Market Segmentation (HSC SSCE Business Studies): Revision Notes
Market Segmentation
Market segmentation is a powerful marketing strategy that helps businesses understand and target their customers more effectively. By dividing the total market into distinct groups, businesses can tailor their marketing approaches to meet specific customer needs and preferences.
What is market segmentation?
Market segmentation occurs when the total market is subdivided into groups of people who share one or more common characteristics. Once these segments are identified, marketing managers select one segment to become the target market. This allows businesses to develop a specific marketing mix (product, price, place, promotion) tailored to each target market.
The primary aim of market segmentation is to increase sales, market share and profits by better understanding and responding to the desires of different customer groups.
Market segmentation enables businesses to move away from mass marketing approaches and instead focus resources on specific customer groups that are most likely to respond positively to their offerings. This targeted approach typically results in more efficient use of marketing budgets and higher return on investment.
Understanding segmentation variables
A segmentation variable is a characteristic of an individual or group that marketing managers use to divide the total market into meaningful segments. These variables help businesses identify distinct customer groups with similar needs, behaviours or characteristics.
The four main segmentation variables
Consumer markets can be segmented using four main variables: demographic, geographic, psychographic and behavioural. Each variable provides different insights into customer characteristics and behaviours.
While each segmentation variable can be used independently, the most effective market segmentation strategies often combine multiple variables to create highly specific and actionable customer profiles. This multi-variable approach helps businesses develop more precise marketing strategies.
Demographic segmentation
Demographic segmentation divides the total market according to particular features of a population, including size, age, sex, income, cultural background and family size. This is one of the most commonly used segmentation methods because demographic data is relatively easy to measure and collect.
Key demographic variables include:
- Age
- Gender
- Education
- Occupation
- Income
- Social class
- Religion
- Ethnicity
Age and gender are particularly popular demographic variables.
Worked Example: Coca-Cola's Age-Based Segmentation
Coca-Cola demonstrates effective demographic segmentation across its product range by targeting different age groups:
- Mother energy drink: targets 15 to 35-year-old males
- Diet Coke: appeals to health-conscious adults
- Fanta: primarily targets 13 to 16-year-olds
- Mount Franklin: aimed at younger females and families
- Powerade and Pump: target 18 to 24-year-old males engaged in athletics (the "active consumer")
This strategy allows Coca-Cola to meet the diverse needs of different age demographics while maintaining a strong presence across the entire beverage market.
Worked Example: Nike's Multi-Demographic Strategy
Nike demonstrates effective demographic segmentation by primarily targeting consumers aged between 15 and 45. The company has strategically focused on three key demographics:
- Women: Expanded women's apparel and product lines
- Young athletes: Invested in local club sponsorships
- Runners: Partnered with professional athletes to appeal to this demographic
This targeted approach has enabled Nike to capture significant market share across multiple demographic segments while maintaining brand consistency.
Geographic segmentation
Geographic segmentation divides the total market according to geographic locations. This type of segmentation recognises that people in different locations display different characteristics and have varying wants and needs.
Geographic segmentation is based on:
- Geographic units (countries, states, cities)
- Region (urban, suburban, rural)
- City size
- Climate
- Cultural preferences
- Landforms
Businesses often need to modify their marketing mix to suit different geographic regions.
Worked Example: McDonald's Geographic Menu Adaptation
McDonald's exemplifies geographic segmentation by adapting its menu to local preferences across different regions:
- Germany: Beer is served in restaurants (not available in the United States)
- Middle East: McArabia is offered to suit regional tastes
- Brazil: Banana pie is available
- India: McVeggie salsa bean burger is served
These adaptations reflect differences in drinking preferences and food cultures between regions while maintaining core brand elements across all locations. This strategy demonstrates how geographic segmentation can enhance customer satisfaction and market penetration in diverse regions.
City size can also influence business decisions. Some franchise fast-food businesses will not locate in cities with populations under 25,000 people due to insufficient market size.
Climate significantly impacts product demand and provides a clear example of how geographic factors directly influence purchasing behaviour. Consumers in Jindabyne require snow chains and heavy outdoor clothing, while consumers in Port Macquarie prefer lightweight clothing. Understanding these geographic differences helps businesses stock appropriate inventory and develop region-specific marketing campaigns.
Psychographic segmentation
Psychographic segmentation divides the total market according to personality characteristics, motives, opinions, socioeconomic groups and lifestyles. This approach focuses on understanding why people behave the way they do, rather than just demographic facts.
Psychographic variables include:
- Lifestyle
- Personality
- Motives
- Socioeconomic group
- Consumer opinions and interests
- Values
When using psychographic segmentation, businesses research consumers' brand preferences, favourite music, radio and television programs, reading habits, personal interests, hobbies and values. These factors help marketers understand the psychological drivers behind purchasing decisions.
For example, comparing an average Toyota Corolla owner with an average Porsche Cayman S owner reveals different attitudes. These consumers will respond quite differently about vehicle maintenance costs, insurance and accessories because their values, lifestyles and motivations differ significantly.
Worked Example: Blackmores' Psychographic Segmentation
Blackmores provides an excellent example of psychographic segmentation in action. The company's target market is predominantly women aged 20 to 49. However, Blackmores further segments this group according to their primary interests and motives:
- General wellbeing
- Weight management
- Pregnancy
- Fitness
The company produces highly-targeted creative marketing campaigns for each segment, addressing their specific motivations and lifestyle concerns. This approach demonstrates how psychographic segmentation can create meaningful connections with customers by speaking directly to their personal values and goals.
Challenge with psychographic segmentation: Unlike demographic variables, psychographic variables can be difficult to accurately measure, especially personality characteristics and lifestyle preferences. This presents a significant challenge for marketing research teams who must rely on surveys, focus groups, and behavioural data to infer psychological characteristics. Despite this challenge, psychographic variables can be used alone or combined with other segmentation types to create more precise customer profiles.
Behavioural segmentation
Behavioural segmentation divides the total market according to customers' relationship to the product. This includes customers' knowledge of, attitude towards, use of, or benefits sought from the product.
Behavioural variables include:
- Purchase occasion
- Benefits sought
- Loyalty
- Usage rate (heavy, moderate, light users)
- Price sensitivity
Markets can be divided into users and non-users, and users can be further classified as heavy, moderate or light users. To encourage light and moderate users to increase purchases, businesses may need to redesign products, adjust pricing or implement special promotional activities.
Customer loyalty is a powerful behavioural variable that can significantly impact long-term business success. Loyal customers typically:
- Generate repeat purchases over extended periods
- Are less price-sensitive than new customers
- Often provide valuable word-of-mouth marketing
- Cost less to serve than acquiring new customers
Worked Example: Qantas Loyalty Program
The hospitality industry demonstrates effective behavioural segmentation through loyalty programs. Hotels, restaurants and airlines provide superior service to their most loyal customers.
The Qantas Club membership program exemplifies this approach by:
- Giving members access to Qantas Club Lounges in Australia
- Providing access to international lounges worldwide
- Offering exclusive benefits and services
- Creating a sense of prestige and belonging
This program rewards frequent flyers with tangible benefits, encouraging continued loyalty and increased usage rate among high-value customers.
Benefits sought is another crucial aspect of behavioural segmentation. By determining what benefits customers desire from a product, marketers can design products that directly satisfy these specific needs.
Worked Example: Shampoo Industry Benefit Segmentation
The shampoo industry demonstrates benefit segmentation by targeting different customer needs:
- Anti-dandruff: For customers seeking scalp health solutions
- Detangling: For customers with long or easily tangled hair
- Volumising: For customers wanting fuller-looking hair
- Moisturising: For customers with dry or damaged hair
Companies develop specific products targeting these different needs while also considering lifestyle attitudes and values. This multi-faceted approach combines behavioural segmentation (benefits sought) with psychographic segmentation (lifestyle) to create highly targeted product offerings.
Real-world application: Property market segmentation
The Australian property market demonstrates practical market segmentation with six distinct buyer segments that combine multiple segmentation variables.
Worked Example: Australian Property Market Segments
The Australian property market can be divided into six distinct buyer segments:
- Young renters
- First home buyers (typically aged 35 to 44 years)
- Upgraders
- Downsizers (aged 60 to 74 years)
- Retirees
- Aged care market
Looking ahead, demand from young renters and upgraders is set to decline, while aged care demand will remain steady. The standout groups driving housing demand over the next decade are first home buyers, downsizers and retirees.
First home buyers (projected to take up 20% of total new housing demand):
- Seek room to grow and opportunities for property improvement
- Affordability is a major consideration
- Preferences vary by location: inner city apartments, townhouses/duplexes in middle suburbs, or larger homes in outer suburbs
Downsizers (projected to take up 32% of total new housing demand):
- 92% have no children living at home
- Three-quarters are couples or live alone
- Prefer to remain in the same neighbourhood near friends and family
- Seek low maintenance, convenience, like-minded residents and small projects
- Some desire inner city living in spacious, well-priced, quality apartments
- Others prefer compact housing like townhouses, villas and dual-income homes
This case study illustrates how demographic factors (age, household composition) combine with psychographic factors (lifestyle preferences, motivations) and behavioural factors (benefits sought) to create meaningful market segments. Understanding these segments helps property developers build the right housing types at appropriate prices to meet actual market demand.
Key Points to Remember:
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Market segmentation divides the total market into groups sharing common characteristics, enabling businesses to target customers more effectively and increase sales, market share and profits.
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Four main segmentation variables exist: demographic (age, gender, income, education), geographic (location, climate, region), psychographic (personality, lifestyle, values) and behavioural (usage rate, loyalty, benefits sought).
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Demographic segmentation is most widely used because demographic data is easy to measure and collect, with age and gender being particularly popular variables.
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Different segmentation types can be combined to create more precise customer profiles, though psychographic variables can be challenging to measure accurately.
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Real-world businesses adapt their strategies to different segments, as seen with Coca-Cola's age-based product range, McDonald's geographic menu variations, and the Australian property market's distinct buyer segments.