Become a Financial Modeling & Valuation Analyst (FMVA)®. Enroll today to advance your career!
Login to your new FMVA dashboard today!

Market Segmentation and Targeting

identify potential customers, choose target customers, and create value

What are market segmentation and targeting?

Market segmentation and targeting is the process of identifying a firm’s potential customers, choosing the customers to pursue, and create value for the targeted customers. This is achieved through the segmentation, targeting, and positioning (STP) process.

 

Market Segmentation and Targeting - man drawing on whiteboard

 

Quick Summary Points

  • Market segmentation and targeting help firms determine and acquire key customers.
  • Consumers can be put into segments based on location, lifestyle, and demographics.
  • Another way to segment consumers is by asking the who, what, and why question.
  • Segmentation and targeting influence a company’s strategy for pricing, communication, and customer management.

 

Overview of the STP process

As mentioned earlier, STP stands for segmentation, targeting, and positioning. Segmentation is the first step of the process. It groups customers with similar needs together and then determines the characteristics of the customers. For example, an automotive company can split customers into two categories: price sensitive and price insensitive. The characteristic of a price sensitive category might be that they have less disposable income and cares about reliability.

The second step is targeting in which the company selects the segment of customers they will focus on. Companies will determine this base on the attractiveness of the segment. Attractiveness depends on the size, profitability, intensity of competition, and ability of the firm to serve the customer in the segment.

The last step is positioning or creating a value proposition for the company that will appeal to the selected customer segment. After creating value, companies communicate the value to consumers through the design, distribution, and advertisement of the product. For example, the automotive company can create value for price-sensitive customers by marketing their cars as fuel efficient and reliable.

 

How do companies segment consumers?

The most common way to segment consumers is by looking at geography, demographics, psychographics, behaviour, and benefits sought. Psychographics is the lifestyle, interests, opinions, and personality of the consumer. Behaviour is the loyalty, purchase occasion, and usage rate of the buyer and benefits sought is the value the consumer is looking for such as convenience, price, and status associated with the product. Another way to segment consumers is by asking why, what and who.

A more difficult but important thing for companies when segmenting consumers is understanding behaviour. This is the “why” question. By collecting information on a consumer’s past purchases, companies can make good predictions of future purchases. Therefore, this allows companies to target the right consumer.

The “what” that companies ask focuses on purchase behaviour. Data that interests companies can be broken down into recency, frequency, and monetary value. These three things show when the last visit to the store was, how frequency the customers shops there, and how much money they spend. These help companies determine customer loyalty and value of customers.

Segmenting consumers by “who” is arguably the easiest way because the information is readily available. Information can include a person’s income, education, family size, and age. Companies hope that these features closely correlates to the needs of the consumer. For example, if a person is in their mid-40s and has a large family, then the automobile company will likely advertise an SUV instead of a two-seater.

 

How do companies target customers?

Targeting is the process of evaluating the attractiveness of the consumer segments as well as determining how to attract the consumers. A firm’s choice of consumer segment largely depends on the product and service they are offering. It also determines the marketing strategy the company will employ. Markets that are undifferentiated is suitable for mass marketing. For example, large companies like Microsoft will utilize the same design and similar ads for all customers. For other markets, one-to-one marketing is more appropriate. An example of this would be Dairy Queen, where the customers can design and create their own cake. Another example would be luxury stores such as Tiffany Co. which sends personalized letters as ads.

Three factors influence a company’s selection of segments. First of all, companies consider the characteristics of the segments. Characteristics include are how fast or slow a segment is growing and how profitable it is. Secondly, the company consider its own competencies and resources to address the needs of the segments. For example, a large segment is attractive, however, a company might not have the resource to serve the whole segment. Lastly, a company considers the competition n the segment, both current and in the future. A large and growing segment may be profitable but will attract a lot of competition. This might create lower margins.

 

Segmentation and targeting strategy

Strategies are the process of creating product, pricing, communication, and customer management strategies. Product strategy aims to extract the most value out of customers. This is done by offering products at different price levels or by only making expensive products available first. Pricing strategy involves appealing to price-sensitive or insensitive segments. Communication strategy advertises the appropriate ads using the right media to target the chosen consumer group. For example, products for younger audiences will be advertised through digital channels as this segment spends more time on Google and Facebook. Lastly, customer management strategies use customer’s past purchase behaviour to decide the best approach to promote products. This includes offering upgrades, priority boarding for airplanes, or coupons. The strategy will also account for how frequently to promote the product.

 

Additional Resources

Thank you for reading CFI’s article on market segmentation and targeting. TO keep learning and advancing your career, these resources will be useful:

  • Value Proposition
  • Customer Profitability Analysis
  • Cornering the Market
  • Economic Moat

CFI's Corporate & Business Strategy Course

Learn to perform Strategic Analysis in CFI’s online Business Strategy Course! The comprehensive course covers all the most important topics in corporate strategy!