TheStreet

When it comes to marketing, there is a plethora of strategies companies employ to best present their product as the solution to consumer's needs. One of the most basic marketing tools is market segmentation, which allows companies to group off different kinds of consumers with varying needs, demographics or unique responses to products and better target their specific wants. 

So, what actually is market segmentation, and how does it work? 

What Is Market Segmentation?

As a marketing strategy, market segmentation is designed to help companies better market to groups that they will have the most success at meeting their needs. Market segmentation helps companies create a market mix that allows them to target their marketing campaigns to audiences that are more likely to need their product - and, potentially find under-served segments to branch out to. 

By more narrowly targeting their key markets, companies are able to be more efficient with their resources - including money and time - when mounting campaigns to draw new customers. 

Market Segmentation Definition

Market segmentation is the process of dividing prospective consumers into different groups depending on factors like demographics, behavior and various characteristics. Market segmentation helps companies better understand and market to specific groups of consumers that have similar interests, needs and habits.

In each market segment, there are typically three things that are common to all segments - homogeneity, distinctiveness and reaction.

In each individual group, the potential customers are generally homogeneous - meaning they are generally fairly similar in terms of their common needs. Additionally, the members of each individual grouping are distinct from the other groups - or, they are different in some ways than customers in other groupings. Lastly, consumers in each group have similar (or relatively similar) reactions to various marketing, advertising and products directed at their segment, and tend to perceive the full value of products differently than others in different groups. 

Factors of Market Segmentation 

What goes into the process of market segmentation? 

There are several factors that a company or business will need to examine during the market segmenting process - including how accessible the segments are and specific identification parameters.

For example, companies need to be able to clearly identify different segments of potential consumers. Additionally, the measurability of the segment's size is important to understand how best to plan a strategy, as is the segment's accessibility regarding promotional or marketing materials. 

Moreover, to support the strategy, the strategy must be appropriate for the resources of the particular company and in line with their policies. 

Types of Market Segmentation

But what types of market segmentation are there? How can companies divide their prospective markets? 

In general, there are four basic types of market segmentation (with some variation in them) - behavioral, demographic, psychographic and geographic. 

1. Behavioral

As the name may suggest, behavioral market segmentation is focused on how consumers interact with a product, or how much they know about a product. 

For example, behavioral segmentation could include what brands consumers are loyal to, how sensitive consumers are to certain prices, their usage or certain decision-making processes. Behavioral also includes occasion, engagement and life cycle. 

Behavioral marketing is often employed most during Christmas or holiday shopping seasons when consumer behavior is somewhat altered. 

2. Demographic

One of the major ways to segment the market is by demographics. Marketers often segment consumers into groups based on similar age, gender, family size, religion, nationality, income and education level. These are often helpful ways for businesses to better assess what might interest their prospective consumers and better target them based on more narrowed needs. 

An example of demographic market segmentation could be marketing a retirement service to older citizens. 

3. Psychographic

With psychographic segmentation, companies examine consumer's lifestyles, personality, interests, opinions, social class, habits and activities to better ascertain their needs. 

For example, a consumer who is very active with outdoor activities like camping, hiking and skiing would more likely be interested in tents, hiking boots and ski shoes than someone who spends lots of time reading indoors. In marketing, much of this information is procured through surveys or other data that give a company a better picture of a consumer's lifestyle and interests to better target their specific niches. 

4. Geographic

Geographic information about consumers can be very helpful (and even essential) to marketing to the right groups. Geographic market segmenting takes into account what country, region, city or area a potential consumer resides in. However, it may also encompass the density of a city, population, climate and language to help further group consumers. 

For example, marketing to Spanish-speaking consumers would be very different than marketing to English-speaking consumers. Or, a company selling heaters would likely need to know where their customers in colder climates were as opposed to those in warmer climates who may have less need of their product.

Market Segmentation Examples 

Here are some actual examples of market segmentation. 

One example of market segmentation in action is Victoria's Secret and their teenage-targeting brand PINK. Victoria's Secret primarily targets women, while their brand PINK is targeted more toward teenage girls and women. However, the brand has also long marketed itself to men - usually husbands or boyfriends of women who are looking to purchase gifts. Given the brand's pricing, Victoria's Secret also targets a relatively affluent segment with additional income to spend on lingerie or mid-price undergarments. 

Apple (AAPL) has made its fortune by segmenting the overall electronics market into primarily early adapters and affluent market segments. 

Another good example of market segmentation is the banking industry - like Wells Fargo (WFC) or JP Morgan Chase (JPM) . Both are large banks with a multitude of different products that require market segmentation to best market them individually. For example, JP Morgan Chase would not likely market 401(k)s or IRAs to college-aged customers - instead, banks may focus on a 30- to 40-year-old demographic, or even senior citizens. 

Additionally, certain food brands or grocery stores like Whole Foods typically segment their market into more health-conscious consumers who are willing to pay more for organic or naturally-sourced food products and groceries. 

While the list goes on, market segmentation may include multiple types of segmentation (like geographic or behavioral) and cover a wide variety of needs. 

Benefits of Market Segmentation 

While market segmentation is, in essence, essential to a business' success in focusing their resources on marketing to the right groups, there are several other benefits of market segmentation.

For one, market segmentation helps companies zero in their resources on areas where they have a better chance of success. Instead of marketing to an entire group of people in need of jackets, a sportswear company like Nike (NKE) could market to people in need of water-resistant running jackets - who would likely fall into a sporty, active lifestyle market segment. 

Another major benefit of market segmentation is its usefulness in helping companies narrow their message to be more unique for specific consumers. Instead of sending out generic, mass marketing messages or advertising, market segmentation allows companies to customize messages to niche audiences that are more likely to be in need of the specific product that company is offering. This can boost customer acquisition through advertising and keep costs lower. 

Market segmentation also helps companies identify underserved markets that may be able to help them expand into new territory - and grow their profits.

In fact, according to a 2008 study by Bain & Company, 81% of executives attributed market segmentation as an essential component to growing profits. 

Given its numerous advantages, market segmentation is a major marketing strategy used by the most successful companies.