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Market Segmentation

Types of Market Segmentation

LRW
Posted On  August 27, 2019
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Since people can be incredibly diverse in their behaviors, needs, attitudes, lifestyle, and purchase drivers, a market segmentation study helps you identify sets of customers (or buying occasions) with important attributes in common so that you can most effectively set your marketing and product strategies and priorities.

While there are many simple ways to segment a market, a true “segmentation study” is a robust undertaking that leverages both art and science to paint a picture as rich and nuanced as your market.

What Kind of Segmentation Study is Right for My Brand and Business Situation?

You know your brand would benefit from a segmentation study, but what kinds of segmentations are out there, and which one is right for your business?

Here are some of the common types of segmentation, followed by examples of business challenges effectively served by each type.

Person-Based Segmentation

A person-based segmentation is the most common consumer segmentation study. Just about any large brand needs a clear understanding of the types of customers they can address in their marketing. The business-to-business (B2B) analog of person-based segmentation can either group people (e.g., IT decision-makers) or organizations (e.g., ACME Corp.).

While there are several types of person-based segmentation techniques, two have recently increased in popularity: demographic segmentation and attitudinal segmentation.

Demographic Segmentation

As its name implies, demographic segmentation groups segments by relatively straightforward personal traits like age, sex, and geography. It’s also possible to segment on psychographics, lifestyle, and values-based to inform long-term innovation, or to position commodified or image-driven products like water or perfume, respectively. In the B2B space, demographics translates to firmographic attributes like industry or revenues.

Demographic segmentations have been popular for decades because they are often inexpensive, easy to understand, and relatively simple to target and buy media against. However, demographic segmentations aren’t especially useful for building marketing strategies against as the profiling on category needs, attitudes, and behaviors tends to be flat and undifferentiated. Demographic segmentations are increasingly being promoted by DIY software platforms as an efficient, cost-effective way to build a segmentation study, but they don’t always offer the strategic benefits of other study types.

Attitudinal Segmentation

A more in-depth person-based segmentation study offers insights into the beliefs, needs, and wants of consumers so that brands know how to position their brand and promote it to people through messaging and media. In other words, they tell you what to say and to whom.

With an attitudes and needs-based segmentation approach, a person-based segmentation study allows brands to monitor and explore their segments in future research by using an efficient and accurate algorithm or short-form survey (also known as a typing tool). If the brand has rich behavioral data in their database, they can also tag or score their database with likelihoods of segment membership. That helps them map their existing customers to the various segments, adjusting customer service and communications on a segment-specific basis.

Needs-Based Segmentation, AKA Occasion-Based Segmentation

The other broad category of segmentation studies has multiple names: needs-based segmentation, occasion-based segmentation, or “jobs to be done.” This kind of segmentation study identifies specific situations with unique customer needs and allows the same customer to exist in different need states on different occasions, when they are likely buying different brands to accomplish different jobs. For example, a customer may purchase a given soft drink to quench their thirst after a workout, and they may also purchase the same beverage as a late afternoon pick-me-up.

Due to the complexity of understanding that a person can belong to more than one segment throughout a given day, month, or year, this type of needs- or occasion-based segmentation study is not entry-level stuff. Rather, it’s most appropriate for companies who already understand how to market differently to different groups of people.

Needs-based segmentations are common when a client has a brand portfolio – different categories, products, or sub-brands – and wants to either position each of the products for the right types of occasions or get insights that can inform innovation activities.

Since segments in a needs- or occasion-based segmentation are situations, not people, there is little need for an algorithm or typing tool since you can’t classify a survey respondent into one need state. This allows for tremendous flexibility in how to statistically create the segments (one of several splashes of art in an otherwise scientific process).

The Benefits of a Demand Landscape

When a brand has a large portfolio of sub-brands or products, there can be unnecessary overlap between them that requires rationalization.  A demand landscape, which is a cross between a person-based segmentation and a needs-based segmentation, is an effective tool to do just that.

A demand landscape tells you who to talk to and what to promote to them, depending on their segment and situation. The framework, which requires conducting a person-based segmentation first, followed by a needs-based segmentation, is extremely effective in identifying innovation opportunities. While some companies like to do both studies in a single survey, modern best practices in data collection encourage separate surveys to protect the representativeness of your sample and the quality of the data collected.

Segmenting the Segmentation Market

To offer a better sense of which types of segmentations apply to specific business situations, we conducted an unscientific “segmentation of segmentation types.”

Here are a few illustrative examples to help you understand which segmentation type may be right for your business situation:

Super Fan Seekers – A prominent movie studio and entertainment company was looking to better understand their universe of viewers and fans. The company had previously analyzed audiences on a title by title basis but wanted to develop a more nuanced approach to marketing and advertising to drive higher engagement and viewership among key segments.

Solution: Person-based segmentation for category-level insights on the motivations, feelings, behaviors of fans.

Candy Eater Capturers – A chocolate brand wanted to better understand when customers buy their products, what needs those products serve, and how to target key sets of customers in future research studies, like a brand tracker.

Solution: Person-based segmentation, followed by a category-level occasion-based segmentation to enable portfolio management and to draw out opportunities for product innovation.

Cola Category Crushers – A large beverage company with various product lines and categories wanted to understand their primary customer segments by product line, by category, and by occasion in order to rationalize their product lines and create successful new products.

Solution: Multiple person-based segmentations by category, then occasion-based segmentation layered on top to create a series of demand landscapes.

Pharma Finders – A pharmaceutical company producing a cancer drug needed to understand how to market their product to patients through a network of sales reps.

Solution: Person-based segmentation, with a very simple short-form

survey algorithm/typing tool for sales reps to quickly identify which patients belong to which segment.

Office Furniture Fundamentalists – A maker of design-driven office furniture wanted to understand their key customer groups, and especially what attitudes and beliefs informed the way they shop for – and purchase – new office furniture.

Solution: Attitudes-based B2B person-based segmentation to help the company understand how key sets of buyers feel about office furniture, and what drives their purchases.

Whatever its final design, an effective market segmentation study helps you identify the most valuable groups of customers and prospects, prioritized by their receptivity to your brand’s offering, their accessibility in the market, alignment with your strategy and brand purpose, and the size of their economic opportunity.

Learn more about our approach to market segmentation here.

Written by LRW
For 40 years, LRW has been asking so what?® to help our clients use market research to have significant business impact. Learn more about us at LRWonline.com.

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