Week 6.2 Steps of Segmentation

Identifying the target market starts with segmentation. Once you understand your customers and are able to segment the market, you can identify the target market with the most potential. There is a process of segmenting the market and then selecting and reaching the target segments. The process has five steps as shown in the figure below. 

Market Segmentation Process. The process of market segmentation consists of 5 steps: 1) group potential buyers into segments; 2) group products into categories; 3) develop market-product grid and estimate market sizes; 4) select target markets; and 5) take marketing actions to reach target markets.

Step 1: Group Potential Buyers into Segments 

There are five main criteria to use when forming the segments:

  1. Potential for increased profit: Segmentation is costly. Businesses apply segmentation only if it will lead to higher profits. If there is no chance of increasing profits, then there is no need for segmentation.
  2. Similarity of needs of potential buyers within a segment: Potential consumers who are in the same segment must share similar needs and wants. Businesses take marketing actions towards each segment and they expect to get the same reaction from the consumers who are in the same segment.  
  3. Difference of needs of buyers among segments: Potential consumers who are in different segments must have different needs and wants. If they share similar needs and wants, they should be in the same segment. Different segments require different marketing actions, which means greater costs. It helps to lower the costs if the firm combines the segments that are not significantly different so that it reduces the number of marketing actions.
  4. Potential of a marketing action to reach a segment: Reaching a segment requires effective marketing actions. If the actions are very complicated or impossible to take then there is no point in segmentation.
  5. Simplicity and cost of assigning potential buyers to segments: As mentioned earlier, segmentation is costly. It requires research to identify specific needs of potential buyers. If the research shows the needs are very diverse and that trying to segment will lead to so many micro segments to which it will be very costly to reach out then there is no point in segmentation.    

When segmenting, we can pick from many segmentation variables. There are four main dimensions of segmentation: Geographic, demographic, psychographic, and behavioural segmentation. The table below shows these dimensions and the variables corresponding to each dimension.   

 Main DimensionsVariablesTypical Breakdown
Geographic Segmentation Region Atlantic provinces, Quebec, Ontario, Prairie provinces, British Columbia
City or census metropolitan area (CMA) size Under 5,000; 5,000-19,999; 20,000-49,999; 50,000-99,999; 100,000-249,999; 250,000-499,999; 500,000-999,999; 1,000,000-3,999,999; 4,000,000+
Density Urban, suburban, rural
Climate East, west
Demographic segmentation Age Infant; preschool; child; youth; collegiate; adult; senior
Gender Male, female
Family size 1-2; 3-4; 5+
Birth era Baby Boomer (1946-1964); Generation X (1965-1976); Baby Boomlet/Generation Y (1977-1994)
Marital status Never married; married; separated; divorced; widowed
Income Under $10,000; 10,000-19,999; 20,000-29,999; 30,000-39,999; 40,000-54,999; 55,000-74,999; 75,000+
Education Grade school or less; some high school; high school graduate; some university; university graduate
Race White, Black, Asian, Native, Other
Home ownership Own home; rent home
Psychographic association Personality Gregarious; compulsive; extroverted; introverted
Lifestyle (PRIZMS) Grads & Pads; Fresh Air Families; Our Time; Pets and PCS; etc.
Behavioural segmentation Benefits sought Quality; service; low price
Usage rate Light user; medium user; heavy user
User status Non-user; ex-user; prospect; first-time user; regular user
Loyalty status None; medium; strong

Concept Check Question:

Which of the following statements is false regarding segmentation?


Step 2: Group Products to be Sold into Categories

Businesses pay close attention to the differences in the needs of consumers in each segment. In order to address the needs in the best way possible, businesses create differentiated products. These products could be different based on the features of the product, pricing, distribution, etc. As you have learned, companies have full control over the marketing mix elements (4Ps) which allows them to create different mixes of the 4Ps to create differentiated products. 

Segmentation and green consumerism

It is very common to apply demographic segmentation, or segmenting a market based on population characteristics. However, there are many other variables that could be used, as you have seen in the chart above. 

In addition to the variables listed so far, there is also segmentation based on environmental friendliness. Companies with a green focus pay attention to segmentation aligned with consumers’ environmental orientation. 

One important point is that segmentation can be done using a combination of different variables rather than just a single variable. Using a single variable is also fine but in many cases a single demographic variable may not be sufficient in understanding and segmenting a given market. As a result, marketers combine a number of variables that might be relevant to their target market. 

Clinique products

Example: Cosmetics companies, such as Clinique, combine many variables in their segmentation, specifically gender, income, and occupation. These variables help to distinguish segments for different lines of cosmetic products.

Step 3: Develop a Market-Product Grid and Estimate Size of Markets

You have seen an example of a market-product grid from Sleep Country. Below is an additional example from a fast food restaurant that is located next to an urban university. We label the market segments in the horizontal rows and products in the vertical columns as shown in the table below. The market sizes are estimates from zero to three. Zero means no potential. One represents small potential. Two represents medium size potential. Three shows the most potential. 


 Products: Meals
Markets BreakfastLunchBetween-meal SnackDinnerAfter-dinner Snack
StudentDormitory 0 1 3 0  3
Apartment 1 3 3 1 1
Day commuter 0 3 2 1 0
Night commuter 0 0 1 3 2
Non-studentFaculty or staff 0 3 1 1 0
Live in area 0 1 2 2 1
Work in area 0 3 0 1 0


The blue-shaded area in the table shows the target markets. The reason behind the selected target market is coming from the potential market size estimates. There is almost no potential for breakfast. For that reason, the restaurant decided not to serve breakfast at all. The non-student segment is also eliminated from the target market due to lower potential compared to the student segment. The restaurant still serves non-students but all marketing activities are directed towards students since they are promising the highest market size estimates.

Step 4: Select Target Markets 

Once you develop a market-product grid, it is fairly easy to identify the target market from the grid based on the highest market size estimates. 

The grid is the tool to use when selecting a target market.  

Critical Thinking Activity: Develop a market-product grid for your group project. Remember that you are not identifying their current target market. Rather, you are developing the grid based on your market-product strategy and segmentation. 

Concept Check Questions:

1. The first step in segmenting and targeting markets that link customer needs to marketing actions is to


2. In a market-product grid, what factor is estimated or measured for each of the cells?


Step 5: Take Marketing Actions to Reach Target Markets 

Identifying target markets makes it possible to take actions towards the segments we include in the target market. Based on the characteristics of each segment, marketers decide on the best tools to reach out to these segments. We will cover promotional strategies in future lessons.