A Step-by-step Guide to Segmenting a Market

How to segment a market

Market segmentation, the selection of appropriate target markets, and the design of an appropriate and competitive positioning is critical to success in most marketplaces. This article walks through a step-by-step guide of the initial steps, from the defining the overall market where we are competing to the selection of a attractive target market.

Please follow the step-by-step guide below. Please note that there are additional helpful topics available on the Market Segmentation Study Guide, which have been linked throughout this article, alternatively you could use a search bar all the top-level menu to find relevant information.

Which Segmentation steps to complete?

Depending upon your segmentation task you may need just to complete steps one to three below, or you may need steps one to six – so check what is required first.

Steps 1 to 3 cover the process of market segmentation only – where we decide on a market and then segment it into different groups of consumers with common needs or behaviors.

The further steps of 4 to 6 cover the steps of how to choose an attractive and viable target market.

(Please note: There are actually nine steps of the full segmentation, targeting and positioning process, which are discussed in the article on the full STP process.

Step One – Define the market

The first step in creating market segments is to clearly define the market of interest. As discussed in the markets, sub-markets and product-markets section, it is important not to define a market too broadly.

For instance, let’s assume that you are looking to segment the market for a firm that operates a chain of book stores. It would be too top-level and too awkward to define the market as all retailing consumers, as it is unlikely to lead to any meaningful segmentation.

As shown in the following diagram, we need to split out the overall broad market (retailing) into its various sub-markets (such as, supermarkets, specialty stores and so on).

We can also further define some of these sub-markets (if they are still too broad) as is shown for specialty stores below.

And finally, we need to determine the market’s geographic boundaries. It this case a list of possibilities has been provided in the figure.

Let’s pick the UK; so our defined product/market is book retailers in the UK.

An example of a product market definition, using a book retailing chain Let’s now consider another example – this time for Starbucks, the well-known coffee chain. Obviously they are an international brand with operations in many countries. But how do they define their market? Do they compete in take-home coffee from supermarkets? Do they compete with food and fine dining? Are they competing in the fast food market?

Primarily they define their market as takeaway and dine-in quality coffee retailing, rather than at home coffee and other forms of out-of-home food.

Therefore, a clear definition of the market makes it much simpler to understand the market, to conduct segmentation, and ultimately to develop an appropriate marketing mix offering.

Step Two – Create market segments

Now that we have defined the product/market clearly (which we will refer to as ‘the market’ from this point on), we need to determine what types (segments) of different consumers form that overall market.

To do this, we need to review the list of segmentation bases/variables and choose two or three of those variables that we think (or know from market research) affect the purchasing behavior of book consumers.

Note: When segmenting a business market, please see segmentation bases for business markets instead of the above link.

For this market, let’s pick a couple of segmentation variables, as shown in the following table. These particular segmentation variables have been chosen as they are likely to influence the purchasing behavior of books and, therefore, should lead to the identification of interesting segments.

Main segmentation base

Segmentation variable

Example/s

Demographic

Age group

Pre-teens, teens, young adults, older adults

Behavioral

Shopping style

Enjoys shopping, functional, avoids

Please note that we have used two top-level segmentation bases – of demographic and behavioral – and have selected a broad age group variable (from the demographic base), as well as shopping enjoyment/style (from the behavioral base).

Now we have chosen the segmentation variables, we can use a segmentation tree structure to help map out the segments, as shown below. Other examples for segmentation trees can be found in how is market segmentation actually undertaken.

And please note there is a free Excel template available on this website to allow you to construct a segmentation tree and segment profiles easily from any market research survey data or customer base data that you have access to.

Market segments for book consumers, constructed via a market segmentation tree

As you can see, five different segments have been created by applying these segmentation variables. In the first stage, a broad demographic split has been used (to create children, young adults and older adults segment). The two adult segments then have a behavior variable applied to them (whether they enjoy shopping or just like to get in and out quickly).

Remember that are many ways to segment the same market. Provided that the segmentation variables have some logic to them, most outcomes should be quite acceptable.

Therefore, our five market segments in this example are:

  1. Children
  2. Young adults (18-40 years), who enjoy the shopping experience
  3. Young adults (18-40 years), who are functional/convenience shoppers
  4. Older adults (40+ years), who enjoy the shopping experience
  5. Older adults (40+ years), who are functional/convenience shoppers

Please see the article on market segmentation examples, as well as the list of market segment ideas.

By going through this exercise, we also gain a greater understanding of the marketplace overall and the different types of needs that may exist across different consumer groups. Therefore, market segmentation is usually a helpful analytical exercise for marketers to undertake, as it generates knowledge and potential market insights.

Step Three – Evaluate the proposed market segments for viability

Now that we have developed some market segments we may be required to evaluate them to ensure that they are usable and logical. This would happen in a real-life firm, but it may not form part of your particular task if this is a student activity.

To do this, you need to quickly assess the segments against a checklist of factors. This is discussed in more detail in criteria for effective segmentation. Basically, all that is required is to list the evaluation criteria and to provide a supporting comment, as is demonstrated in the following table.

If, on occasion, the segments that you have created don’t appear to meet the evaluation criteria, then simply revisit step two and change the segmentation variables that you have selected.

Evaluation Criteria

Our assessment

Homogeneous Segments should be similar in needs
Heterogeneous Assumes that age groups vary in needs, which is likely in this market
Measurable Market research data can be utilized
Substantial Given the segments are relatively broad, they should be individually substantial
Accessible Various merchandising techniques can be used to promote and reach each of these segments
Actionable/practical The firm has the capabilities to market to each segment, if required
Responsive Each market segment should respond better to a distinct marketing mix, rather than a generic offering

Step Four – Construct segment profiles

You may be required to describe the segments (develop a segment profile). The following is a checklist of factors that you might consider. For some of these items below you may not know actually – in that case either make a logical assumption or do not include the factor in the segment profile. Remember that the task here is to describe and understand the segments a little more.

An example of how to complete this table is shown in segment profiles.

KEY MEASURES
  • Segment size measures
  • Segment growth rate
  • Proportion of the overall market
CONSUMER BEHAVIOR
  • Main consumer needs
  • Usage level
  • Level of brand loyalty
  • Price sensitivity
  • Product involvement levels
  • Retailer preferences
DESCRIPTION
  • Geographic spread
  • Demographic description
  • Psychographic description
COMPETITION/COMMUNICATION
  • Main competitive offerings
  • Main media choices

Step Five – Evaluate the attractiveness of each segment

If you are required to select one target market from you list of market segments, then you need to use some form of objective assessment. Again, this topic is covered in detail in how are target markets selected, but as a quick guide you should use some of the following factors in assessing the attractiveness of each market segment.

Financial Issues

  • Segment size
  • Segment growth rate
  • Profit margins

Structural Attractiveness

  • Competitors
  • Distribution channels

Strategic Direction

  • Fit with firm’s strategy
  • Fit with firm’s goals

Marketing Expertise

  • Resources
  • Capability
  • Branding

Step Six – Select target market/s

Using the assessment information you have just constructed, you can select the most appropriate target market for the firm. While there are many factors to consider, you should at least take into account: the firm’s strategy, the attractiveness of the segment, the competitive rivalry of the segment, and the firm’s ability to successfully compete.