Market segments are the individual sub-groups of a large market, consisting of customers who share common or similar characteristics. Market segmentation describes the process of dividing a market for a product into smaller or distinct groups of customers in an effort to meet their specific desired needs and wants. Understanding the different needs of these customer sub-groups within a market enables marketers to target their customers better. Examples of market segments include:

Market segmentation can be useful in identifying new business opportunities, such as finding an unfilled niche in the market. For example, prior to 1997, Mercedes Benz did not produce any small cars despite the company having been founded 70 years before. It launched the A Class compact car, selling over 1.1 million cars before releasing its second-generation A Class vehicles in 2004.

The A-Class Mercedes-Benz

A market can be segmented in four broad ways: (1) demographic segmentation, (2) geographic segmentation, (3) psychographic segmentation, and (4) socio-economic segmentation.

1.  Demographic segmentation

Demographic segmentation involves splitting consumers according to statistical characteristics of the population, such as age, gender, family size, religion, ethnicity and income.

• Age – for example, different movies (films) are produced to appeal to young children, teenagers and adults. In many markets, people’s tastes change with age, such as the types of food they eat, the books they read, and the cars they drive. Hence, many businesses segment their markets by age.

• Gender – for example, females typically spend far more money on cosmetics, haircuts, personal hygiene products, home furnishing, and pets. By contrast, men tend to spend more money than money do on dining out, travel, investments, sports, gambling, electronics and cars.

• Family size – for example, all theme parks use some form of price discrimination, such as offering various family tickets. There is no ‘typical’ family, so theme parks and leisure parks offer a variety of these as discounted prices for families, e.g. one adult and two children, two adults and two children, or two adults and three children, and so forth.

• Religion – this can have a major impact on businesses, such as McDonald’s being unable to sell beef products in India or pork products in Jewish and Islamic countries.

• Ethnicity – for example, rice is a very popular staple food product for people from China, India, Indonesia, Bangladesh and Vietnam (the top 5 countries for rice consumption). Jewish people buy Kosher food products. Chinese residents have a preference for foreign luxury brands, such as Apple, BMW, Chanel, Gucci, Moët & Chandon, and Rolex.

Customers pay a higher price for business class air travel

2.  Geographic segmentation

Geographic segmentation splits consumers according to their different geographical locations. Geographical factors include population density, climate (weather), and geographical locations. For instance, customers in rural areas of a country may have slightly different needs and wants from those in urban areas. In many countries, the climatic conditions vary in different parts of the country. Clothes retailers such as GAP and H&M can therefore divide (segment) their markets based on climate or cultural preferences of customers, for example. Another example is McDonald’s, which incorporates local food preferences in their menus served at different locations. McDonald’s serves beer in Germany, rice products in China, fish products in Portugal, banana pies in Brazil and McVeggie burgers (without beef) in India.

Geographic segmentation goes beyond domestic borders, so can include areas such as countries and international regions. Geographic segmentation enables marketers to localize their products to better suit customers in different areas or regions of the world. This helps marketing efforts to be more focused to meet geographic differences in customer needs and wants. Geographic segmentation is important in marketing, especially for multinational companies with global brands because a successful marketing mix in one part of the world does not guarantee success in other regions of the globe.

However, it should be noted that the needs and preferences of all customers of a particular geographic area is unlikely to be exactly the same. Globalization, for example, has led to a convergence of tastes across the world.

3.  Psychographic segmentation

Psychographic segmentation splits the market according to people’s lifestyle choices and personal values:

• Lifestyle choices include people’s personal interests, such as their hobbies and other pursuits. For example, publishers of consumer magazines use psychographic segmentation to cater for a range of interests, such as sports, motoring, home improvement, fashion, consumer electronics, health and beauty, cinema, and weddings.

• Personal values are the moral beliefs held by particular market segments. Examples include vegans, vegetarians and environmental activists. It can also include people’s views or beliefs regarding animal testing, fair trade, and sustainability (such as reducing, recycling and reusing of products).

Magazine publishers use psychographic segmentation

4.  Socio-economic segmentation

Socio-economic segmentation splits the market according to consumer or household income levels. This is often linked to their type of profession and/or their level of educational attainment. Businesses then devise focused marketing mixes, targeted at each market segment based on their income level of social status

For example, segmentation by income level is used by many businesses. For instance, airline carriers offer different ticket prices for their airline services, such as economy class, premium-economy class, business class, and first class air travel.

However, it should be noted that market segmentation often creates a limited number of customer groupings, which are potentially contain bias, generalisations and stereotypes. Many customers may not fit neatly into these market segments. In addition, limited marketing budgets may not enable all identified market segments to be specifically targeted.

Nevertheless, the marketing mix should be tailored to meet the needs and wants of the target market(s), in order for the business to achieve its marketing objectives. So, market segmentation enables businesses to be more customer-focused, thereby improving the cost effectiveness of their marketing strategies. Hence, segmentation and targeting can enable a business to increase its sales revenue, market share and profitability. IBM’s Institute for Business Value sums this up very well, stating that:

“Today, segmentation is no longer a simple or static marketing technique.
It is core to the way successful companies run their business.”

The target market is a clearly identifiable group of customers that an organization focuses its marketing efforts on, i.e. it is the segment(s) of the market that the business aims its marketing strategy at. Customers in the same target market have unique needs, tastes and preferences. Targeting is the systematic process of marketing to a specific target segment. Market segmentation is a prerequsite to targeting.

As marketing activities can be very expensive, it is important for a business to create a clear and focused marketing mix for different market segments. Once a particular target market is identified, marketers can create and use a suitable marketing mix and appropriate marketing strategies to achieve the organization’s marketing objectives. Segmentation enables businesses to have greater knowledge about their customers in order to have more focused marketing.

For example, Ford’s marketing strategy aimed at customers of its best-selling Fiesta models in Europe will be very different from the company’s marketing mix for its Mustang models in North America. Karlmann King, the world’s most expensive SUV (sports utility vehicle) will have a completed different marketing mix targeted a very wealthy customers. The Karlmann King has a 6.8-litre V10 engine, and a price tag of over $2.2 million, and comes with the optional extra of having the car bullet proofed(!)

The Karmann King SUV

Establishing suitable target markets enables the business to know which customers to aim the firm's goods or services at. The target market can apply to both existing and potential customers. For example, some businesses operate in:

• Mass markets – businesses operating in mass markets supply products to cater for a broad range of target markets, e.g., smartphones, breakfast cereal, and washing detergents.

• Niche markets – businesses operating in niche markets supply highly specialised products to cater for a small and select target market, e.g., a newspaper or magazine that targets readers with a particular interest such as snowboarding, antique model toys, or classic cars.

It is unlikely that a business can afford to target everyone for its products. Target markets and market segments are important for businesses in order to effectively aim their products particular groups of consumers who share similar characteristics.

Hence, segmentation is more likely to create cost-effective targeting strategies and marketing campaigns. Alternatively, the lack of market segmentation and targeting results in a marketing mix that is likely to be inappropriate or ineffective for the organization’s potential customers.

Example of position map for car brands

Businesses do not tend to compete against all other brands within the same market. For example, Honda’s Jazz and NSX models cater for completely different market segments. The same applies to Nissan’s Micra and GTR models. Instead, businesses tend to differentiate their different products and brands to meet the needs and wants of their different target markets.

Position mapping can help a business to identify potential gaps in the market. For example, both Mercedes Benz and BMW traditionally produce cars in the ‘premium products’ quadrant of a position map. This meant it was not catering for customers who preferred ‘economy products’, which led both manufacturers to produce smaller cars, such as the Mercedes A class and BMW 1 Series, to cater for a different target market.

Note: the position map only shows the perceptions of customers surveyed at one point in time. These views are not necessarily representative, but can give businesses insight to what customers think of their brands and products. For example, the price of a new Porsche can range from $46,475 to over $200,000 – so it can be somewhat subjective to position the brand in terms of ‘price’. Similarly, perceptions of Ford in terms of price can be difficult to determine, since a Ford Fiesta starts from around $14,115 but a Ford F-450 pick-up truck can cost in the region of $85,805.

A reposition strategy is required if the business does not like how it is currently positioned (perceived) by customers. It can do this by creating an improved marketing mix, possibly targeting different market segments.

Position maps enables marketing managers to improve their product portfolio management. Having a better picture of the way customers perceive a particular organization, product or brand helps a business to adjust its marketing mix and improve its marketing strategies in order to increase sales revenues and profits.

Several categories of products can be identified from a typical position map that uses price and quality as the axes labels:

• Premium products are those perceived by customers to be of high quality and high price. Examples include the iPhone, Bugatti Veyron, Rolex watches, and Hermes handbags.

• Cowboy products are those perceived by customers to be of low quality but high price. This strategy is not sustainable, as customers regard these as ‘rip off’ products. However, it is sometimes used by firms to maximise sales in the short term,

• Bargain products are those perceived by customers to be of high quality but sold at a low price. Again, this strategy is unlikely to be sustainable due to the low profit margins, but can be a method to increase sales and brand awareness in the short term.

• Economy brands are those perceived by customers to be of low quality and sold at a low price. Examples include supermarket own-label products, such as Walmart branded wines, pasta, shampoos, and canned food products. Other examples include low-cost accommodation (such as youth hostels) and and budget airlines.

 To see a real-word example, watch how Steve Job used position maps as part of his infamous launch of the iPhone, back in 2007 (skip to 4 minutes to see this):

 To recap your understanding of this topic, watch this 5-minute video about position maps:

In summary, a market segment is a distinct group of customers with similar characteristics, tastes and preferences, e.g., male or female customers of motor vehicles. A target market is the group of customers that an organization focuses on selling its products to, e.g. Higher Level Mathematics students in the IB Diploma Programme. Overall, segmentation, consumer profiling and targeting are crucial to creating and executing an effective marketing mix.

 ATL Activity 8 (Thinking skills) - Repositioning Lego

Read this article from The Guardian about how Lego reinvented itself as a superbrand. Then answer the questions that follow.

Questions

1. Since its founding in 1932, Lego never posted a loss until which year?

2. Consultants suggested to Lego to look to which American toy manufacturer's diversification strategy?

3. Lego built theme parks, costing £125m ($156m), making a loss of how much in their first year?

4. In which year did the Lego Group overtake Ferrari to become the world's most powerful brand?

5. Between which years did Lego's profits quadruple?

6. Which year was the Lego Movie released?

7. Which Danish town was Lego founded in?

8. Legoland parks in the UK are owned by which company?

9. Winners of Lego Ideas submissions, a crowdsourcing competition, receive what percentage of their product's in net sales?

10. In 2011, what percentage of Lego's customer base was made up from boys/males?

11. How many years of research did Lego Friends take?

12. Who was the founder of Lego?

13. What did the family of the Lego Group invest in back in 1946, despite advice against it?

14. When was Lego's "System" created (every brick being able to fit with every other, and everything being backwards compatible)?

15. A mathematician recently deduced that just six eight-stud bricks of the same color could be combined in how many different ways?

 Teacher only box

Answers

1. Since its founding in 1932, Lego never posted a loss until which year? 1998

2. Consultants suggested to Lego to look to which American toy manufacturer's diversification strategy? Mattel

3. Lego built theme parks, costing £125m ($156m), making a loss of how much in their first year? £25m

4. In which year did the Lego Group overtake Ferrari to become the world's most powerful brand? 2015

5. Between which years did Lego's profits quadruple? 2008 - 2010

6. Which year was the Lego Movie released? 2014

7. Which Danish town was Lego founded in? Billund

8. Legoland parks in the UK are owned by which company? Merlin Entertainments

9. Winners of Lego Ideas submissions, a crowdsourcing competition, receive what percentage of their product's in net sales? 1%

10. In 2011, what percentage of Lego's customer base was made up from boys/males? 90%

11. How many years of research did Lego Friends take? Four years

12. Who was the founder of Lego? Ole Kirk Christiansen

13. What did the family of the Lego Group invest in back in 1946, despite advice against it? A plastic-injection molding machine

14. When was Lego's "System" created (every brick being able to fit with every other, and everything being backwards compatible)? 1958

15. A mathematician recently deduced that just six eight-stud bricks of the same colour could be combined in how many different ways? 915,103,765

• Demographic segmentation involves splitting consumers according to statistical characteristics of the population, such as age, gender, family size, religion, ethnicity, and income.

• Geographic segmentation splits consumers according to their different geographical factors, such as population density, climate (weather), and geographical locations.

• Market segmentation describes the process of dividing a market for a product into smaller or distinct groups of customers in an effort to meet their specific desired needs and wants.

• Market segments are the individual sub-groups of a large market, consisting of customers who share common or similar characteristics.

• A position map is a visual marketing tool used to show the perspectives of customers regarding a firm’s products or brands against those of rival ones in the market.

• Psychographic segmentation splits the market according to people’s lifestyle choices and personal values.

• The target market is a clearly identifiable group of customers that an organization focuses its marketing efforts on, i.e., it is the segment(s) of the market that the business aims its marketing strategy at.

• Targeting is the systematic process of marketing to a specific target segment. Market segmentation is a prerequsite to targeting.