0264 · 3.1.4Market segmentation

Market segmentation basics

0:00Imagine a clothing shop offering the same outfit to every customer. A teenager choosing casual clothing has different priorities from someone preparing for an outdoor walk. An office employee may need something suitable for formal meetings. Understanding those differences helps a business decide what to offer and who to approach. This video explains how market segmentation works and why its benefits come with costs. A market is where buyers and sellers of a particular product come together.

0:24Within that market, customers have different needs, preferences and amounts they can spend. Businesses must understand these differences when deciding what to sell. A useful starting point is to group customers who share characteristics that affect their buying decisions. A market segment is an identifiable sub-group of a whole market in which consumers have similar characteristics or preferences. Market segmentation means dividing a market into segments. Each group helps the business understand a particular set of customers.

0:51The business can then choose which groups to serve and adapt its products to their requirements. Segmentation begins with understanding customers, followed by decisions about serving them. A business might focus on one group or offer different products to several groups. Customers benefit when the available choices match their requirements more closely. For the business, the aim is to use its resources effectively and attract purchases.

Segmentation methods

1:13Coral Thread sells clothing through a shop and a website. It can divide its potential customers according to age, income, location, gender and lifestyle. These characteristics provide different clues about what buyers might need. We will use this same business throughout the five methods, so their differences are easy to compare. Age segmentation groups customers according to how old they are. Coral Thread could offer colourful casual clothing for teenagers and easy-fastening garments for young children.

1:38Children may need clothing they can put on independently, while teenagers may place greater importance on appearance. The business uses age to identify likely requirements, then checks whether its products satisfy them. Income is the money a person receives over a period. Grouping customers by income helps Coral Thread understand differences in their ability to spend. It could offer affordable everyday clothing to lower-income customers and premium garments to higher-income buyers.

2:03The benefit comes from matching the offer to spending capacity. Individual preferences still matter within each group. Grouping by location divides customers according to the geographical area where they are based. Coral Thread might offer warm coats to customers in colder regions and lightweight clothing in warmer areas. Climate affects the practical purpose of these purchases. Understanding that difference helps the business offer suitable products in each area and reduce unsold inventory.

2:29Gender can provide another basis for grouping customers where clothing preferences, fit or requirements differ. Coral Thread could develop ranges for customers seeking menswear and womenswear. Information about demand helps it decide which styles and sizes to offer. Preferences vary within each group, so the business still needs evidence about what its customers actually want. Lifestyle describes how people spend their time and the interests and values that influence their choices.

2:54Coral Thread could target customers who regularly enjoy outdoor activities. Waterproof jackets would suit their need for protection during walks. This group could include customers of different ages and incomes because their shared activity creates a similar product requirement. Several characteristics can describe the same customer at once. A teenager with a limited clothing budget in a cold region may also enjoy outdoor activities. Coral Thread could use that combination to offer an affordable waterproof jacket.

3:20Useful segmentation focuses on characteristics that help explain purchasing decisions. Evidence about customers makes those choices more reliable.

Benefits and drawbacks of segmentation

3:27One advantage for the business is that products can meet customer needs more closely. Outdoor customers gain practical clothing designed for the activities they enjoy. That closer fit gives them a reason to choose Coral Thread. However, separate ranges create extra costs for the business because different designs and materials require additional spending. Revenue is the income a business receives from selling goods or services, while profit is total revenue minus total costs.

3:52A closer match to customer needs can increase sales, and profit rises if the additional revenue exceeds the extra costs. The drawback is that each segment contains fewer potential buyers than the whole market. A business focused on one group therefore has a smaller potential customer base. Promotion aimed at the right people can reduce wasted spending for the business. Coral Thread could place an advertisement where outdoor enthusiasts are likely to see it.

4:17More of the audience would then have a reason to consider its waterproof jackets. On the other hand, potential customers outside the selected group may be missed. Separate campaigns for several groups also add costs for the business. Segmentation can help a business spot gaps in the market, where customers have needs that existing products serve poorly. Coral Thread might discover demand for affordable outdoor clothing in smaller sizes. Serving that demand could attract additional buyers.

4:40However, finding reliable information can require expensive research. The business must pay for this information before it knows whether the opportunity will succeed.

Worked example and exam technique

4:51Pine Escapes organises short holidays and wants to attract more bookings. Its customer information shows two groups with different preferences, and families make most of its enquiries. Families with young children want child-friendly activities, while activity-seeking adults prefer demanding outdoor experiences. The business has enough money to adapt one holiday package initially. Its task is to decide how these differences can guide that adaptation. Start by identifying the characteristic that separates the groups.

5:17The ages of family members affect what activities are suitable, so age provides a useful basis for segmentation. Families make most of the enquiries, so Pine Escapes chooses them as the group for its adapted package. It then checks their shared requirement, which is enjoyable activities suitable for children. The business adds child-friendly activities to the package and presents these clearly in its advertising. Parents can now see how the holiday meets their requirements.

5:41That closer match gives families a stronger reason to book. Pine Escapes also considers the extra costs of organising these activities. The financial benefit depends on additional revenue exceeding those costs. Accurate segmentation recognises similarities within a group while allowing for individual differences. A customer’s characteristics provide clues that the business checks against evidence about preferences. Use segmentation to describe how the whole market is divided, then identify the group the business chooses to serve.

6:08When explaining a benefit, connect it to a customer requirement and a clear business outcome. In Paper One Short Answer and Data Response or Paper Two Case Study, the question can connect segmentation to a particular business. An exam-style task is to explain one advantage and one disadvantage for Pine Escapes. Explain means set out purposes or reasons, say why and how, supported with relevant evidence. Select points that connect directly to its holiday packages and family customers.

6:35Pine Escapes can match its holiday package more closely to the needs of families with young children. Child-friendly activities give these customers a reason to book, so sales can increase. However, adapting the package creates extra costs for the business. It must pay to organise suitable activities, so the additional spending reduces the financial benefit from extra bookings. Remember that a market segment is an identifiable sub-group of a whole market in which consumers have similar characteristics or preferences.

7:01Market segmentation means dividing a market into segments. Age, income, location, gender and lifestyle help businesses understand different customer requirements. A closer match can improve sales, reduce wasted promotion and reveal opportunities. The business must weigh those benefits against extra costs, smaller customer groups and missed buyers.