Market segmentation

Market segmentation is a process of dividing a heterogeneous market into relatively more homogenous
segments based on certain parameters like geographic, demographic, psychographic, and behavioural. It is the
activity of dividing a broad consumer or business market, normally consisting of existing and potential
customers, into sub-groups of consumers (known as segments) based on some type of shared characteristics.

In dividing or segmenting markets, researchers typically look for common characteristics such as shared needs,
common interests, similar lifestyles, or even similar demographic profiles. The overall aim of segmentation is
to identify high yield segments – that is, those segments that are likely to be the most profitable or that have
growth potential – so that these can be selected for special attention (i.e. become target markets). Many
different ways to segment a market have been identified. Business-to-business (B2B) sellers might segment the
market into different types of businesses or countries. While business-to-consumer (B2C) sellers might
segment the market into demographic segments, lifestyle segments, behavioural segments, or any other
meaningful segment.

Market segmentation assumes that different market

segments require different marketing programs – that is,
different offers, prices, promotion, distribution, or some
combination of marketing variables. Market segmentation
is not only designed to identify the most profitable
segments, but also to develop profiles of key segments in The STP approach highlights the three areas of
order to better understand their needs and purchase decision-making
motivations. Insights from segmentation analysis are
subsequently used to support marketing strategy
development and planning. Many marketers use the S-T-P approach; Segmentation → Targeting →
Positioning to provide the framework for marketing planning objectives. That is, a market is segmented, one or
more segments are selected for targeting, and products or services are positioned in a way that resonates with
the selected target market or markets.

Contents
Definition and brief explanation
History
Criticisms
Market segmentation strategy
Segmentation, targeting, positioning
Identifying the market to be segmented
Bases for segmenting consumer markets
Geographic segmentation
Demographic segmentation
Psychographic segmentation
Behavioural segmentation
Other types of consumer segmentation
Selecting target markets
Criteria for evaluating segment attractiveness
Developing the marketing program and positioning strategy
Basis for segmenting business markets
Use in customer retention
Segmentation: algorithms and approaches
A-priori segmentation
Post-hoc segmentation
Statistical techniques used in segmentation
Data sources used for segmentation
Companies (proprietary segmentation databases)
See also
References
External links

Definition and brief explanation

Market segmentation is the process of dividing up mass markets into groups with similar needs and wants.[1]
The rationale for market segmentation is that in order to achieve competitive advantage and superior
performance, firms should: "(1) identify segments of industry demand, (2) target specific segments of demand,
and (3) develop specific 'marketing mixes' for each targeted market segment. "[2] From an economic
perspective, segmentation is built on the assumption that heterogeneity in demand allows for demand to be
disaggregated into segments with distinct demand functions.[3]

History
The business historian, Richard S. Tedlow, identifies four stages in
the evolution of market segmentation:[4]

Fragmentation (pre-1880s): The economy was

characterised by small regional suppliers who sold goods
on a local or regional basis
Unification or mass marketing (1880s–1920s): As
transportation systems improved, the economy became
unified. Standardised, branded goods were distributed at a
national level. Manufacturers tended to insist on strict
standardisation in order to achieve scale economies with a The Model-T Ford (1921) is an early
view to penetrating markets in the early stages of a example of a mass marketing
product's lifecycle. e.g. the Model T Ford (undifferentiated segmentation)
Segmentation (1920s–1980s): As market size increased, approach. Initially, it was produced
manufacturers were able to produce different models only in black.
pitched at different quality points to meet the needs of
various demographic and psychographic market segments.
This is the era of market differentiation based on demographic, socio-economic, and lifestyle
factors.
Hyper-segmentation (post-1980s): a shift towards the definition of ever more narrow market
segments. Technological advancements, especially in the area of digital communications,
 allow marketers to communicate with individual consumers or very small groups. This is
sometimes known as one-to-one marketing.

The practice of market segmentation emerged well before marketers

thought about it at a theoretical level.[5] Archaeological evidence
suggests that Bronze Age traders segmented trade routes according to
geographical circuits.[6] Other evidence suggests that the practice of
modern market segmentation was developed incrementally from the
16th century onwards. Retailers, operating outside the major
metropolitan cities, could not afford to serve one type of clientele
exclusively, yet retailers needed to find ways to separate the wealthier
clientele from the "riff raff". One simple technique was to have a
window opening out onto the street from which customers could be By the 1930s, Ford was producing
Deluxe models in a range of colours
served. This allowed the sale of goods to the common people, without
such as this Ford Deluxe Coupe
encouraging them to come inside. Another solution, that came into
(1931)
vogue from the late sixteenth century, was to invite favored customers
into a back-room of the store, where goods were permanently on
display. Yet another technique that emerged around the same time was
to hold a showcase of goods in the shopkeeper's private home for the benefit of wealthier clients. Samuel
Pepys, for example, writing in 1660, describes being invited to the home of a retailer to view a wooden jack.[7]
The eighteenth-century English entrepreneurs, Josiah Wedgewood and Matthew Boulton, both staged
expansive showcases of their wares in their private residences or in rented halls to which only the upper
classes were invited while Wedgewood used a team of itinerant salesmen to sell wares to the masses.[8]

Evidence of early marketing segmentation has also been noted elsewhere in Europe. A study of the German
book trade found examples of both product differentiation and market segmentation in the 1820s.[9] From the
1880s, German toy manufacturers were producing models of tin toys for specific geographic markets; London
omnibuses and ambulances destined for the British market; French postal delivery vans for Continental Europe
and American locomotives intended for sale in America.[10] Such activities suggest that basic forms of market
segmentation have been practised since the 17th century and possibly earlier.

Contemporary market segmentation emerged in the first decades of the twentieth century as marketers
responded to two pressing issues. Demographic and purchasing data were available for groups but rarely for
individuals and secondly, advertising and distribution channels were available for groups, but rarely for single
consumers. Between 1902 and 1910, George B Waldron, working at Mahin's Advertising Agency in the
United States used tax registers, city directories, and census data to show advertisers the proportion of
educated vs illiterate consumers and the earning capacity of different occupations, etc. in a very early example
of simple market segmentation.[11][12] In 1924 Paul Cherington developed the 'ABCD' household typology;
the first socio-demographic segmentation tool.[11][13] By the 1930s, market researchers such as Ernest Dichter
recognised that demographics alone were insufficient to explain different marketing behaviours and began
exploring the use of lifestyles, attitudes, values, beliefs and culture to segment markets.[14] With access to
group-level data only, brand marketers approached the task from a tactical viewpoint. Thus, segmentation was
essentially a brand-driven process.

Wendell R. Smith is generally credited with being the first to introduce the concept of market segmentation
into the marketing literature in 1956 with the publication of his article, "Product Differentiation and Market
Segmentation as Alternative Marketing Strategies."[15] Smith's article makes it clear that he had observed
"many examples of segmentation" emerging and to a certain extent saw this as a "natural force" in the market
that would "not be denied."[16] As Schwarzkopf points out, Smith was codifying implicit knowledge that had
been used in advertising and brand management since at least the 1920s.[17]
Until relatively recently, most segmentation approaches have retained a tactical perspective in that they address
immediate short-term decisions; such as describing the current “market served” and are concerned with
informing marketing mix decisions. However, with the advent of digital communications and mass data
storage, it has been possible for marketers to conceive of segmenting at the level of the individual consumer.
Extensive data is now available to support segmentation at very narrow groups or even for the single customer,
allowing marketers to devise a customised offer with an individual price which can be disseminated via real-
time communications.[18] Some scholars have argued that the fragmentation of markets has rendered
traditional approaches to market segmentation less useful.[19]

Criticisms
The limitations of conventional segmentation have been well documented in the literature.[20] Perennial
criticisms include:

That it is no better than mass marketing at building brands[21]

That in competitive markets, segments rarely exhibit major differences in the way they use
brands[22]
That it fails to identify sufficiently narrow clusters[23]
Geographic/demographic segmentation is overly descriptive and lacks sufficient insights into
the motivations necessary to drive communications strategy[24]
Difficulties with market dynamics, notably the instability of segments over time[25][26] and
structural change which leads to segment creep and membership migration as individuals
move from one segment to another[27]

Market segmentation has many critics. But in spite of its limitations, market segmentation remains one of the
enduring concepts in marketing and continues to be widely used in practice. One American study, for
example, suggested that almost 60 percent of senior executives had used market segmentation in the past two
years.[28]

Market segmentation strategy

A key consideration for marketers is whether to segment or not to segment. Depending on company
philosophy, resources, product type, or market characteristics, a business may develop an undifferentiated
approach or differentiated approach. In an undifferentiated approach, the marketer ignores segmentation and
develops a product that meets the needs of the largest number of buyers.[29] In a differentiated approach the
firm targets one or more market segments, and develops separate offers for each segment.[29]

In consumer marketing, it is difficult to find examples of undifferentiated approaches. Even goods such as salt
and sugar, which were once treated as commodities, are now highly differentiated. Consumers can purchase a
variety of salt products; cooking salt, table salt, sea salt, rock salt, kosher salt, mineral salt, herbal or vegetable
salts, iodised salt, salt substitutes, and many more. Sugar also comes in many different types - cane sugar, beet
sugar, raw sugar, white refined sugar, brown sugar, caster sugar, sugar lumps, icing sugar (also known as
milled sugar), sugar syrup, invert sugar, and a plethora of sugar substitutes including smart sugar which is
essentially a blend of pure sugar and a sugar substitute. Each of these product types is designed to meet the
needs of specific market segments. Invert sugar and sugar syrups, for example, are marketed to food
manufacturers where they are used in the production of conserves, chocolate, and baked goods. Sugars
marketed to consumers appeal to different usage segments – refined sugar is primarily for use on the table,
while caster sugar and icing sugar are primarily designed for use in home-baked goods.
 Main Strategic Approaches to Segmentation[30]
Number of Segmentation
Comments
segments strategy
Undifferentiated
Zero Mass marketing: no segmentation
strategy
Niche marketing: focus efforts on a
One Focus strategy
small, tightly defined target market
Two or Differentiated Multiple niches: focus efforts on 2
more strategy or more, tightly defined targets
Even simple products like salt, which
One-to-one marketing: customise might be considered as
Thousands Hypersegmentation the offer for each individual commodities, are highly
customer
differentiated in practice.

A number of factors are likely to affect a company's segmentation

strategy:[31]

Company resources: When resources are restricted, a

concentrated strategy may be more effective.
Product variability: For highly uniform products (such as
sugar or steel) undifferentiated marketing may be more
appropriate. For products that can be differentiated, (such
as cars) then either a differentiated or concentrated
approach is indicated.
Product life cycle: For new products, one version may be
used at the launch stage, but this may be expanded to a
more segmented approach over time. As more competitors
Different types of sugar: clockwise
enter the market, it may be necessary to differentiate.
from top-left: White refined,
Market characteristics: When all buyers have similar tastes unrefined, brown, unprocessed cane
or are unwilling to pay a premium for different quality, then
undifferentiated marketing is indicated.
Competitive activity: When competitors apply differentiated or concentrated market
segmentation, using undifferentiated marketing may prove to be fatal. A company should
consider whether it can use a different market segmentation approach

Segmentation, targeting, positioning

The process of segmenting the market is deceptively simple. Seven basic steps describe the entire process
including segmentation, targeting, and positioning. In practice, however, the task can be very laborious since it
involves poring over voluminous data, and requires a great deal of skill in analysis, interpretation, and some
judgment. Although a great deal of analysis needs to be undertaken, and many decisions need to be made,
marketers tend to use the so-called S-T-P process, that is Segmentation→ Targeting → Positioning, as a broad
framework for simplifying the process.[32] Segmentation comprises identifying the market to be segmented;
identification, selection, and application of bases to be used in that segmentation; and development of profiles.
Targeting comprises an evaluation of each segment's attractiveness and selection of the segments to be
targeted. Positioning comprises the identification of optimal position and development of the marketing
program.

Identifying the market to be segmented

The market for a given product or service known as the market potential or the total addressable market
(TAM). Given that this is the market to be segmented, the market analyst should begin by identifying the size
of the potential market. For existing products and services, estimating the size and value of the market potential
is relatively straightforward. However, estimating the market potential can be very challenging when a product
or service is totally new to the market and no historical data on which to base forecasts exists.

A basic approach is to first assess the size of the broad population, then estimate the percentage likely to use
the product or service and finally to estimate the revenue potential.

Another approach is to use a historical analogy.[33] For

example, the manufacturer of HDTV might assume that
the number of consumers willing to adopt high definition
TV will be similar to the adoption rate for Color TV. To
support this type of analysis, data for household
penetration of TV, Radio, PCs, and other
communications technologies is readily available from
government statistics departments. Finding useful
analogies can be challenging because every market is
unique. However, analogous product adoption and
growth rates can provide the analyst with benchmark
estimates, and can be used to cross-validate other To estimate market size, a marketer might
methods that might be used to forecast sales or market evaluate the adoption and growth rates of
size. comparable technologies (historical analogy
method).
A more robust technique for estimating the market
potential is known as the Bass diffusion model, the
equation for which follows:[34]

N(t) – N(t−1) = [p + qN(t−1)/m] × [m – N(t−1)]

Where:

N(t)= the number of adopters in the current time period, (t)

N(t−1)= the number of adopters in the previous time period, (t-1)
p = the coefficient of innovation
q = the coefficient of imitation (the social contagion influence)
m = an estimate of the number of eventual adopters

The major challenge with the Bass model is estimating the parameters for p and q. However, the Bass model
has been so widely used in empirical studies that the values of p and q for more than 50 consumer and
industrial categories have been determined and are widely published in tables.[35] The average value for p is
0.037 and for q is 0.327.

Bases for segmenting consumer markets

A major step in the segmentation process is the selection of a suitable base. In this step, marketers are looking
for a means of achieving internal homogeneity (similarity within the segments), and external heterogeneity
(differences between segments).[36] In other words, they are searching for a process that minimises differences
between members of a segment and maximises differences between each segment. In addition, the
segmentation approach must yield segments that are meaningful for the specific marketing problem or
situation. For example, a person's hair color may be a
relevant base for a shampoo manufacturer, but it would
not be relevant for a seller of financial services. Selecting
the right base requires a good deal of thought and a basic
understanding of the market to be segmented.

In reality, marketers can segment the market using any

base or variable provided that it is identifiable,
substantial, responsive, actionable and stable.[37]

Identifiability refers to the extent to which

managers can identify or recognise distinct
Major bases used for segmenting a market
groups within the marketplace
Substantiality refers to the extent to which a
segment or group of customers represents a sufficient size to be profitable. This could mean
sufficiently large in number of people or in purchasing power
Accessibility refers to the extent to which marketers can reach the targeted segments with
promotional or distribution efforts
Responsiveness refers to the extent to which consumers in a defined segment will respond to
marketing offers targeted at them
Actionable – segments are said to be actionable when they provide guidance for marketing
decisions.[38]

For example, although dress size is not a standard base for segmenting a market, some fashion houses have
successfully segmented the market using women's dress size as a variable.[39] However, the most common
bases for segmenting consumer markets include: geographics, demographics, psychographics, and behaviour.
Marketers normally select a single base for the segmentation analysis, although, some bases can be combined
into a single segmentation with care. For example, geographics and demographics are often combined, but
other bases are rarely combined. Given that psychographics includes demographic variables such as age,
gender, and income as well as attitudinal and behavioural variables, it makes little logical sense to combine
psychographics with demographics or other bases. Any attempt to use combined bases needs careful
consideration and a logical foundation.
 Segmentation
Brief explanation of base (and example)
base
Quantifiable population characteristics. ( age,
Demographic gender, income, education, socio-economic
status, family size or situation).
Physical location or region ( country, state,
Geographic
region, city, suburb, postcode).
Geo-
Combination of geographic & demographic
demographic or
variables.
geoclusters
Lifestyle, social or personality characteristics.
Psychographics (typically includes basic demographic
descriptors)
Purchasing, consumption or usage behaviour. (
Needs-based, benefit-sought, usage occasion,
Behavioural
purchase frequency, customer loyalty, buyer
readiness).
The same consumer changes in their
Contextual and attractiveness to marketers based on context
situational and situation. This is particularly used in digital
targeting via programmatic bidding approaches
Typical segments examples
Young, Upwardly-mobile, Prosperous,
Professionals (YUPPY); Double Income No
Kids (DINKS); Greying, Leisured And
Moneyed (GLAMS); Empty- nester, Full-
nester
New Yorkers; Remote, outback Australians;
Urbanites, Inner-city dwellers
Rural farmers, Urban professionals, 'sea-
changers', 'tree-changers'
Socially Aware; Traditionalists,
Conservatives, Active 'club-going' young
professionals
Tech-savvy (aka tech-heads); Heavy users,
Enthusiasts; Early adopters, Opinion
Leaders, Luxury-seekers, Price-conscious,
Quality-conscious, Time-poor
Actively shopping, just entering into a life
change event, being physically in a certain
location, or at a particular retailer which is
known from GPS data via smartphones.

The following sections provide a detailed description of the most common forms of consumer market
segmentation.

Geographic segmentation

Geographic segmentation divides markets according to geographic criteria. In practice, markets can be
segmented as broadly as continents and as narrowly as neighborhoods or postal codes.[40] Typical geographic
variables include:

Country Brazil, Canada, China, France, Germany, India, Italy, Japan, UK, US
Region North, North-west, Mid-west, South, Central
Population density: central business district (CBD), urban, suburban, rural, regional
City or town size: under 1,000; 1,000–5,000; 5,000–10,000 ... 1,000,000–3,000,000 and over
3,000,000
Climatic zone: Mediterranean, Temperate, Sub-Tropical, Tropical, Polar

The geo-cluster approach (also called geodemographic segmentation) combines demographic data with
geographic data to create richer, more detailed profiles.[41] Geo-cluster approaches are a consumer
classification system designed for market segmentation and consumer profiling purposes. They classify
residential regions or postcodes on the basis of census and lifestyle characteristics obtained from a wide range
of sources. This allows the segmentation of a population into smaller groups defined by individual
characteristics such as demographic, socio-economic, or other shared socio-demographic characteristics.

Geographic segmentation may be considered the first step in international marketing, where marketers must
decide whether to adapt their existing products and marketing programs for the unique needs of distinct
geographic markets. Tourism Marketing Boards often segment international visitors based on their country of
origin.
A number of proprietary geo-demographic packages are available for commercial use. Geographic
segmentation is widely used in direct marketing campaigns to identify areas that are potential candidates for
personal selling, letter-box distribution, or direct mail. Geo-cluster segmentation is widely used by
Governments and public sector departments such as urban planning, health authorities, police, criminal justice
departments, telecommunications, and public utility organisations such as water boards.[42]

Demographic segmentation

Segmentation according to demography is based on consumer- demographic variables such as age, income,
family size, socio-economic status, etc.[43] Demographic segmentation assumes that consumers with similar
demographic profiles will exhibit similar purchasing patterns, motivations, interests, and lifestyles and that
these characteristics will translate into similar product/brand preferences.[44] In practice, demographic
segmentation can potentially employ any variable that is used by the nation's census collectors. Typical
demographic variables and their descriptors are as follows:

Age: Under 5, 5–8 years, 9–12 years, 13–17 years, 18–24, 25–29, 30–39, 40–49, 50–59,
60+[45]
Gender: Male, Female[46]
Occupation: Professional, self-employed, semi-professional, clerical/ admin, sales, trades,
mining, primary producer, student, home duties, unemployed, retired[47]
Socio-economic: A, B, C, D, E, or I, II, III, IV or V (normally divided into quintiles)[48]
Marital Status: Single, married, divorced, widowed
Family Life-stage: Young single; Young married with no children; Young family with children
under 5 years; Older married with children; Older married with no children living at home, Older
living alone[49]
Family size/ number of dependants: 0, 1–2, 3–4, 5+
Income: Under $10,000; 10,000–20,000; 20,001–30,000; 30,001–40,000, 40,001–50,000 etc.
Educational attainment: Primary school; Some secondary, Completed secondary, Some
university, Degree; Post graduate or higher degree
Home ownership: Renting, Own home with mortgage, Home owned outright
Ethnicity: Asian, African, Aboriginal, Polynesian, Melanesian, Latin-American, African-
American, American Indian, etc.
Religion: Catholic, Protestant, Muslim, Jewish, Buddhist, Hindu, Other

In practice, most demographic segmentation utilises a combination of demographic variables.

The use of multiple segmentation variables normally requires analysis of databases using sophisticated
statistical techniques such as cluster analysis or principal components analysis. These types of analysis require
very large sample sizes. However, data collection is expensive for individual firms. For this reason, many
companies purchase data from commercial market research firms, many of whom develop proprietary software
to interrogate the data.

The labels applied to some of the more popular demographic segments began to enter the popular lexicon in
the 1980s.[50][51][52] These include the following:[53][54]

DINK: Double (or dual) Income, No Kids, describes one member of a couple with
above-average household income and no dependent children, tend to exhibit
discretionary expenditure on luxury goods and entertainment and dining out
GLAM: Greying, Leisured and Moneyed. Retired older persons, asset rich, and high
income. Tend to exhibit higher spending on recreation, travel, and entertainment
 GUPPY: (aka GUPPIE) Gay, Upwardly
Mobile, Prosperous, Professional;
blend of gay and YUPPY (can also
refer to the London-based equivalent of
YUPPY)
MUPPY: (aka MUPPIE) Mid-aged,
Upwardly Mobile, Prosperous,
Professional
Preppy: (American) Well educated,
well-off, upper-class young persons; a
graduate of an expensive school. Often
distinguished by a style of dress. Visualisation of two approaches to demographic
SITKOM: Single Income, Two Kids, segmentation using one and two variables. On the
Oppressive Mortgage. Tend to have left, a single variable (age) is used. On the right,
very little discretionary income, struggle two variables (income and occupation) are used to
to make ends meet form the segments.
Tween: Young person who is
approaching puberty, aged
approximately 9–12 years; too old to be considered a child, but too young to be a
teenager; they are 'in between'.
WASP: (American) White, Anglo-Saxon Protestant. Tend to be high-status and
influential white Americans of English Protestant ancestry.
YUPPY: (aka yuppie) Young, Urban/ Upwardly-mobile, Prosperous, Professional. Tend
to be well-educated, career-minded, ambitious, affluent, and free spenders.

Psychographic segmentation

Psychographic segmentation, which is sometimes called psychometric or lifestyle segmentation, is measured

by studying the activities, interests, and opinions (AIOs) of customers. It considers how people spend their
leisure,[55] and which external influences they are most responsive to and influenced by. Psychographics is a
very widely used basis for segmentation, because it enables marketers to identify tightly defined market
segments and better understand consumer motivations for product or brand choice.

While many of these proprietary psychographic segmentation analyses are well-known, the majority of studies
based on psychographics are custom designed. That is, the segments are developed for individual products at a
specific time. One common thread among psychographic segmentation studies is that they use quirky names to
describe the segments.[56]

Behavioural segmentation

Behavioural segmentation divides consumers into groups according to their observed behaviours. Many
marketers believe that behavioural variables are superior to demographics and geographics for building market
segments[57] and some analysts have suggested that behavioural segmentation is killing off demographics.[58]
Typical behavioural variables and their descriptors include:[59]

Purchase/Usage Occasion: regular occasion, special occasion, festive occasion, gift-giving

Benefit-Sought: economy, quality, service level, convenience, access
User Status: First-time user, Regular user, Non-user
Usage Rate/Purchase Frequency: Light user, heavy user, moderate user
Loyalty Status: Loyal, switcher, non-loyal, lapsed
Buyer Readiness: Unaware, aware, intention to buy
 Attitude to Product or Service: Enthusiast, Indifferent, Hostile; Price Conscious, Quality
Conscious
Adopter Status: Early adopter, late adopter, laggard
Scanner data from super market or credit card information data[60]

Note that these descriptors are merely commonly used examples. Marketers customise the variable and
descriptors for both local conditions and for specific applications. For example, in the health industry, planners
often segment broad markets according to 'health consciousness' and identify low, moderate, and highly health
conscious segments. This is an applied example of behavioural segmentation, using attitude to product or
service as a key descriptor or variable which has been customised for the specific application.

Purchase/usage occasion

Purchase or usage occasion segmentation focuses on analyzing occasions when consumers might purchase or
consume a product. This approach customer-level and occasion-level segmentation models and provides an
understanding of the individual customers’ needs, behaviour, and value under different occasions of usage and
time. Unlike traditional segmentation models, this approach assigns more than one segment to each unique
customer, depending on the current circumstances they are under.

Benefit-sought

Benefit segmentation (sometimes called needs-based segmentation) was developed by Grey Advertising in the
late 1960s.[61] The benefits-sought by purchasers enables the market to be divided into segments with distinct
needs, perceived value, benefits sought, or advantage that accrues from the purchase of a product or service.
Marketers using benefit segmentation might develop products with different quality levels, performance,
customer service, special features, or any other meaningful benefit and pitch different products at each of the
segments identified. Benefit segmentation is one of the more commonly used approaches to segmentation and
is widely used in many consumer markets including motor vehicles, fashion and clothing, furniture, consumer
electronics, and holiday-makers.[62]

Loker and Purdue, for example, used benefit segmentation to segment the pleasure holiday travel market. The
segments identified in this study were the naturalists, pure excitement seekers, escapists.[63]

Attitudinal segments

Attitudinal segmentation provides insight into the mindset of customers, especially the attitudes and beliefs that
drive consumer decision-making and behaviour. An example of attitudinal segmentation comes from the UK's
Department of Environment which segmented the British population into six segments, based on attitudes that
drive behaviour relating to environmental protection:[64]

Greens: Driven by the belief that protecting the environment is critical; try to conserve
whenever they can
Conscious with a conscience: Aspire to be green; primarily concerned with wastage; lack
awareness of other behaviours associated with broader environmental issues such as climate
change
Currently constrained: Aspire to be green but feel they cannot afford to purchase organic
products; pragmatic realists
Basic contributors: Sceptical about the need for behaviour change; aspire to conform to
social norms; lack awareness of social and environmental issues
 Long-term resistance: Have serious life priorities that take precedence before a behavioural
change is a consideration; their everyday behaviours often have a low impact on the
environment, but for other reasons than conservation
Disinterested: View greenies as an eccentric minority; exhibit no interest in changing their
behaviour; may be aware of climate change but have not internalised it to the extent that it
enters their decision-making process.

Other types of consumer segmentation

In addition to geographics, demographics, psychographics, and behavioural bases, marketers occasionally turn
to other means of segmenting the market, or to develop segment profiles.

Generational segments

A generation is defined as "a cohort of people born within a similar span of time (15 years at the upper end)
who share a comparable age and life stage and who were shaped by a particular span of time (events, trends,
and developments)."[65] Generational segmentation refers to the process of dividing and analyzing a
population into cohorts based on their birth date. Generational segmentation assumes that people's values and
attitudes are shaped by the key events that occurred during their lives and that these attitudes translate into
product and brand preferences.

Demographers, studying population change, disagree about precise dates for each generation.[66] Dating is
normally achieved by identifying population peaks or troughs, which can occur at different times in each
country. For example, in Australia the post-war population boom peaked in 1960,[67] while the peak occurred
somewhat later in the US and Europe,[68] with most estimates converging on 1964. Accordingly, Australian
Boomers are normally defined as those born between 1945–1960; while American and European Boomers are
normally defined as those born between 1946–64. Thus, the generational segments and their dates discussed
here must be taken as approximations only.

The primary generational segments identified by marketers are:[69]

Builders: born 1920 to 1945

Baby boomers: born about 1946–1964
Generation X: born about 1965–1980
Generation Y, also known as Millennials; born about 1981–1996
Generation Z, also known as Zoomers; born 1997–2012

Unique characteristics of selected generations[70]

Millennials Generation X Baby Boomers
Technology use 24% Technology use 12% Work ethic 17%
Music/ popular culture 11% Work ethic 11% Respectful 14%
Liberal/ tolerant 7% Conservative/ traditional 7% Values/ morals 8%
Smarter 6% Smarter 6% Smarter 5%
Clothes 5% Respectful 5% N/A —

Cultural segmentation
Cultural segmentation is used to classify markets according to the cultural origin. Culture is a major dimension
of consumer behaviour and can be used to enhance customer insight and as a component of predictive models.
Cultural segmentation enables appropriate communications to be crafted for particular cultural communities.
Cultural segmentation can be applied to existing customer data to measure market penetration in key cultural
segments by product, brand, channel as well as traditional measures of recency, frequency, and monetary
value. These benchmarks form an important evidence-base to guide strategic direction and tactical campaign
activity, allowing engagement trends to be monitored over time.[71]

Cultural segmentation can be combined with other bases, especially geographics so that segments are mapped
according to state, region, suburb, and neighborhood. This provides a geographical market view of population
proportions and may be of benefit in selecting appropriately located premises, determining territory boundaries,
and local marketing activities.

Census data is a valuable source of cultural data but cannot meaningfully be applied to individuals. Name
analysis (onomastics) is the most reliable and efficient means of describing the cultural origin of individuals.
The accuracy of using name analysis as a surrogate for cultural background in Australia is 80–85%, after
allowing for female name changes due to marriage, social or political reasons, or colonial influence. The extent
of name data coverage means a user will code a minimum of 99 percent of individuals with their most likely
ancestral origin.

Online customer segmentation

Online market segmentation is similar to the traditional approaches in that the segments should be identifiable,
substantial, accessible, stable, differentiable, and actionable.[72] Customer data stored in online data
management systems such as a CRM or DMP enables the analysis and segmentation of consumers across a
diverse set of attributes.[73] Forsyth et al., in an article 'Internet research' grouped current active online
consumers into six groups: Simplifiers, Surfers, Bargainers, Connectors, Routiners, and Sportsters. The
segments differ regarding four customers' behaviours, namely:[74]

The amount of time they actively spend online,

The number of pages and sites they access,
The time they spend actively viewing each page,
And the kinds of sites they visit.

For example, Simplifiers make over 50 percent of all online transactions. Their main characteristic is that they
need easy (one-click) access to information and products as well as easy and quickly available service
regarding products. Amazon.com is an example of a company that created an online environment for
Simplifiers. They also 'dislike unsolicited e-mail, uninviting chat rooms, pop-up windows intended to
encourage impulse buys, and other features that complicate their on- and off-line experience'. Surfers like to
spend a lot of time online, thus companies must have a variety of products to offer and constant update,
Bargainers are looking for the best price, Connectors like to relate to others, Routiners want content and
Sportsters like sport and entertainment sites.

Selecting target markets

Another major decision in developing the segmentation strategy is the selection of market segments that will
become the focus of special attention (known as target markets). The marketer faces a number of important
decisions:

What criteria should be used to evaluate markets?

How many markets to enter (one, two or more)?
 Which market segments are the most valuable?

When a marketer enters more than one market, the segments are often
labeled the primary target market, secondary target market. The
primary market is the target market selected as the main focus of
marketing activities. The secondary target market is likely to be a
segment that is not as large as the primary market, but has growth
potential. Alternatively, the secondary target group might consist of a
small number of purchasers that account for a relatively high In targeting, a group of consumers is
proportion of sales volume perhaps due to purchase value or purchase selected to become the focus of the
frequency. marketing program

In terms of evaluating markets, three core considerations are

essential:[75]

Segment size and growth

Segment structural attractiveness
Company objectives and resources.

Criteria for evaluating segment attractiveness

There are no formulas for evaluating the attractiveness of market segments and a good deal of judgment must
be exercised.[76] Nevertheless, a number of considerations can be used to assist in evaluating market segments
for overall attractiveness. The following lists a series of questions that can be asked.

Segment size and growth

How large is the market?
Is the market segment substantial enough to be profitable? (Segment size can be measured in
the number of customers, but superior measures are likely to include sales value or volume)
Is the market segment growing or contracting?
What are the indications that growth will be sustained in the long term? Is any observed growth
sustainable?
Is the segment stable over time? (Segment must have sufficient time to reach desired
performance level)

Segment structural attractiveness

To what extent are competitors targeting this market segment?
Do buyers have bargaining power in the market?
Are substitute products available?
Can we carve out a viable position to differentiate from any competitors?
How responsive are members of the market segment to the marketing program?
Is this market segment reachable and accessible? (i.e., with respect to distribution and
promotion)

Company objectives and resources

Is this market segment aligned with our company's operating philosophy?
 Do we have the resources necessary to enter this market segment?
Do we have prior experience with this market segment or similar market segments?
Do we have the skills and/or know-how to enter this market segment successfully?

Developing the marketing program and positioning strategy

When the segments have been determined and separate offers
developed for each of the core segments, the marketer's next task is to
design a marketing program (also known as the marketing mix) that
will resonate with the target market or markets. Developing the
marketing program requires a deep knowledge of key market
segment's purchasing habits, their preferred retail outlet, their media
habits, and their price sensitivity. The marketing program for each
brand or product should be based on the understanding of the target
market (or target markets) revealed in the market profile.

Positioning is the final step in the S-T-P planning approach;

Segmentation → Targeting → Positioning; a core framework for
developing marketing plans and setting objectives. Positioning refers The marketing program is designed
to decisions about how to present the offer in a way that resonates with the needs of the target market in
mind
with the target market. During the research and analysis that forms the
central part of segmentation and targeting, the marketer will have
gained insights into what motivates consumers to purchase a product
or brand. These insights will form part of the positioning strategy.

According to advertising guru, David Ogilvy, "Positioning is the act of designing the company’s offering and
image to occupy a distinctive place in the minds of the target market. The goal is to locate the brand in the
minds of consumers to maximise the potential benefit to the firm. A good brand positioning helps guide
marketing strategy by clarifying the brand’s essence, what goals it helps the consumer achieve, and how it
does so in a unique way."[77]

The technique known as perceptual mapping is often

used to understand consumers' mental representations of
brands within a given category. Traditionally two
variables (often, but not necessarily, price and quality) are
used to construct the map. A sample of people in the
target market are asked to explain where they would
place various brands in terms of the selected variables.
Results are averaged across all respondents, and results
are plotted on a graph, as illustrated in the figure. The
final map indicates how the average member of the
population views the brand that makes up a category and
how each of the brands relates to other brands within the
same category. While perceptual maps with two
Perceptual map of the U.S. motor vehicle category
dimensions are common, multi-dimensional maps are
also used.

There are a number of different approaches to positioning:[78]

1. Against a competitor
2. Within a category
 3. According to product benefit
4. According to product attribute
5. For usage occasion
6. Along price lines e.g. a luxury brand or premium brand
7. For a user
8. Cultural symbols e.g. Australia's Easter Bilby (as a culturally appropriate alternative to the
Easter Bunny).

Basis for segmenting business markets

Segmenting business markets is more straightforward than segmenting consumer markets. Businesses may be
segmented according to industry, business size, business location, turnover, number of employees, company
technology, purchasing approach, or any other relevant variables.[79] The most widely used segmentation
bases used in business to business markets are geographics and firmographics.[80]

The most widely used bases for segmenting business markets are:

Geographic segmentation occurs when a firm seeks to identify the most promising
geographic markets to enter. Business can tap into business census type products published
by Government departments to identify geographic regions that meet certain predefined
criteria.

Firmographics (also known as emporographics or feature based segmentation) is the

business community's answer to demographic segmentation. It is commonly used in
business-to-business markets (an estimated 81% of B2B marketers use this technique).
Under this approach the target market is segmented based on features such as company
size, industry sector or location usage rate, purchase frequency, number of years in business,
ownership factors and buying situation.[81][80]

Key firmographic variables: standard industry classification (SIC); company size (either
in terms of revenue or number of employees), industry sector or location (country and/or
region), usage rate, purchase frequency, number of years in business, ownership
factors and buying situation

Use in customer retention

The basic approach to retention-based segmentation is that a company tags each of its active customers on four
axes:

Risk of customer cancellation of company service

One of the most common indicators of high-risk customers is a drop off in usage of the
company's service. For example, in the credit card industry, this could be signaled through a
customer's decline in spending on his or her card.
Risk of customer switching to a competitor
Many times customers move purchase preferences to a competitor brand. This may happen
for many reasons those of which can be more difficult to measure. It is many times beneficial
for the former company to gain meaningful insights, through data analysis, as to why this
change of preference has occurred. Such insights can lead to effective strategies for winning
back the customer or on how not to lose the target customer in the first place.
Customer retention worthiness
This determination boils down to whether the post-retention profit generated from the
customer is predicted to be greater than the cost incurred to retain the customer and includes
 evaluation of customer lifecycles.[82][83]

This analysis of customer lifecycles is usually included in the growth plan of a business to determine which
tactics to implement to retain or let go of customers.[84] Tactics commonly used range from providing special
customer discounts to sending customers communications that reinforce the value proposition of the given
service.

Segmentation: algorithms and approaches

The choice of an appropriate statistical method for the segmentation depends on a number of factors including,
the broad approach (a-priori or post-hoc), the availability of data, time constraints, the marketer's skill level,
and resources.[85]

A-priori segmentation

A priori research occurs when "a theoretical framework is developed before the research is conducted".[86] In
other words, the marketer has an idea about whether to segment the market geographically, demographically,
psychographically or behaviourally before undertaking any research. For example, a marketer might want to
learn more about the motivations and demographics of light and moderate users in an effort to understand what
tactics could be used to increase usage rates. In this case, the target variable is known – the marketer has
already segmented using a behavioural variable – user status. The next step would be to collect and analyze
attitudinal data for light and moderate users. The typical analysis includes simple cross-tabulations, frequency
distributions and occasionally logistic regression or one of a number of proprietary methods.[87]

The main disadvantage of a-priori segmentation is that it does not explore other opportunities to identify
market segments that could be more meaningful.

Post-hoc segmentation

In contrast, post-hoc segmentation makes no assumptions about the optimal theoretical framework. Instead, the
analyst's role is to determine the segments that are the most meaningful for a given marketing problem or
situation. In this approach, the empirical data drives the segmentation selection. Analysts typically employ
some type of clustering analysis or structural equation modeling to identify segments within the data. Post-hoc
segmentation relies on access to rich datasets, usually with a very large number of cases and uses sophisticated
algorithms to identify segments.[88]

The figure alongside illustrates how segments might be formed using clustering; however, note that this
diagram only uses two variables, while in practice clustering employs a large number of variables.[89]

Statistical techniques used in segmentation

Marketers often engage commercial research firms or consultancies to carry out segmentation analysis,
especially if they lack the statistical skills to undertake the analysis. Some segmentation, especially post-hoc
analysis, relies on sophisticated statistical analysis.

Common statistical approaches and techniques used in segmentation analysis include:

Clustering algorithms[90] – overlapping, non-overlapping and fuzzy methods; e.g. K-means or

other Cluster analysis
 Conjoint analysis[91]
Ensemble approaches – such as random
forests[92]
Chi-square automatic interaction detection – a
type of decision-tree[93]
Factor analysis or principal components
analysis[94]
Latent Class Analysis – a generic term for a
class of methods that attempt to detect
underlying clusters based on observed patterns
of association[95]
Logistic regression[96]
Multidimensional scaling and canonical
analysis[97]
Mixture models – e.g., EM estimation algorithm,
finite-mixture models[98]
Model-based segmentation using simultaneous
and structural equation modeling[99] e.g. Visualisation of market segments formed using
LISREL clustering methods
Other algorithms such as artificial neural
networks.[100]

Data sources used for segmentation

Marketers use a variety of data sources for segmentation studies and market profiling. Typical sources of
information include:[101][102]

Internal sources
Customer transaction records e.g. sale value per transaction, purchase frequency
Patron membership records e.g. active members, lapsed members, length of membership
Customer relationship management (CRM) databases
In-house surveys
Customer self-completed questionnaires or feedback forms

External sources
Commissioned research (where the business commissions a research study and maintains
exclusive rights to the data; typically the most expensive means of data collection)
Data-mining techniques
Census data (population and business census)
Observed purchase behaviours
Government agencies and departments
Government statistics and surveys (e.g. studies by departments of trade, industry, technology,
etc.)
Omnibus surveys (a standard, regular survey with a basic set of questions about demographics
and lifestyles where an individual can add specific sets of questions about product preference
 or usage; generally lower cost than commissioned survey methods)
Professional/Industry associations/Employer associations
Proprietary surveys or tracking studies (also known as syndicated research; studies carried out
by market research companies where business can purchase the right to access part of the
data set)
Proprietary databases/software[103]

Companies (proprietary segmentation databases)

Acorn – geo-demographic segmentation[104]
Claritas Prizm – geo-demographic segmentation[105]
Experian – geo-demographic segmentation
Mosaic – geo-demographic segmentation
Roy Morgan Research Values Segments -psychographic/ psychometric[106]
VALS-psychographic/ psychometric
Values Modes-psychographic/ psychometric

See also
Marketing § Segmentation
Market analysis § Market segmentation
Attitudinal targeting
Behavioural targeting
Demographic profile
Demographic targeting
Geo-targeting
Geodemographic segmentation
Mass marketing
Marketing strategy
Microsegment
Niche market
Persona
Positioning (marketing)
Precision marketing
Precision marketing
Product differentiation
Psychographics
Sagacity segmentation
Segmenting and positioning
Serviceable available market
Target audience
Targeted advertising
Total addressable market

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