Market Segmentation:
Choose Groups to Serve

Market segmentation divides a market into groups with relatively similar needs and wants, as defined by Monash Business School. The resulting segments provide a basis for deciding which groups to serve and how an offer should address their needs.

Why market segmentation matters#

Segmentation connects customer differences to business choices. Understanding the needs of each group can inform product development, more specific marketing messages, and the identification of underserved markets, as described in Qualtrics’ explanation of segmentation benefits.

Start with the choice the research should inform: a product range, a distribution channel, a message, or a priority market. Record what would change for each proposed segment. This gives the analysis a practical purpose and provides a way to judge its usefulness.

Segmentation, targeting, and positioning#

These are separate decisions within the segmentation, targeting, and positioning model:

Identifying a segment leaves a further choice about whether to invest in it. Keep the description of the group separate from the reasons for selecting it, and connect the eventual positioning to the need that justified that selection.

The four main types of market segmentation#

Consumer markets are commonly segmented using the following four bases:

Benefit segmentation focuses on what buyers want from a product; occasion segmentation focuses on when they buy; usage segmentation focuses on how much they use it. These are behavioral bases in OpenStax’s account of consumer segmentation.

A segmentation study can combine more than one basis. Choose variables that answer the research question, then check their relevance against actual needs and purchasing behavior.

Real examples of market segmentation#

LEGO: age and product selection#

LEGO’s US shop-by-age page organizes products into age categories, including 4+ and 18+. This is a visible example of a demographic variable being used to organize an offering.

The practical connection is between a recognizable characteristic and a product selection. The page demonstrates that connection directly. It does not disclose how LEGO developed its internal segments or establish how much revenue any category generates.

Spotify: student status and household arrangements#

Spotify’s US Premium page lists Individual, Student, Duo, and Family plans. Student is available to eligible students, Duo is for couples residing at the same address, and Family covers up to six family members residing at the same address.

Read as a segmentation example, these offers show how eligibility and household arrangements can correspond to different subscription choices. The published distinctions include who qualifies and how many accounts the plan provides. They illustrate differences in the offer without requiring assumptions about listeners’ personalities or the company’s financial results.

How to segment a market#

1. Define the market and the decision#

State the product category, geographic area, relevant buyers, and period covered by the research. Decide whether the question concerns the wider market, prospective buyers, or existing customers. Include prospective buyers when evaluating demand beyond the current customer base.

The U.S. Small Business Administration’s market research guidance recommends examining demand, market size, location, and competing alternatives. Use those questions to establish the market boundary before dividing it into groups.

2. Gather evidence about needs and behavior#

Combine existing information with direct research where the question requires it. The SBA describes surveys, questionnaires, focus groups, and in-depth interviews as ways to research consumers directly.

Keep the research focused on the planned decision: reasons for buying, desired benefits, alternatives considered, purchasing occasions, and barriers to purchase. Record who supplied each answer and when. When using transaction records, retain the observation period and the definition of each measure.

Separate recorded behavior from explanations offered by respondents. Label both clearly in the findings so that an observed purchase and a stated reason for purchase remain distinguishable.

3. Form groups with explicit rules#

Two approaches differ in when the grouping criteria are chosen. In a priori segmentation, variables are selected before customers are classified. In post hoc segmentation, the data are analyzed first and groups are formed from similarities and differences.

Whichever approach is used, write a rule that allows another person to assign a buyer consistently. Specify the information required, the time period, and the treatment of missing answers. Describe the shared need or behavior alongside the rule.

For overlapping criteria, state whether buyers can belong to several groups or whether the application requires one assignment. Make that choice explicit before using the segments in a campaign or reporting their sizes.

4. Check whether the segments are usable#

OpenStax identifies five criteria for effective market segmentation:

• Accessible: Buyers can be reached at an affordable cost through available channels.
• Differentiable: Groups have differences relevant to their needs or response to marketing.
• Actionable: The business can implement a practical offer or marketing approach for the group.
• Measurable: Segment size or sales potential can be estimated.
• Substantial: The opportunity can justify the resources required to serve it.

Assess the criteria together. Record the route to the buyers, the proposed offer, estimated demand, and the costs of reaching and serving the group. Identify missing evidence before treating an estimate as an investment case.

5. Select the groups to serve#

Target selection determines how many segments receive attention. OpenStax describes targeting strategies that include a broad offer for the market, differentiated offers for several segments, and concentrated marketing focused on one segment.

Compare the groups on demand, reachable buyers, competitive alternatives, the fit of the existing offering, and the resources required. Document why the selected group deserves priority and which uncertainties remain.

For each selected target, specify what changes in the product, message, channel, or service. Check that the business can deliver the proposed offer before communicating it. Keep the targeting decision traceable to the research that supports it.

6. Test the grouping and the marketing approach#

For segments discovered through clustering, check the result beyond the data used to create it. Ullmann, Hennig, and Boulesteix describe validation using held-aside or independently collected data. Their framework addresses the quality and replication of clustering results.

Evaluate the marketing approach separately. Qualtrics recommends testing targeted campaigns, tracking conversions, and revisiting disappointing findings. Record the intended outcome, eligible audience, measurement period, and cost before interpreting results.

Keep separate records of whether buyers can be classified consistently and whether the resulting offer performs well. Revise the assignment rule when it fails to identify the intended group; revisit the offer when the proposed treatment needs improvement.

What to record for each segment#

Use a short segment description that contains:

• The market boundary and buyers included.
• The shared need, characteristic, or behavior.
• The assignment rule and information required.
• The supporting evidence and its collection date.
• The means of reaching and serving the group.
• The proposed action, estimated costs, and intended outcome.
• The evidence that would prompt a revision.

Keep the segment definition, target selection, and performance record connected. Together, they show which group is being served, why it was selected, and whether the chosen approach merits continued investment.