Market segmentation

Market segmentation is the process of dividing potential customers into groups (or "segments") based on shared characteristics or interests such as location, demographic factors, or potential needs. Theoretically, consumers within an identified segment should respond similarly to different types of marketing messaging. This makes it easier to personalize marketing campaigns instead of trying to market to each potential client individually.

Several types of market segmentation are commonly applied by businesses, including segmentation by geographic location, distribution-based segmentation where a manufacturer markets the same products under several different brand names, and price segmentation to appeal to different income levels. For example, food companies may use geographic segmentation to appeal to regional tastes, while a manufacturer of pet products might market the exact same flea and tick collars to both grocery stores and veterinarians under different brand names. Many automotive companies use price segmentation to market various makes and models, such as General Motors (GM) targeting its Chevrolet line to one audience and its Cadillac line to another.

Other common forms of market segmentation include grouping potential customers by certain demographic similarities. Some products are designed for women, and others are designed for men. Additionally, certain products and services are designed for members of specific age groups or people from different educational backgrounds. For example, a recruiter for a private school might target highly educated households headed by parents of school-aged children.

Overview

The ideas behind market segmentation can be traced back to ancient Greece. The philosopher Aristotle wrote in his text Rhetoric that one person cannot effectively persuade another unless they tailor the argument to their audience. Aristotle was referring to different forms of government, but the marketing parallels are there. Indeed, history is filled with examples of businesses thriving by catering to specific customers. For example, a weaver might mainly produce simple, durable fabrics for the average consumer, but also create some fancier materials intended for a few wealthy clients.

While business practices related to market segmentation often developed intuitively throughout history, the use of "segmentation" specifically as a marketing term was pioneered by Wendell R. Smith in the Journal of Marketing in 1958. Smith, a renowned academic and well-respected consultant who later became a corporate executive, was president of the American Marketing Association (AMA) in the late 1950s. His article "Product Differentiation and Market Segmentation as Alternative Marketing Strategies" was hailed as a landmark breakthrough within the marketing community. The formal practice of market segmentation became common throughout the 1950s and 1960s and remained popular in subsequent decades, although theoretical frameworks often evolved.

The increasing focus of marketing on specific demographic and lifestyle segments can be seen in many iconic mid-twentieth-century advertisements. For instance, the fitness program designed by Charles Atlas, which suggested it could help young men fend off bullies and impress girls, was heavily targeted at comic book readers. In contrast, ads for luxury goods might be more common in business or literary magazines, under the assumption that readers are relatively affluent. However, the proliferation of such marketing tactics also led to backlash in some cases. Critics felt that dividing consumers, particularly along gender, race, and class lines, tended to promote and reinforce stereotypes.

By the 1970s, marketers increasingly refined their efforts to appeal to consumers' emotions, and the term psychographics, an amalgamation of the words "psychology" and "demographics," was born. Market researcher Emanuel Demby introduced the term in 1974, aiming to better understand the consumer behavior of baby boomers by factoring in their shared generational ideals instead of simply their age. The concept went on to become highly influential. In 1978, Arnold Mitchell and his colleagues at the Stanford Research Institute created the Values Attitude and Lifestyle (VALS) psychographic methodology to divide American consumers into nine different categories based on income level, education level, intelligence, and their degree of self-confidence. The VALS framework divides most consumers into eight types, with the rest falling into the "low resources" category. They are ranked in descending order of perceived value to brands:

• Innovators. High income and high resource individuals who are motivated by achieving the finer things in life.
• Thinkers. Well-educated professionals with high resources who make rational decisions and are likely to accept social change.
• Believers. Only subtly different from thinkers, they use social influences to make purchasing decisions.
• Achievers. People who excel at both their jobs and their personal lives and are more likely to purchase brands with proven track records.
• Strivers. Consumers who do not have the resources to be achievers but have similar values and would buy similar products if they could afford them.
• Experiencers. Mostly young, high resource consumers who want to be different, so they spend much on food, clothes, and youth-oriented items.
• Makers. Consumers who want self-expression but are limited by their resources, so they focus on making better homes and families.
• Survivors. Mostly older consumers who are least likely to adapt to innovations and are loyal to certain brands.

Many other structures and theories of market segmentation have since been proposed and refined. Businesses and other organizations may apply multiple levels of segmentation when trying to better understand consumers. For example, a grocery store chain might use a high-level geographic approach to stock different items in different regions of a country, and then use a psychographic framework to help determine which specific brands to select. Major retailers often analyze sales, pricing, economic demographics, weather data, and more to develop highly segmented marketing approaches.

The rise of the internet and social media had a profound impact on market segmentation practices. Brand managers can get feedback from customers and potential customers in real time, and process results quickly in complex ways. Where marketers once had to rely on broad assumptions about people based on certain characteristics, algorithms and data analysis can provide much more specifically relevant information. However, critics have warned that the same longstanding potential drawbacks of segmentation remain, including stereotyping and the risk of developing overly complex or confusing product lines or communications.

Bibliography

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