What is market segmentation?

Market segmentation is the process of dividing a specific market into subgroups based on a set of certain characteristics. The aim of this segmentation is to identify groups with the highest potential profit or growth.

From a business perspective, market segmentation refers to the aggregation of prospective customers into groups with shared needs and consumption tendencies. Market segmentation is an extension of market research and aims to establish and determine customer groups which companies can then target with tailored branding and products.

Where have you heard about market segmentation?

Market segmentation is important to consider in both business and investing when determining which sectors are best to invest in.

Businesses use segmentation to split their target market into groups. They look at location, demographics such as gender, income levels and age, and previous buying behaviour. Digital companies use big data sets to make their targeting even more effective.

Traditionally market segmentation helps marketers to:

• Personalise their marketing campaigns
• Target customers individually
• Reduce the risk of unsuccessful marketing

From an investment point of view, understanding market segmentation and how companies use it can help traders identify stock that might have the potential to rise in price. Investing in different market segments allows traders to diversify their investment portfolios, which significantly increases their chances for profit.  

What you need to know about market segmentation...

By understanding market segments, companies can leverage targeting in their product, sales and marketing strategies. Properly segmented markets can bring significant advantages. According to a study by Bain and Company, 81 per cent of CEOs confirm that segmentation was vitally important for their business success and growing profits. 

Four major types of market segmentation include:

• Demographic segmentation

Demographic segmentation sorts a market by factors including age, income, education, gender, race and occupation. This is also one of the simplest and most effective types of market segmentation, because we often make choices about products and services based on demographic factors.

• Geographic segmentation

Traditionally a subset of demographics, geographical segmentation is considered the easiest type of market segmentation. It helps to determine different customers’ groups based on their location. Prospective customers have different preferences, needs and interests according to climate and regions they live in. Geographical segmentation helps businesses to determine where and how to advertise and sell particular products.

• Firmographic segmentation

Whereas demographic segmentation looks at how the individual consumer fits into certain rubrics of race, gender or socioeconomic status, firmographic segmentation analyses organisations. It takes into account a company’s size, number of employees, etc. Firmographic segmentation shows how to address a small business, rather than a large international corporation.

• Behavioural segmentation

Behavioural segmentation tracks and subdivides the market according to customers’ behaviour and decision-making, including lifestyle, purchase and consumption patterns. Dividing the audience based on their purchase behaviour enables businesses to estimate brand loyalty patterns to get consumers to stay loyal.