Market Segmentation & Targeting

Not all customers are the same. Businesses use market segmentation to divide a market into distinct groups of customers and then target the segments most likely to buy their product or service. This lesson explains how and why businesses segment markets and the benefits and limitations of doing so.

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What Is Market Segmentation?

Market segmentation is the process of dividing a market into distinct groups of customers (segments) who share similar characteristics, needs, or behaviours. Each segment can then be targeted with a tailored marketing approach.

Term	Definition
Market segment	A group of customers within a market who share similar characteristics or needs
Target market	The specific segment(s) a business aims its products and marketing at
Mass market	A very large market with products aimed at a wide range of customers
Niche market	A small, specialised segment of a larger market

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Methods of Market Segmentation

Markets can be segmented in several ways:

Method	Description	Example
Demographic	Age, gender, income, occupation, education, family size	Saga targets customers aged 50+; Haribo targets children
Geographic	Location — country, region, urban vs rural	Greggs focuses on UK high streets; North Face targets cold climates
Psychographic	Lifestyle, values, attitudes, interests	Tesla targets environmentally conscious, affluent consumers
Behavioural	Buying habits, brand loyalty, usage rate	Tesco Clubcard segments customers by shopping patterns
Income	Segmenting by spending power	Aldi targets budget-conscious shoppers; Waitrose targets higher earners

graph TD
    A[Market Segmentation] --> B[Demographic]
    A --> C[Geographic]
    A --> D[Psychographic]
    A --> E[Behavioural]
    A --> F[Income]
    B --> G[Age, gender, income]
    C --> H[Location, region, climate]
    D --> I[Lifestyle, values, attitudes]
    E --> J[Buying habits, loyalty]
    F --> K[Spending power]

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Mass Market vs Niche Market

Feature	Mass Market	Niche Market
Size	Very large — aims at the whole market	Small — targets a specific segment
Competition	High — many businesses competing for customers	Lower — fewer businesses in the segment
Products	Standardised, appeal to a wide audience	Specialised, tailored to specific needs
Prices	Often lower due to economies of scale	Often higher due to specialisation and lower volumes
Marketing	Broad marketing campaigns (e.g. TV advertising)	Targeted marketing (e.g. specialist magazines, social media)
Examples	Coca-Cola, Tesco, McDonald's	Rolls-Royce, Lush Cosmetics, Rapha cycling wear

Advantages of Each

Mass market advantages:

• Large customer base = high sales volume
• Economies of scale reduce unit costs
• Brand recognition across the whole market

Niche market advantages:

• Less competition from large businesses
• Can charge higher prices (premium pricing)
• Builds strong customer loyalty
• Easier to focus on specific customer needs

Exam Tip: A common exam question asks you to evaluate whether a business should target a mass market or a niche market. Consider factors such as the business's resources, the level of competition, and the specific needs of customers.

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Why Do Businesses Segment the Market?

Segmentation provides several benefits:

1. Better understanding of customers — businesses can identify the specific needs of different groups.
2. More effective marketing — targeted marketing messages are more likely to attract customers in that segment.
3. Higher customer satisfaction — products can be tailored to meet the needs of each segment.
4. Increased sales and profit — reaching the right customers with the right product increases revenue.
5. Competitive advantage — businesses that understand their market segments can differentiate themselves from competitors.
6. More efficient use of resources — marketing budgets are spent on reaching the most relevant customers.

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Targeting

Once a business has segmented the market, it must decide which segment(s) to target. This involves choosing the most profitable or attractive segments based on:

• Size of the segment — is it large enough to be profitable?
• Growth potential — is the segment growing or declining?
• Accessibility — can the business reach customers in this segment?
• Profitability — will serving this segment generate enough profit?
• Competition — how many competitors are already targeting this segment?

Targeting Strategies

Strategy	Description	Example
Undifferentiated	One product for the whole market (mass marketing)	Coca-Cola's original Coke
Differentiated	Different products for different segments	Toyota offers budget (Aygo) to luxury (Lexus)
Concentrated (niche)	Focus on one specific segment	Rolls-Royce targets ultra-wealthy consumers

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Limitations of Market Segmentation

Market segmentation is not without challenges:

1. Cost — developing different products and marketing campaigns for each segment is expensive.
2. Complexity — managing multiple segments adds complexity to business operations.
3. Over-segmentation — dividing the market into too many small segments may make none of them profitable.
4. Inaccurate segmentation — if segments are poorly defined, marketing efforts may miss the target.
5. Changing segments — customer characteristics and preferences change over time, requiring ongoing research.

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Summary

• Market segmentation divides a market into distinct groups of customers with similar characteristics.
• Common segmentation methods include demographic, geographic, psychographic, behavioural, and income-based.
• Mass markets are large with high competition; niche markets are small with less competition but higher prices.
• Segmentation helps businesses understand customers, target marketing, and increase sales.
• Targeting involves choosing the most profitable segment(s) and developing an appropriate strategy.
• Limitations include cost, complexity, and the risk of over-segmentation or inaccurate segmentation.

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Sample Size, Reliability and Bias in Segmentation Research