11.5 Market Segmentation

Demographic Segmentation

Demographic segmentation uses categories such as age, education, gender, income, and household size to differentiate among markets. This form of market segmentation is the most common because demographic information is easy to obtain. The U.S. Census Bureau provides a great deal of demographic data, especially about metropolitan areas. For example, marketing researchers can use census data to find areas within cities that contain high concentrations of high-income consumers, single individuals, or those employed in certain trades. However, even though demographic information is easier to obtain than other types of information, it may not always be the best approach to segmentation because it is limited on what it can reveal about consumers.

Many products are targeted to various age groups. Much of the music industry, movies, clothing trends, and thousands of other products are targeted towards Gen Z. In contrast, cruises, medicinal products, fine jewelry, hybrid vehicles, and anti-aging skin care products are targeted toward older generations. An example of how Frito Lay targets various age groups for three of its most popular products is shown in Table 11.3.

Income is another popular way to segment markets. Income level influences consumers’ wants and determines their buying power. Electronics, clothing, cars, and some food and beverage products are among the many markets segmented by income. Processed food items are often targeted to lower-income groups, whereas products found at Trader Joe's or Whole Foods are aimed at higher-income consumers.

Geographic Segmentation

Geographic segmentation means segmenting markets by region of the country, city or county size, market density, or climate. Market density is the number of people or businesses within a certain area. Many companies segment their markets geographically to meet regional preferences and buying habits. A national restaurant chain, for instance, might adjust their menu offerings for specific markets, such as extra cheese on items for urban locations or additional flavor profiles in more ethnically diverse areas. Automobile firms sell more pickup trucks and truck parts in the middle of the country than on either coast. More pickup truck sales happen in the Midwest, from Wyoming and South Dakota in the northern parts to Texas in the southern region.

Psychographic Segmentation

Race, income, occupation, and other demographic variables help in developing strategies but often do not paint the entire picture of consumer needs. Demographics provide basic data that can be observed about individuals, but psychographics provide vital information that is often much more useful in crafting the marketing message. Demographics provide the framework, and psychographics expand upon it. Psychographic segmentation is market segmentation by personality or lifestyle. People with common activities, interests, and opinions are grouped together and given a “lifestyle name.” For example, Harley-Davidson divides its customers into lifestyle segments from "freedom-seeking" customers who like open-road adventures to brand-loyal "traditionalists" for whom riding a Harley product is part of their identity. Two managers could both be categorized by the same demographics, such as the same age, similar income, and comparable education levels. If only looking at these variables, a marketer might create one advertisement to appeal to both managers. However, if the marketer added the psychographic variables that one manager was involved in city politics and coached their child's soccer team, whereas the other was a hobbyist farmer and had no children, the messages might be designed very differently in order to be more successful.

Benefit Segmentation

Benefit segmentation is based on what a product will do rather than on consumer characteristics. For years Crest toothpaste was targeted toward consumers concerned with preventing cavities. Now Crest's market is subdivided, offering specialized products such as Crest Kids, Crest Densify, and Crest 3D White. Sensodyne toothpaste is firstly aimed at consumers with sensitive teeth, but has also expanded its offerings to include whitening and enamel-building toothpastes based on the benefit segmentation concept.

Volume Segmentation

The fifth main type of segmentation is volume segmentation, which is based on the amount of the product purchased. Just about every product has heavy, moderate, and light users, as well as nonusers. Heavy users often account for a very large portion of a product’s sales. Thus, a firm might want to target its marketing mix to the heavy-user segment. For example, in the fast-food industry, the heavy user (a young, single man) accounts for over 60 percent of all visits to fast-food restaurants.

Retailers are aware that heavy shoppers not only spend more, but also visit each outlet more frequently than other shoppers. Average shoppers visit the grocery store about every five days, which is around 75 days per year. Heavy shoppers would be those that exceed this benchmark. This behavior can translate to other types of shopping such as online purchasing. On each trip, they typically spend more than their medium-shopping counterparts.

Business Market Segmentation

Business markets are segmented differently than consumer markets. Business markets may segment based on geography, volume, and benefits, just as consumer markets are. However, organizations might also segment based on use of the product (such as an insurance firm having one market segment for purchasers who need insurance for a new business and one for purchasers for nonprofits that need coverage for a special event), characteristics of purchasing function (such as purchasing committees, purchasing managers, or purchasing departments), size of the client (one segment for large customers who have different needs than smaller customers), or industry (such as segmenting food systems into restaurants or government agencies such as schools or military bases), as well as other considerations related to characteristics of business customers.

Using Marketing Research to Serve Existing Customers and Find New Customers

How do successful companies learn what their customers value? Through marketing research, companies can be sure they are listening to the voice of the customer. Marketing research is the process of planning, collecting, and analyzing data relevant to a marketing decision. The results of this analysis are then communicated to management. The information collected through marketing research includes the preferences of customers, the perceived benefits of products, and consumer lifestyles. Research helps companies make better use of their marketing budgets. Marketing research has a range of uses, from fine-tuning existing products to discovering whole new marketing concepts.

For example, everything at the Olive Garden restaurant chain, from the décor to the wine list, is based on marketing research. Each new menu item is put through a series of consumer taste tests before being added to the menu. Otterbox uses marketing research to test product features, color choices, and even which phone models to make products for in its line of phone cases and accessories. Otterbox's experts know which designs and features will sell best in which places, not only geographically, but also in which types of stores. For example, cases with waterproof features might sell better in an outdoor equipment store than in a supermarket.

Marketing research can use either primary data (where the organization actually gets the data to then analyze) or secondary data (where the organization uses data that have already been developed and published by another entity and the organization is able to utilize the data for its own purposes). There are three basic research methods used for gathering primary data: survey, observation, and experiment.

With survey research, data are gathered from respondents—through analyzing electronic data such as purchasing habits, through the internet, and sometimes in person. New product development teams may bring in customers from their target market to conduct interviews in order to get input on new product offerings, or may even gather the data in the respondent's home to see how they are using the products. AI is utilized to create virtual environments for product testing to get feedback or to test out new product ideas without having to create a physical prototype.

AI can also be used to automate survey research to expand the reach to consumers as well as to speed up the data collection process. Furthermore, with the power of AI technology, survey-type research can be garnered from multiple sources by scanning online reviews, social media posts, blogs, and other consumer opinion data and then consolidated to reveal market trends. With the power of AI, what historically might have been the effort of a single corporation conducting a survey about a particular product category or new-to-the-market product idea can now be collected and analyzed from multiple sources to compound the information, giving decision makers more depth of knowledge before making strategic business decisions.⁵

Observation research is research that monitors respondents’ actions without direct interaction. In the fastest-growing form of observation research, researchers utilize purchase data collected by most companies to observe trends that can be further divided by demographic and even psychographic variables. Technological advances are rapidly expanding the future of observation research. Nielsen Audio uses a wearable device called a portable people meter (PPM) to capture participants' habits surrounding media consumption. The PPM captures TV viewing habits, music listening habits including source and duration, streaming activities, and any other electronic media that the participant encounters throughout the day.⁶

In the third research method, experiment, the investigator changes one or more variables—price, package, design, shelf space, advertising theme, or advertising expenditures—while observing the effects of those changes on another variable (usually sales). The objective of experiments is to measure causality. For example, an experiment may reveal the impact that a change in package design has on sales.