Identify potential customers, choose target customers, and create value
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
Market segmentation and targeting refer to the process of identifying a company’s potential customers, choosing the customers to pursue, and creating value for the targeted customers. It is achieved through the segmentation, targeting, and positioning (STP) process.
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 questions.
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 in the process. It groups customers with similar needs together and then determines the characteristics of those customers. For example, an automotive company can split customers into two categories: price-sensitive and price-insensitive. The price-sensitive category may be characterized as one with less disposable income.
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 customers 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, behavior, and benefits sought. Psychographics include the lifestyle, interests, opinions, and personality of the consumer.
Behavior is the loyalty, purchase occasion, and usage rate of the buyer, and benefits sought are the values 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 their behavior. 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 behavior. 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 frequently customers shop in the store, and how much money they spend. They help companies determine the value and loyalty 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. Firms hope that such features closely correlate to the needs of the consumer. For example, if a person is in their mid-40s and belongs to a large family, then the automobile company will likely advertise an SUV instead of a two-seater vehicle.
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 are suitable for mass marketing.
For example, large companies such as Microsoft will utilize the same design and similar ads for all customers. For other markets, one-to-one marketing is more appropriate. One example 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 considers its own competencies and resources to address the needs of the segments. For example, a large segment is attractive. However, a company may not be able to serve the whole segment because of a lack of resources.
Lastly, a company considers the competition in the segment, both current and in the future. A large and growing segment may be profitable but will attract a lot of competition, effectively reducing 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. It is done by offering products at different price levels or by only making expensive products available first.
Pricing strategy involves appealing to either price-sensitive or price-insensitive segments. Communication strategy advertises using the appropriate ads and the right media to target the chosen consumer group.
For example, products for younger audiences will be advertised through digital channels as such a segment spends more time on Google and Facebook. Lastly, customer management strategies use a customer’s past purchase behavior to decide the best approach to promote products. They include offering upgrades, priority boarding for airplanes, or coupons. The strategy will also account for how frequently to promote the product.
Thank you for reading CFI’s article on market segmentation and targeting. To keep learning and advancing your career, these CFI resources will be useful:
Take your learning and productivity to the next level with our Premium Templates.
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.
Already have a Self-Study or Full-Immersion membership? Log in
Access Exclusive Templates
Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.