Market segmentation

Market segmentation is the process of dividing a heterogeneous market into distinct subgroups of consumers who share similar characteristics, needs, or behaviors, enabling more targeted and effective marketing strategies (Kotler P., Keller K.L. 2016, p.268)^[1]. Not everyone wants the same car, the same vacation, or the same smartphone. A market of millions contains segments with different needs, different willingness to pay, and different responses to marketing appeals. Segmentation identifies these groups; targeting decides which to pursue; positioning determines how to appeal to them. Together, the STP framework forms the strategic foundation of modern marketing.

The concept emerged in the 1950s as mass marketing's limitations became apparent. Wendell Smith's 1956 article "Product Differentiation and Market Segmentation as Alternative Marketing Strategies" articulated the basic idea. Decades of refinement have produced sophisticated segmentation approaches using demographics, psychographics, behaviors, and now AI-driven micro-segmentation. The principle remains: understand differences among customers and respond to them profitably.

Bases for segmentation

Markets can be divided on multiple dimensions:

Demographic segmentation

Observable characteristics. Age, gender, income, education, occupation, family size, ethnicity—demographic variables are easy to measure and often correlate with needs and behaviors^[2].

Age and life cycle. Children want different products than teenagers, who want different products than retirees. Life stage—single, married, parents, empty nesters—shapes needs.

Income. Luxury brands target high-income segments; value brands target price-sensitive consumers. Income affects both what people buy and how much they'll pay.

Gender. Many products are marketed differently to men and women, though gender-neutral approaches are increasingly common.

Geographic segmentation

Location-based. Region, country, city size, climate, population density—geography affects needs and preferences. Warm-weather clothing sells better in Florida than Minnesota.

Local adaptation. Global brands often adapt to local tastes. McDonald's menu varies by country; beer preferences differ by region^[3].

Urban versus rural. Product needs, distribution channels, and media consumption differ between urban and rural markets.

Psychographic segmentation

Lifestyle and values. Psychographics go beyond demographics to understand how people live, what they value, and how they see themselves. Two people with identical demographics may have very different lifestyles.

Personality. Brand personalities appeal to consumer personalities. Adventure brands attract adventurous consumers; sophisticated brands attract those who see themselves as sophisticated.

Activities, interests, opinions. AIO measures capture how people spend time, what matters to them, and what they believe.

Behavioral segmentation

Purchase behavior. Usage rate (heavy, medium, light users), brand loyalty, purchase occasion, benefits sought—behavioral variables often predict future purchasing better than demographics^[4].

User status. Non-users, first-time users, regular users, and former users require different marketing approaches.

Benefits sought. Different consumers buy the same product for different reasons. Some buy toothpaste for cavity prevention; others for whitening; others for fresh breath.

Criteria for effective segments

Not all segments are useful:

Measurable

Size and characteristics. The segment must be identifiable and quantifiable. How many people are in it? What do they look like? If you can't measure it, you can't target it effectively.

Substantial

Large enough to serve. Segments must be big enough to justify tailored marketing efforts. A segment of twelve people isn't commercially viable^[5].

Accessible

Reachable through marketing. You must be able to reach the segment through available media and distribution channels. A segment you can't communicate with has limited value.

Differentiable

Distinct responses. Segments must respond differently to marketing mix elements. If two segments respond identically, they're effectively one segment.

Actionable

Practical to serve. Resources must exist to develop effective programs for the segment. Identifying a perfect segment means nothing without capability to serve it.

The STP process

Segmentation fits within a broader strategic framework:

Segmentation

Identify bases. Choose segmentation variables appropriate to the product category and market.

Profile segments. Describe each segment's characteristics, size, and attractiveness^[6].

Targeting

Evaluate segments. Assess each segment's size, growth, profitability, competitive intensity, and fit with company capabilities.

Select targets. Choose which segments to serve. Options include:

• Undifferentiated marketing (mass marketing)
• Differentiated marketing (multiple segments with tailored offers)
• Concentrated marketing (focusing on one segment)
• Micromarketing (individual or local marketing)

Positioning

Define positioning. Determine how the product should be perceived relative to competitors within each target segment.

Develop marketing mix. Create product, price, promotion, and place strategies aligned with chosen positioning^[7].

Applications

Segmentation serves multiple purposes:

Product development. Understanding segment needs guides new product features and design.

Pricing strategy. Different segments have different price sensitivities and willingness to pay.

Communication targeting. Messages and media can be tailored to segment preferences and behaviors.

Distribution decisions. Channel selection depends on where target segments shop.

Resource allocation. Segmentation helps prioritize marketing investments across opportunities.

Challenges

Segmentation has limitations:

Segment fluidity. People don't stay in segments permanently. Life changes move people between segments; preferences evolve^[8].

Over-segmentation. Excessive segmentation fragments markets, increases complexity, and may not be cost-effective.

Data privacy. Increasingly sophisticated segmentation requires increasingly detailed customer data, raising privacy concerns and regulatory constraints.

Stereotype risks. Demographic generalizations may not apply to individuals. Not all millennials are alike; not all wealthy consumers want luxury.

Market segmentation — recommended articles

Marketing strategy — Consumer behavior — Market research — Target market

References

• Kotler P., Keller K.L. (2016), Marketing Management, 15th Edition, Pearson.
• Smith W.R. (1956), Product Differentiation and Market Segmentation as Alternative Marketing Strategies, Journal of Marketing, 21(1), pp.3-8.
• Smart Insights (2023), STP Marketing Model.
• HubSpot (2023), Segmentation, Targeting & Positioning Guide.

Footnotes

1. ↑ Kotler P., Keller K.L. (2016), Marketing Management, p.268
2. ↑ Smith W.R. (1956), Market Segmentation, pp.4-6
3. ↑ Smart Insights (2023), STP Marketing Model
4. ↑ Kotler P., Keller K.L. (2016), Marketing Management, pp.278-292
5. ↑ HubSpot (2023), STP Guide
6. ↑ Kotler P., Keller K.L. (2016), Marketing Management, pp.295-308
7. ↑ Smart Insights (2023), Targeting and Positioning
8. ↑ Kotler P., Keller K.L. (2016), Marketing Management, pp.312-324

Author: Sławomir Wawak