Is the process of dividing the whole market into smaller groups that the business wants to serve?

Only a percentage of the general population will buy your products or use your services, so the more accurately you can focus on them, the less your efforts will be wasted. It is a good idea not to aim too widely with your targets, to avoid spreading your resources too thinly.

This guide aims to explain the basics of how to sort your customers into groups. It can help you understand what your customers really want and what you can offer them. It also explains how grouping your customers into market segments is a good foundation for winning and keeping profitable customers.

• Benefits of segmentation
• Customer management
• Approaches to segmentation
• Niche markets

Benefits of segmentation

Segmenting your customers into groups according to their needs has a number of advantages. It can help you to:

• identify your most and least profitable customers
• focus your marketing on the customers who will be most likely to buy your products or services
• avoid the markets which will not be profitable for you
• build loyal relationships with customers by developing and offering them the products and services they want
• improve customer service
• get ahead of the competition in specific parts of the market
• use your resources wisely
• identify new products
• improve products to meet customer needs
• increase profit potential by keeping costs down, and in some areas enabling you to charge a higher price for your products and services
• group your customers by factors such as geographical location, size and type of organisation, type and lifestyle of consumers, attitudes and behaviour

See our guides on how to target the right people in an organisation and how to know your customers' needs.

Customer management

Because your individual customers have differing needs, it will be easier to give them what they want if you divide them into groups sharing similar needs, and treat each group differently.

You can then:

• customise your products and services for each segment
• aim your marketing at each particular group, saving you time and money
• focus on your most profitable customers

Companies usually either target a large segment with many people in it or focus on a niche segment, which will have fewer people in it, but who they can serve well.

Many will try to meet the needs of several segments, but primarily they are aiming for a manageable number of segments with a good number of customers.

How you segment your customers will depend on whether you are marketing your products and services to:

• businesses or organisations - business-to-business or B2B
• individual consumers or households - business-to-consumer or B2C

B2B

If you are segmenting business markets, you could divide the market by:

• what they do - industry sector, public or private, size and location
• how they operate - technology, use of your products
• their buying patterns - how they place orders, their size and frequency
• how they behave - loyalty and attitude to risk

B2C

If you are segmenting consumer markets, you could group customers by:

• location - towns, regions and countries
• profiles - such as age, gender, income, occupation, education, social class
• attitudes and lifestyles
• buying behaviour - including product usage, brand loyalty and the benefits they seek from the product or service

Below is an example of how a computer manufacturer might segment customers to optimise its products and marketing mix, and so command a higher price.

For more advice, see our guides on how to know your customers' needs and identify and sell more to your most valuable customers.

Approaches to segmentation

To segment your customers, you will need to use variables, such as:

• an organisation's sector, size, location and buying patterns
• an individual's age, gender, lifestyle, region, buying behaviour and attitudes

Some businesses use vertical segmentation - selecting particular industries or professions to whom their product or service is likely to appeal. You can also use horizontal segmentation, such as selecting only one job title across a range of organisations.

Market research

To find out about their customers, many businesses conduct market research. There are two main types:

• original research - which involves contacting your customers, and which will give you detailed information about them
• desk research - using published market reports and statistics covering general markets

The main ways of carrying out original research are by:

• face-to-face interviewing
• telephone
• mail
• email or web surveys
• focus groups

Once you have carried out your research, you can then adapt your marketing to reach customers and deliver the products and services they want.

Once you have identified the segments, you can profile customers within them. For example:

Niche markets

Segmenting your customers can help you to identify a niche market - a specific, well-defined area of your market that may be overlooked by competitors.

How to find a niche market

It is a good idea to look more closely at your markets, in order to:

• identify whether there are any market segments that are not well covered at the moment
• think of ways in which you can offer products or services to fit the individual needs of these segments

How to exploit a niche market

To maximise sales to any niche markets you might have identified you should:

• do your research to find out if such a niche exists and how it could best be served
• try to find out as much as you can and develop expertise in the niche market

Remember that going into niche markets can be a risky business:

• make a business case before you try to enter a niche market
• be on your guard for reaction from competitors already operating in the niche
• monitor the market and be prepared to move to another niche

For more advice, see our guides on how to create your marketing strategy and how to know your customers' needs.

Original document, Segment your customers, © Crown copyright 2009
Source: Business Link UK (now GOV.UK/Business)
Adapted for Québec by Info entrepreneurs

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Is the process of dividing a market into small groups?

What do you call a process of dividing of the market into groups of people with similar needs?

What is the process of dividing a total market into smaller groups seeking similar needs and wants from a product or service?

What do you call the process of dividing a large market into smaller parts?