to reach them.

The main ways to segment a market

Customers in the same group often share similar needs, so a business can target them together:

• Location — where customers live, such as a region, a town or a city centre.
• Demographics — characteristics of the population, such as gender or family size.
• Lifestyle — how people spend their time and what interests them.
• Income — how much customers have to spend.
• Age — the age group a product suits.

Segmentation is not the same as market research. Research collects information about customers; segmentation sorts those customers into groups.

Market segmentation is only worth the effort if it changes what a business does. It gives a clear picture of who you are selling to, which sharpens the decisions that follow: what to make, how to promote it and what to charge.

Targeting and more effective marketing

Because people in a segment share needs, you can aim your promotion where those people actually look and use the words they respond to, rather than paying to reach everyone. A small business selling exam revision planners could advertise on student social media and talk about exam stress, reaching the right people for less money. Marketing that speaks to a group's real needs is far more likely to be noticed and remembered, so the same budget works harder.

Standing out and spotting gaps

Shaping a product around one group's needs helps you differentiate from rivals who sell a one-size-fits-all version. A local bakery that notices many nearby families avoid gluten can add a gluten-free range that the rival bakery down the road does not sell.

Studying segments closely also exposes gaps in the market — groups whose needs nobody is meeting yet — and a gap is a fresh business opportunity. Segmentation also guides positioning: deciding whether to be the cheap, quick choice for busy households or the premium pick for enthusiasts. And it lets you build a brand image to match, with packaging, tone and values that feel made for that group.

From satisfaction to profit

When a product genuinely fits, customers are more satisfied, so they come back and recommend it. That lifts sales, and if you grow faster than rivals your market share rises too. Higher sales with controlled costs usually mean more profit, though nothing is guaranteed: the segment has to be big enough to be worth serving.

Market segmentation groups customers with similar needs, but targeting a new segment can bring drawbacks as well as opportunities.

Cost and neglect

Targeting a new segment can be expensive. You may need a new product, different packaging and advertising in places the new customers use. For example, a garden centre that mainly serves local families might target young renters with balcony plant kits. It would need smaller pots, new labels, social media adverts and staff time to set it up. Money and attention spent on the new segment may also mean existing customers are neglected, such as fewer staff on hand to help regular shoppers.

Small segments and wrong assumptions

A new segment may be small, so even interested customers may not buy enough to cover the extra costs. That can make it less profitable than the segments the business already serves. Segmentation also assumes that people in a segment have similar needs, and that assumption can be wrong. A cinema might target parents with toddlers at weekday screenings, but some want a quiet film while others want toys and activities. If the business treats the whole group as identical, the offer may suit very few of them.

Gaps can exist for a reason

Market mapping might show an empty space, but an empty space is not proof of profit. A gap may exist because demand is low or costs are high. A small town might have no late-night dessert delivery, but that could be because too few people order late and paying delivery drivers overnight costs too much. Targeting that gap could fail. A gap in the market may be there for a reason, so it needs checking before a business commits.

Location segmentation means dividing a market by where customers live or work, using geographical features rather than who the customers are. It matters because people in different places often want different things, even when they earn the same and are the same age. A hardware retailer stocks rock salt and insulated pipe lagging in upland areas with icy winters, and sunshades and drought-resistant grass seed in hot, dry regions.

Three ways to split a market by location

Population density is the number of people living in a square kilometre of land. Places are often described as urban (busy towns and cities), suburban (housing on the edge of a city) or rural (countryside with few people). Businesses target densely populated areas when customers must visit in person, because high footfall brings passing trade and one branch can reach thousands of people. A bike repair workshop with a drop-in counter needs plenty of cyclists nearby to stay busy. Where customers are spread thinly, a business may skip the shop altogether and offer delivery or a mobile service instead, as a rural branch might never see enough customers to cover its rent.

Regional segmentation focuses on what customers in one area like and buy, especially where those habits are found only there or are more widespread than elsewhere. Local food, hobbies, weather and rivals all shape what sells, so a small change to a product or its advertising can make it feel made for that place.

Demographic segmentation divides a market by characteristics of the population. Common demographic variables are age, gender, income, family size, ethnicity, religion and education. Each variable creates groups that a business can study and target.

Demographic segmentation assumes that consumers in the same demographic group tend to share similar needs and wants. You might belong to several groups at once, and two people in the same group can still want different things, so it is a useful guide rather than a certainty.

Age segmentation

Age segmentation targets a product or service at a particular age group. A stationery retailer might sell chunky crayons and safety scissors for young children, but sell revision cards, highlighters and planners to teenagers. The products are differentiated so each age group gets features that suit it.

Needs change through the life cycle

As consumers move through stages of the life cycle, their needs and wants often change. A baby needs small portions and soft food; a school pupil may need a tough bag and stationery; an older adult may value easy-open packaging and large print.

Businesses can adapt products for these stages rather than offering a single version for everyone.

Lifestyle segmentation groups consumers by how they live: what they do, what interests them and what they value. Rather than grouping people by age or income alone, a business looks at their activities, interests and opinions.

People with similar lifestyles often want similar products and respond to similar marketing. A business can target a group that shares a hobby, interest or way of living, then choose products, messages and places to advertise that suit that group.

Activities, interests and opinions

For example, imagine Plot and Pot, a small business selling seed kits and online growing guides. It notices that many customers grow vegetables on balconies and allotments. Their activity is regular gardening, their interest is growing their own food and their opinion is that home-grown food tastes better and uses less packaging. Plot and Pot targets this lifestyle segment with small-space seed kits, beginner guides and posts in gardening communities. A customer on the same income but with no interest in gardening is not in this segment, so the business does not waste money advertising to them.

Lifestyle segmentation is different from income segmentation: two people may earn the same amount but have very different hobbies and values. Not everyone in a lifestyle segment is identical either; they simply share enough activities, interests or opinions for one offer to appeal to them.

Market mapping is a business tool that compares the products or brands in a market by plotting them on a grid with two variables. It is used to analyse the competition and to spot a gap in the market. Instead of a long list of rivals, you get a picture of where each one sits and how close together they are.

Choosing the two variables

The variables must be things consumers actually care about, because those are what make a shopper pick one brand over another. Price and quality are the most common pair, but any two relevant features work, such as price and battery life for wireless speakers. So a business picks the two that matter most to the customers it wants.

Using the map to read the market

Choose two variables, position each competing product, then look for a pattern. Brands grouped in the same area form a cluster: a crowded part of the market where a new product would struggle to stand out. An empty area is a gap. It may be an unmet customer need, and so an opportunity for a brand-new product or for an existing one to be repositioned (relaunched with a different price, quality or features).

Here is the data for a market map of headphones:

The medium-price, excellent-sound space is empty. A business could aim a new range there, then set its price, specifications and marketing to land in that space rather than alongside the cluster of cheap rivals.

What a market map cannot tell you

A gap is only useful if enough people would buy there. The space may be empty because customers do not want that combination, or because making it at that price would cost too much, so demand and profitability must be checked before targeting it. The map is also drawn from the business's own judgement about where brands sit, not from sales figures, so it shows position rather than the number of customers or profit.