Market Segmentation and Targeting » Final Revision: Paper 1 - Key Terms and Concepts

What you'll learn this session

Study time: 30 minutes

The concept of market segmentation and why businesses use it
Different methods of segmenting markets (demographic, geographic, psychographic, behavioural)
How to evaluate the effectiveness of different segmentation strategies
The process of targeting and how businesses select target markets
How to apply segmentation and targeting to real business examples

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Introduction to Market Segmentation

Market segmentation is one of the most important concepts in business marketing. It's about splitting up a large market into smaller groups of customers with similar needs, characteristics or behaviours. This helps businesses to target their products more effectively and make better use of their marketing resources.

Key Definitions:

Market Segmentation: The process of dividing a market into distinct groups of buyers who have different needs, characteristics, or behaviours and who might require separate products or marketing mixes.
Target Market: A group of customers that a business has decided to aim its marketing efforts towards.
Market Segment: A group of consumers who respond similarly to a given set of marketing efforts.
Mass Marketing: Treating the entire market as one group and offering the same product to everyone.

Why Do Businesses Segment Markets?

Businesses don't segment markets just for fun – it offers real advantages:

📈 Benefits of Segmentation

Better matches customer needs
Increases customer satisfaction and loyalty
Helps identify gaps in the market
Makes marketing more cost-effective
Helps businesses focus their resources
Can lead to higher profits

⚠ Limitations of Segmentation

Can be expensive to research
May lead to higher production costs
Requires more complex marketing
Segments may be too small to be profitable
Customer preferences can change quickly

Methods of Market Segmentation

There are four main ways to segment a market. Most businesses use a combination of these approaches:

👪 Demographic

Dividing the market based on who customers are:

Age
Gender
Income
Education
Family size
Occupation
Social class

🌎 Geographic

Dividing the market based on where customers are:

Country
Region
City/town
Urban/rural
Climate
Population density

💡 Psychographic

Dividing the market based on how customers think:

Lifestyle
Personality
Values
Attitudes
Interests
Opinions

🛒 Behavioural

Dividing the market based on how customers act:

Purchase occasion (regular, special)
Benefits sought
User status (non-user, first-time, regular)
Usage rate (light, medium, heavy)
Loyalty status
Readiness to buy
Attitude toward product

Effective Market Segmentation

For market segmentation to be useful, the segments must meet certain criteria:

Measurable: You need to be able to identify and measure the size of the segment.
Substantial: The segment must be large enough to be profitable.
Accessible: You need to be able to reach the segment with your marketing.
Differentiable: The segment should respond differently to marketing compared to other segments.
Actionable: You must be able to create effective marketing programmes for the segment.

Case Study Focus: Coca-Cola's Segmentation Strategy

Coca-Cola uses multiple segmentation approaches to target different consumer groups:

Demographic: Diet Coke targets health-conscious adults, while Fanta targets younger consumers.
Geographic: Coca-Cola adjusts sweetness levels in different countries based on local preferences.
Psychographic: Coca-Cola Zero targets those who want the taste without the calories.
Behavioural: Special edition bottles for holidays target occasional celebration purchases.

This multi-faceted approach has helped Coca-Cola maintain its position as one of the world's most valuable brands.

Market Targeting

After segmenting the market, businesses need to decide which segments to target. This process is called targeting.

Targeting Strategies

🎯 Undifferentiated

Targeting the whole market with one offering. Example: Basic household items like salt or sugar.

🎯 Differentiated

Targeting several segments with different offerings for each. Example: Toyota produces different car models for different segments.

🎯 Concentrated

Focusing on just one or a few segments. Example: Rolex focuses on the luxury watch segment.

Factors Affecting Target Market Selection

Company resources: Smaller businesses may need to use concentrated targeting due to limited resources.
Product homogeneity: Similar products may require differentiated targeting to stand out.
Market maturity: New markets might be approached with undifferentiated strategies, while mature markets often require more focused approaches.
Competitor strategies: Businesses might target segments that competitors have overlooked.
Stage in product life cycle: Different strategies may be appropriate at different stages.

Case Study Focus: Netflix's Targeting Evolution

Netflix has evolved its targeting strategy over time:

Initial phase: Concentrated targeting on movie enthusiasts who were frustrated with late fees from traditional rental shops.
Growth phase: Differentiated targeting with various content categories for different viewer segments.
Current phase: Highly sophisticated targeting using viewing data to create and recommend content for micro-segments.
Result: Netflix now creates specific content for different segments (like teen dramas, documentaries, or stand-up comedy) and uses its algorithm to match viewers with content they're likely to enjoy.

Niche Marketing

A niche market is a small, specific segment of a larger market. Niche marketing involves targeting these smaller segments with specialised products or services.

💰 Advantages of Niche Marketing

Less competition
Higher customer loyalty
Can charge premium prices
More focused marketing
Better understanding of customer needs

⚠ Disadvantages of Niche Marketing

Limited market size
Higher risk if niche disappears
Can be difficult to grow
May have higher costs per unit
Limited economies of scale

Exam Tips for Market Segmentation and Targeting

Use examples: Always support your answers with real business examples.
Consider context: Different businesses will segment and target markets differently depending on their size, industry and objectives.
Evaluate: Don't just describe segmentation methods – analyse their effectiveness for specific businesses.
Link to other concepts: Show how segmentation connects to the marketing mix, product development and business strategy.
Remember limitations: Acknowledge that segmentation isn't always beneficial – sometimes mass marketing works better.

Quick Revision Summary

Market Segmentation: Dividing a market into distinct groups with similar needs or characteristics.

Main Types: Demographic, Geographic, Psychographic, Behavioural

Targeting Strategies: Undifferentiated, Differentiated, Concentrated

Effective Segments are: Measurable, Substantial, Accessible, Differentiable, Actionable

Benefits: Better matches customer needs, more efficient marketing, can increase profits

Limitations: Can be expensive, complex, segments may be too small

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