Sellers can choose to pursue consumer markets, business-to-business (B2B) markets, or both. Consequently, one obvious way to begin the segmentation process is to segment markets into these two types of groups.
Different factors influence consumers to buy certain things. Many of the same factors can also be used to segment customers. A firm will often use multiple segmentation bases, or criteria to classify buyers, to get a fuller picture of its customers and create real value for them. Each variable adds a layer of information.
Types of Segmentation Bases
Table 5.1 "Common Ways of Segmenting Buyers" shows some of the different types of buyer characteristics used to segment markets. Notice that the characteristics fall into one of four segmentation categories: behavioral, demographic, geographic, or psychographic. We’ll discuss each of these categories in a moment. For now, you can get a rough idea of what the categories consist of by looking at them in terms of how marketing professionals might answer the following questions:
Behavioral segmentation. What benefits do customers want, and how do they use our product?
Demographic segmentation. How do the ages, races, and ethnic backgrounds of our customers affect what they buy?
Geographic segmentation. Where are our customers located, and how can we reach them? What products do they buy based on their locations?
Psychographic segmentation. What do our customers think about and value? How do they live their lives?
Segmenting by Behavior
Behavioral segmentation divides people and organization into groups according to how they behave with or act toward products. Benefits segmentation—segmenting buyers by the benefits they want from products—is very common. Take toothpaste, for example. Which benefit is most important to you when you buy a toothpaste: The toothpaste’s price, ability to whiten your teeth, fight tooth decay, freshen your breath, or something else? Perhaps it’s a combination of two or more benefits. If marketing professionals know what those benefits are, they can then tailor different toothpaste offerings to you (and other people like you). For example, Colgate 2-in-1 Toothpaste & Mouthwash, Whitening Icy Blast is aimed at people who want the benefits of both fresher breath and whiter teeth.
Another way in which businesses segment buyers is by their usage rates—that is, how often, if ever, they use certain products. Harrah’s, an entertainment and gaming company, gathers information about the people who gamble at its casinos. High rollers, or people who spend a lot of money, are considered “VIPs.” VIPs get special treatment, including a personal “host” who looks after their needs during their casino visits. Companies are interested in frequent users because they want to reach other people like them. They are also keenly interested in nonusers and how they can be persuaded to use products.
The way in which people use products is also be a basis for segmentation. Avon Skin So Soft was originally a beauty product, but after Avon discovered that some people were using it as a mosquito repellant, the company began marketing it for that purpose. Eventually, Avon created a separate product called Skin So Soft Bug Guard, which competes with repellents like Off!
Segmenting by Demographics
Segmenting buyers by personal characteristics such as age, income, ethnicity and nationality, education, occupation, religion, social class, and family size is called demographic segmentation. Demographics are commonly utilized to segment markets because demographic information is publicly available in databases around the world. You can obtain a great deal of demographic information on the U.S. Census Bureau’s Web site. Other government Web sites you can tap include FedStats and The World Factbook, which contains statistics about countries around the world. In addition to current statistics, the sites contain forecasts of demographic trends, such as whether some segments of the population are expected to grow or decline.
AgeAt this point in your life, you are probably more likely to buy a car than a funeral plot. Marketing professionals know this. That’s why they try to segment consumers by their ages. You’re probably familiar with some of the age groups most commonly segmented (see Table 5.2 "U.S. Generations and Characteristics") in the United States. Into which category do you fall?
Table 5.2 U.S. Generations and CharacteristicsSeniors -
Seniors - 1945 and prior
“The Silent Generation,” “Matures,” “Veterans,” and “Traditionalists”
Experienced very limited credit growing up
Tend to live within their means
Spend more on health care than any other age group
Internet usage rates increasing faster than any other group
Baby Boomers 1946–1964
Second-largest generation in the United States
Grew up in prosperous times before the widespread use of credit
Account for 50 percent of U.S. consumer spending
Willing to use new technologies as they see fit
Generation X 1965–1979
Comfortable but cautious about borrowing
Buying habits characterized by their life stages
Embrace technology and multitasking
Generation Y 1980–2000
“Millennials,” “Echo Boomers,” includes “Tweens” (preteens)
Largest U.S. generation
Grew up with credit cards
Adept at multitasking; technology use is innate
Ignore irrelevant media
Today’s college-age students (Generation Y) compose the largest generation. The baby boomer generation is the second largest, and over the course of the last thirty years or so, has been a very attractive market for sellers. Retro brands—old brands or products that companies “bring back” for a period of time—were aimed at baby boomers during the recent economic downturn. Pepsi Throwback and Mountain Dew Throwback, which are made with cane sugar—like they were “back in the good old days”—instead of corn syrup, are examples (Schlacter, 2009). Marketing professionals believe they appealed to baby boomers because they reminded them of better times—times when they didn’t have to worry about being laid off, about losing their homes, or about their retirement funds and pensions drying up.
Baby boomers are aging and the size of the group will eventually decline. By contrast, the members of Generation Y have a lifetime of buying still ahead of them, which translates to a lot of potential customer lifetime value (CLV), the amount a customer will spend on a particular brand over his/her lifetime, for marketers if they can capture this group of buyers. However, a recent survey found that the latest recession had forced teens to change their spending habits and college plans and that roughly half of older Generation Yers reported they had no savings.
So which group or groups should your firm target? Although it’s hard to be all things to all people, many companies try to broaden their customer bases by appealing to multiple generations so they don’t lose market share when demographics change. Several companies have introduced lower-cost brands targeting Generation Xers, who have less spending power than boomers. For example, kitchenware and home-furnishings company Williams-Sonoma opened the Elm Street chain, a less-pricey version of the Pottery Barn franchise. The Starwood hotel chain’s W hotels, which feature contemporary designs and hip bars, are aimed at Generation Xers (Miller, 2009).
The video game market is very proud of the fact that along with Generation X and Generation Y, many older Americans still play video games. (You probably know some baby boomers who own a Nintendo Wii.) Products and services in the spa market used to be aimed squarely at adults, but not anymore. Parents are now paying for their tweens to get facials, pedicures, and other pampering in numbers no one in years past could have imagined.
Segmentation bases are criteria used to classify buyers. The main types of buyer characteristics used to segment consumer markets are behavioral, demographic, geographic, and psychographic. Behavioral segmentation divides people and organization into groups according to how they behave with or toward products. Segmenting buyers by personal characteristics such as their age, income, ethnicity, family size, and so forth is called demographic segmentation. Geographic segmentation involves segmenting buyers based on where they live. Psychographic segmentation seeks to differentiate buyers based on their activities, interests, opinions, attitudes, values, and lifestyles. Oftentimes a firm uses multiple bases to get a fuller picture of its customers and create value for them. Marketing professionals develop consumer insight when they gather both quantitative and qualitative information about their customers. Many of the same bases used to segment consumer markets are used to segment business-to-business (B2B) markets. However, there are generally fewer behavioral-based segments in B2B markets.