Sellers can choose to pursue consumer markets, 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 to create real value for them. Each variable can be used alone or together for additional layers of information.

Types of Segmentation Bases

Table 5.1 shows some of the different types of buyer characteristics used to segment markets. Notice that the characteristics fall into one of four segmentation categories: behavioural, 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:

• Geographic segmentation. Where are our customers located, and how can we reach them? What products do they buy based on their locations?
• Demographic segmentation. How do the ages, races, and ethnic backgrounds of our customers affect what they buy?
• Psychographic segmentation. What do our customers think about and value? How do they live their lives?
• Behavioural segmentation. What benefits do customers want, and how do they use our product?

Segmenting by Geography

Suppose your great new product or service idea involves opening a local store. Before you open the store, you will probably want to do some research to determine which geographical areas have the best potential. For instance, if your business is a high-end restaurant, should it be located near the local college or country club? If you sell ski equipment, you probably will want to locate your shop somewhere in the vicinity of a mountain range where there is skiing. You might see a snowboard shop in the same area but probably not a surfboard shop. By contrast, a surfboard shop is likely to be located along the coast, but you probably would not find a snowboard shop on the beach.

Geographic segmentation divides the market into areas based on location and explains why the checkout clerks at stores sometimes ask for your postal code. It’s also why businesses print codes on coupons that correspond to postal codes. When the coupons are redeemed, the store can find out where its customers are located—or not located. Geocoding is a process that takes data such as this and plots it on a map. Geocoding can help businesses see where prospective customers might be clustered and target them with various ad campaigns, including direct mail. One of the most popular geocoding software programs is PRIZM, which is produced by a company called Environics Analytics. PRIZM  uses postal codes and demographic information to classify the population into segments. Combining both demographic and geographic information is referred to as geodemographics or neighbourhood geography. The idea is that housing areas in different postal codes typically attract certain types of buyers with certain income levels. To see how geodemographics works, visit the Environics Analytics website. Type in your postal code, and you will see customer profiles of the types of buyers who live in your area.

Proximity marketing is an interesting new technology firms are using to segment and target buyers geographically within a few hundred feet of their businesses using wireless technology. In some areas, you can switch your mobile phone to a “discoverable mode” while you’re shopping and, if you want, get ads and deals from stores as you pass by them, which is often less expensive than hiring people to hand you a flier as you walk by (“Bluetooth Proximity,” 2007). ^[1]

To learn about how proximity marketing works at a real company, listen to Apurva Ghelani’s audio clip. Ghelani is a senior sales engineer for Air2Web, a company that helps businesses promote their brands and conduct transactions with people via their mobile phones.

In addition to figuring out where to locate stores and advertise to customers in that area, geographic segmentation helps firms tailor their products. Chances are you won’t be able to find the same heavy winter coat you see at a Walmart in Montreal and at a Walmart in Victoria because of the climate differences between the two places. Market researchers also look at migration patterns to evaluate opportunities.

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 Statistics Canada website (https://www.statcan.gc.ca/en/start). The World Factbook (https://www.cia.gov/the-world-factbook/) 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.

Age

At 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. Into which category do you fall?

The baby boomer and Generation X demographic have 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).^[2] 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, 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 (“Generation Y,” 2009).^[3]

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 & Washington, 2009).^[4]

The video game market is very proud of the fact that along with Generation X and Generation Y, many older adults 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.

As early as the 1970s, U.S. automakers found themselves in trouble because of changing demographic trends. Many of the companies’ buyers were older Americans inclined to “buy American.” Japanese cars had developed a better reputation. Despite the challenges U.S. automakers face today, they have taken great pains to cater to the “younger” generation—today’s baby boomers who don’t think of themselves as being old. If you are a car buff, you perhaps have noticed that the once-stodgy Cadillac now has a sportier look and stiffer suspension. Likewise, the Chrysler 300 looks more like a muscle car than the old Chrysler Fifth Avenue your great-grandpa might have driven.

Automakers have begun reaching out to Generations X and Y, too. GM has sought to revamp the century-old company by hiring a new younger group of managers—managers who understand how Generation X and Y consumers are wired and what they want. “If you’re going to appeal to my daughter, you’re going to have to be in the digital world,” explained one GM vice president (Cox, 2009).^[5]

Companies have to develop new products designed to appeal to Generation Z and also find new ways to reach them. People in these generations not only tend to ignore traditional advertising but also are downright annoyed by it. To market to gym enthusiasts, who are generally younger, Gymshark has reached out to influencers, where they can show off new lines of clothing for the brand.

Income

Tweens might appear to be an attractive market when you consider they will be buying products for years to come. But would you change your mind if you knew that baby boomers account for 50 percent of all consumer spending in the United States? Americans over sixty-five now control nearly three-quarters of the net worth of U.S. households; this group spends $200 billion a year on major “discretionary” (optional) purchases such as luxury cars, alcohol, vacations, and financial products (Reisenwitz et al., 2007).^[6]

Income is used as a segmentation variable because it indicates a group’s buying power and may partially reflect their education levels, occupation, and social classes. Higher education levels usually result in higher-paying jobs and greater social status. The makers of upscale products such as Rolexes and Lamborghinis aim their products at high-income groups. However, a growing number of firms today are aiming their products at lower-income consumers. The fastest-growing product in the financial services sector is prepaid debit cards, most of which are being bought and used by people who don’t have bank accounts. Firms are finding that this group is a large, untapped pool of customers who tend to be more brand loyal than most. If you capture enough of them, you can earn a profit (von Hoffman, 2006).^[7] Based on the targeted market, businesses can determine the location and type of stores where they want to sell their products.

Income isn’t always indicative of who will buy your product. Companies are aware that many consumers want to be in higher income groups and behave like they are already part of them. Mercedes Benz’s cheaper line of “C” class vehicles is designed to appeal to these consumers.

Gender Identity

Gender identity has traditionally been a way to segment consumers, but changes are coming. People who identify as male or female or  other have different needs and also shop differently. Consequently, these groups are often, but not always, segmented and targeted differently. Marketing professionals don’t stop there, though. For example, because women make many of the purchases for their households, market researchers sometimes try to further divide them into subsegments.

In addition to segmenting by gender identity, market researchers might combine gender identity with marital status and other demographic characteristics.

Family Life Cycle

Family life cycle refers to the stages families go through over time and how this affects people’s buying behaviour. For example, if you have no children, your demand for pediatric services (medical care for children) is likely to be none, but if you have children, your demand might be very high because children frequently get sick. You may be part of the target market not only for pediatric care but also for a host of other products, such as diapers, daycare, children’s clothing, entertainment services, and educational products. A secondary segment of interested consumers might be grandparents who are likely to spend less on day-to-day childcare items but more on special-occasion gifts for children. Many markets are segmented based on the special events in people’s lives. Think about brides (and want-to-be brides) and all the products targeted at them, including websites and television shows such as Say Yes to the Dress, My Fair Wedding, Platinum Weddings, and Bridezillas.

Resorts also segment vacationers depending on where they are in their family life cycles. When you think of family vacations, you probably think of Disney resorts. Some vacation properties, such as Sandals, exclude children from some of their resorts. Perhaps they do so because some studies show that the market segment with the greatest financial potential is married couples without children (Hill et al., 1990).^[8] Keep in mind that although you might be able to isolate a segment in the marketplace, including one based on family life cycle, you can’t make assumptions about what the people in it will want. Just like people’s demographics change, so do their tastes. For example, over the past few decades, families have been getting smaller. Households with a single occupant are more commonplace than ever, but until recently that hasn’t stopped people from demanding bigger cars (and more of them) as well as larger houses.

The trends toward larger cars and larger houses appear to be reversing. High energy costs, inflation and concern for the environment are leading people to demand smaller houses.

Ethnicity

People’s ethnic backgrounds have a big impact on what they buy. If you’ve visited a grocery store that caters to a different ethnic group than your own, you’ve probably been surprised to see the types of products sold there. It’s no secret that Canada is becoming—and will continue to become—more diverse.

Asian Canadians are the second-largest ethnic group in Canada. Collectively, they have the most buying power of any ethnic group in Canada. Many people of Asian descent are known to be early adapters of new technology and have above-average incomes. As a result, companies that sell luxury products spend more money segmenting and targeting the Asian community (The Insight Research Corporation, 2003).^[9]

As you can guess, even within various ethnic groups there are many differences in terms of the goods and services buyers choose. Consequently, painting each group with a broad brush would leave you with an incomplete picture of your buyers. For example, although Asians share the same race, Chinese, Japanese, and Korean immigrants do not share the same language (The Insight Research Corporation, 2003).^[10] Moreover, Asian market segments include new immigrants, people who immigrated to Canada decades ago, and native-born Canadians. So what language will you use to communicate your offerings to these people and where?

Segmenting by Psychographics

What if your product crosses several market segments? For example, the group of potential consumers for cereal could be “almost” everyone, even though groups of people may have different needs with regard to their cereal. Some consumers might be interested in the fiber, some consumers (especially children) may be interested in the prize that comes in the box, other consumers may be interested in the added vitamins, and still other consumers may be interested in the type of grains. Associating these specific needs with consumers in a particular demographic group could be difficult. Marketing professionals want to know why consumers behave the way they do, what is of high priority to them, or how they rank the importance of specific buying criteria. Think about some of your friends who seem a lot like you. Have you ever gone to their homes and been shocked by their lifestyles and how vastly different they are from yours? Why are their families so different from yours?

Psychographic segmentation can help fill in some of the blanks. Psychographic information is frequently gathered via extensive surveys that ask people about their activities, interests, opinions, attitudes, values, and lifestyles. One of the most well-known psychographic surveys is VALS (which originally stood for “Values, Attitudes, and Lifestyles”) and was developed by a company called SRI International in the late 1980s. SRI asked thousands of Americans the extent to which they agreed or disagreed with questions similar to the following: “My idea of fun at a national park would be to stay at an expensive lodge and dress up for dinner” and “I could stand to skin a dead animal” (Donnelly Jr. & Peter, 2002).^[11] Based on their responses to different questions, consumers were divided up into eight categories, each characterized by certain buying behaviours.

To find out which category you’re in, take a VALS survey. VALS surveys have been adapted and used to study buying behaviour in other countries, too. Note that both VALS and PRIZM group buyers are based on their values and lifestyles, but PRIZM also overlays the information with geographic data. As a result, you can gauge what the buying habits of people in certain zip codes are, which can be helpful if you are trying to figure out where to locate stores and retail outlets.

The segmenting techniques we’ve discussed so far in this section require gathering quantitative information and data. Quantitative information can be improved with qualitative information you gather by talking to your customers and getting to know them (recall that this is how Healthy Choice frozen dinners were created). Consumer insight is what results when you use both types of information. You want to be able to answer the following questions:

• Am I looking at the consumers the way they see themselves?
• Am I looking at life from their point of view?

Best Buy asked store employees to develop insights about local consumer groups in order to create special programs and processes for them. Employees in one locale invited a group of retirees to their store to explain how to make the switch to digital television. The store sold $350,000 worth of equipment and televisions in just two hours’ time. How much did it cost? The total cost included ninety-nine dollars in labour costs plus coffee and donuts.

Read about some of the extreme techniques Nokia uses to understand cell phone consumers around the world.

Segmenting by Behaviour

Behavioural segmentation divides people and organizations 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 occasion in which people use products is also 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! Similarly, Glad, the company that makes plastic wrap and bags, found out customers were using its Press’n Seal wrap in ways the company could never have imagined. The personnel in Glad’s marketing department subsequently launched a website called 1000uses.com that contains both the company’s and consumers’ use tips. Some of the ways in which people use the product are pretty unusual, as evidenced by the following comment posted on the site: “I have a hedgehog who likes to run on his wheel a lot. After quite a while of cleaning a gross wheel every morning, I got the tip to use ‘Press’n Seal wrap’ on his wheel, making clean up much easier! My hedgie can run all he wants, and I don’t have to think about the cleanup. Now we’re both GLAD!”

Now it is time to apply what you have learned about segmentation to some examples!