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Business · Spotting a business opportunity

Market segmentation

Not every customer wants the same thing, so businesses divide a market into segments - by location, demographics, lifestyle, income and age - and target the ones whose needs they can meet best.

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Teacher resources

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Student handouts

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Last Lesson

Answer from memory before the answers appear.

  • What is the difference between primary and secondary research?

    Primary is new, first-hand information; secondary already exists and was collected by someone else.

  • Give two methods of primary research.

    Any two of: survey, questionnaire, focus group, observation, interview.

  • What is qualitative data?

    Opinions, feelings and reasons.

  • How can a business make its research more reliable?

    Use a larger, representative sample and avoid bias.

Learning Objectives

  1. 1Explain what a market segment is.
  2. 2Explain how a market can be segmented by location, demographics, lifestyle, income and age.
  3. 3Explain how businesses use market segmentation to target customers.
  4. 4Explain the benefits of market segmentation to a business.

What Is Market Segmentation?

Market segmentation means dividing a market into smaller groups of customers with similar needs.

  • Market

    All the customers who might buy a type of product, for example everyone who buys trainers.

  • Segment

    A smaller group within the market whose customers share similar characteristics and needs, for example runners, fashion buyers or children.

  • Target market

    The segment or segments a business chooses to aim its product and marketing at.

  • Why do it?

    A product designed for everyone often suits no one well. Aiming at a segment lets a business meet those customers' needs exactly.

Ways to segment a market

Ways to segment a market

  • Location

    • where customers live or work
    • local, national, international
    • town or country

  • Demographics

    • gender
    • family size
    • ethnicity
    • religion
    • occupation

  • Lifestyle

    • hobbies
    • interests
    • attitudes
    • how customers spend their time

  • Income

    • low, middle and high earners
    • budget, mid-range and luxury products

  • Age

    • children
    • teenagers
    • adults
    • over-60s

Location

Grouping customers by where they live or work.

  • What it means

    Customers in different places often have different needs - a city, a village, the coast or another country.

  • Why it matters

    Climate, culture and local tastes change what people buy. A shop in a student area will stock different things from one in a retirement town.

  • Example

    Supermarkets change their ranges store by store, and sell more barbecue food in areas with hot summers.

Demographics

Grouping customers by the characteristics of the population.

  • What it means

    Dividing customers by features such as gender, family size, ethnicity, religion and occupation.

  • Why it matters

    Each group can have different needs - a family of five needs a bigger car than a single person.

  • Example

    Car makers sell small city cars to single people and seven-seat cars to large families.

Lifestyle

Grouping customers by how they live and what they care about.

  • What it means

    Dividing customers by their hobbies, interests, attitudes and habits.

  • Why it matters

    People with the same age and income can live very differently - one spends weekends hiking, another gaming.

  • Example

    Gyms, vegan food brands, outdoor clothing and gaming accessories all target lifestyle segments.

Income

Grouping customers by how much they earn.

  • What it means

    Dividing customers into low, middle and high earners.

  • Why it matters

    Income decides what customers can afford and how much they are willing to pay.

  • Example

    Hotel chains offer budget rooms, mid-range hotels and luxury suites to customers with different incomes.

Age

Grouping customers by how old they are.

  • What it means

    Dividing customers into age groups such as children, teenagers, young adults, families and the over-60s.

  • Why it matters

    Needs change as people get older - in what they buy, where they buy it and how they hear about it.

  • Example

    Saga sells holidays and insurance designed only for people aged over 50.

Segmenting the Market for Holidays

  • Age

    Customers: Families with young children. What they need: Kids' clubs, pools, short flights

  • Age

    Customers: Over-60s. What they need: Comfort, organised trips, quieter resorts

  • Income

    Customers: Low income. What they need: Cheap package deals and camping

  • Income

    Customers: High income. What they need: Luxury hotels and first-class travel

  • Lifestyle

    Customers: Adventure seekers. What they need: Hiking, diving and activity holidays

The Benefits of Market Segmentation

Segmentation helps a business spend its money where it will work.

  • Meets needs better

    A product designed for one segment can meet those customers' needs exactly, so they are more likely to buy it.

  • Targeted marketing

    The business can advertise where its target customers will see it, so it wastes less money on promotion.

  • Spots gaps

    Looking at segments can reveal a group of customers whose needs no business is meeting.

  • Higher sales and loyalty

    Customers who feel a product is made for them are more likely to buy again.

  • Can charge more

    A product that meets a segment's needs exactly may justify a higher price.

Case study

Saga: A Business Built on One Segment

Saga began in the 1950s by offering cheap out-of-season holidays to retired people, who could travel when hotels were quiet. It now sells holidays, cruises and insurance designed only for people aged 50 and over. By targeting one age segment, Saga can design its products around those customers' needs - comfort, reassurance and organised trips - and advertise where they will see it.

50+ The age of Saga's target customers
1950s Saga's first holidays for retired people

Segment the Trainers Market

The market for trainers is huge. Divide it into four segments using at least three different ways of segmenting (location, demographics, lifestyle, income or age). For each segment, describe the customers and one thing they need from a pair of trainers.

1. Name each segment and the method used.

2. Describe the customers in it.

3. Give one need those customers have.

A good answer shows: Four clearly different segments, each named by its method of segmentation, with a specific customer need for each.

Can I...?

  1. 1Explain what market segmentation is.
  2. 2Explain segmentation by location, demographics, lifestyle, income and age.
  3. 3Give a real example of each.
  4. 4Explain how segmentation helps a business target customers.
  5. 5Explain the benefits of market segmentation.

Summary & Exam Focus

  • A market segment is a group of customers with similar needs.
  • Markets can be segmented by location, demographics, lifestyle, income and age.
  • Businesses choose a target market and design the product and marketing around it.
  • Segmentation meets needs better, targets marketing and reveals gaps in the market.

Exam focus

Explain one benefit to a business of segmenting its market. (3 marks) (3 marks)

Name one benefit and build a chain: segment, then better-targeted product or marketing, then what that means for sales, costs or profit.

Key terms

The vocabulary this lesson expects you to use. Each one is linked from the first place it appears above.

Market
All the customers who might buy a type of product.
Market segment
A group of customers within a market who share similar characteristics and needs.
Market segmentation
Dividing a market into segments of customers with similar needs.
Target market
The segment a business aims its product and marketing at.
Demographics
Characteristics of the population, such as gender, family size, ethnicity and occupation.
Lifestyle
How customers live: their hobbies, interests and attitudes.

Questions and answers

9 questions set on this lesson, with the mark schemes and model answers open.

1. Exam question Define 1 mark Foundation

Define the term 'market segmentation'.

Mark scheme — 1 mark available

  • Dividing a market into groups of customers with similar characteristics / needs — 1 mark

Model answer

Dividing a market into smaller groups of customers who share similar characteristics and needs.

2. Exam question State 1 mark Foundation

State one way a market can be segmented.

Mark scheme — 1 mark available

  • Any one of: location; demographics; lifestyle; income; age — 1 mark

Model answer

By age.

3. Exam question Outline 2 marks Foundation

Outline one way a holiday company could segment its market.

Mark scheme — 2 marks available

  • A method identified: location / demographics / lifestyle / income / age — 1 mark
  • Developed in the context of a holiday company — 1 mark

Model answer

By income (1), offering cheap package holidays for customers on lower incomes and luxury holidays for high earners (1).

4. Exam question Explain 3 marks Foundation

Explain one benefit to a business of segmenting its market.

Mark scheme — 3 marks available

  • A benefit identified, e.g. better meets needs / targeted marketing / identifies gaps / higher sales — 1 mark
  • First linked point of explanation — 1 mark
  • Second linked point of explanation — 1 mark

Model answer

It can target its marketing more effectively (1). By knowing which segment it is selling to, the business can advertise only where those customers will see it (1). This means it wastes less money on promotion to people who will not buy, so its marketing costs are lower for each sale made (1).

5. Exam question Analyse 6 marks Core

Source: Leon has opened a small gym in a town with a large university and a growing number of retired residents. He wants to attract more members, and is thinking about offering separate memberships for different groups of customers. Analyse the benefits to Leon of segmenting his market.

Mark scheme — 6 marks available

  • AO2 (Application, 3 marks): uses the context - university students, retired residents, gym memberships — Level 1-3
  • AO3a (Analysis, 3 marks): chains of reasoning showing how segmentation benefits Leon — Level 1-3

Model answer

Segmenting by age would let Leon meet the different needs of his two main groups. Students may want cheap memberships and late opening, while retired residents may prefer daytime classes and a quieter gym. By designing a membership for each, both groups are more likely to join, which increases his total number of members and revenue. Segmenting would also help Leon target his promotion. He could advertise student deals on social media and at the university, and advertise daytime classes in local newspapers and community centres. This means he spends his limited marketing budget where each segment will actually see it, rather than wasting money on adverts that reach the wrong people.

6. Multiple choice 1 mark Foundation

What is a market segment?

  1. A A business's share of total sales
  2. B A group of customers with similar characteristics and needs Correct
  3. C A method of secondary research
  4. D A competitor's product

Why: A segment is a smaller group of customers within a market who have similar characteristics and needs.

7. Multiple choice 1 mark Core

A company sells clothing designed for people who enjoy hiking and camping. Which method of segmentation is it using?

  1. A Location
  2. B Income
  3. C Lifestyle Correct
  4. D Age

Why: Hiking and camping are hobbies and interests, so this is lifestyle segmentation.

8. Multiple choice 1 mark Core

A hotel chain offers budget rooms, standard rooms and luxury suites. Which method of segmentation is this?

  1. A Income Correct
  2. B Location
  3. C Age
  4. D Demographics

Why: Offering different price levels targets customers with different incomes.

9. Multiple choice 1 mark Stretch

Which one of the following is a benefit of market segmentation?

  1. A It removes all competition from the market
  2. B It means the business sells to every customer in the market
  3. C It guarantees the business a profit
  4. D It lets the business target its marketing and waste less money Correct

Why: Knowing its target segment lets a business advertise where those customers will see it, so less money is wasted.