Market segmentation is the process of dividing the total market into groups whose members have similar needs and wants. Marketers don’t create market segments, they just identify them. When identifying market segments, be sure that you are not merely identifying a sector. If you segment customers based on their age and income, you might find that within that sector customers can have very different wants. At this point you have only identified a sector. You will need to further divide this group to identify segments to be more effective as a marketer. For example you may decide that you need to further divide the sector into male and female groups because there is a difference in their needs and wants for the product or service you are offering. However, if there is no identifiable difference, there is no need to segment further.

There are different approaches for segmenting markets and the approach you take depends on what you are selling. There are three main types of descriptors, or characteristics: geographic, demographic and psychosocial. This chart shows some of the ways you can segment the market. Not all of these will apply to your business. For example, if you have determined that a person’s occupation has little or no bearing on the amount of bread that they consume, and you sell bread, you do not need to segment the market in this way. Since people within the same demographic group can exhibit very different psychographic profiles, examining psychographic elements is critical.

Criteria for Evaluating Market Segments
For a segment to be practical it should be evaluated against the following six criteria.

Retail Strategy

A retail strategy is composed of three elements (1) target market (2) retail format and (3) competitive advantage tactics. As outlined in the book Retailing Management, Fifth Edition by Michael Levy and Barton A. Weitz
(McGraw-Hill/Irwin), in the apparel market, the style of the clothes might be segmented into three categories: conservative, traditional (classic) and fashion-forward. From the above chart you might be able to determine that that a person’s age has a bearing on the type of clothing styles they prefer. For example, middle age people might prefer classic styles while a slightly younger group might prefer clothing that is more fashion-forward. The type of customer who is interested in fashion-forward clothing might be more innovative or early adapters who are conscious of social status, and willing to take some risk.

Target Market

Target marketing is marketing directed toward a particular market segment or segments. This is in contrast to mass marketing which offers a product to the entire market. A firm makes a decision to target a particular market segment based on that segment’s attractiveness and the fit between the market segment and the firm itself. The market’s attractiveness depends on it’s size, profitability and growth. The existing competition in the market will influence it’s profitability. Market research is often necessary to obtain the attractiveness of a market segment. How does the market segment fit with the organization’s objectives, resources and capabilities? If there is no fit, then the market segment in question should not be targeted. Perhaps there is another segment that would be more appropriate.

Demographics and Age

In the book, Boom Bust & Echo 2000, David K. Foot and Daniel Stoffman explain the importance of analyzing demographics to help explain many of the trends in consumer behavior, economics, social mores and public policy. The basic premise is that people change as they get older. As time passes, we all get older. The United States and Canada have populations that on average are getting older. These stage of life changes bring about changes in our attitudes, desires, shopping habits and careers. Baby boomers make up a large part of the population. David Foot divides these age groups into cohorts. The first cohort was born in 1914 or earlier. The second cohort was born between 1915 and 1919. The third cohort was born between 1920 and 1929. The forth cohort was born between 1930 and 1939. The fifth cohort was born during the Second World War between 1940 and 1946. The sixth cohort was the baby boom born between 1946 and 1964 in the United States and between 1947 and 1966 in Canada. Generation X (Gen-X) is the group of people born at the end of the baby boom, and are in fact baby boomers, despite the media confusion out there that sometime claims that Generation X are the baby bust generation. The characters of Douglas Copeland’s novel, Generation X, were born in the early 1960’s. In Canada, the seventh cohort was born between 1967 and 1979. This is the baby bust. In the USA, they were born between 1965 and 1979. The baby-boom echo are the children of the boomers. They were born between 1980 and 1995.

Age, Price and Quality in Retail As a retailer, you can target whichever market you decide to target. Regardless of which market you target, it is helpful to take a look at the baby boom and echo markets since they are of a significant size. What does a large group of baby boomers that are in their 40’s, 50’s and early 60’s want? What about the smaller echo generation that is now in their 20’s? As people move through their lives, their consumer needs and wants change. Generally speaking, people in their 20’s want low prices because they don’t have a lot of money. They may have student loans to pay back. After that, they are saving up money to buy real estate, appliances, furniture and cars. They also are starting families. People in their 40’s and 50’s want good quality and good service. They generally already have most of their household needs. In a world of limited resources, it’s not realistic to expect all three: low price, high quality and excellent service. You might expect two out of the three. Baby boomers have more money than time and are willing to pay more than the lowest price for good quality products and good service. Once service aspect that boomers don’t have much patience for is a retailer that wastes their time or a retailer that is not courteous. A person in their 20’s is more willing to shop around for the best price on an item, wait in line to get it, bring it home, assemble it if necessary and return it if it has a defect. Baby boomers aren’t so willing.

Baby Boom

The baby boom and echo cohorts have altered the face of retail. According to David Foot and Daniel Stoffman in their book Boom Bust & Echo 2000, the 1990’s saw a transformation in the retail segment that responded to the general shift from a young market to a middle age market, largely caused by the aging of the baby boomers. The type of stores that the middle aged market frequent began to change. As a result, some stores that competed solely on price began to either disappear completely or make changes. One example of a store that specialized in low prices and had low service levels was Consumers Distributing. Smaller stores that offer experienced, knowledgeable staff, attractive decor and a more relaxed atmosphere began to thrive more than previously. You can expect this trend to continue during the coming years. Since the echo cohort currently is in their 20’s and late teens, they will more likely be shopping in stores that offer the best price. They are more willing to shop around for low prices. There are a couple of significant differences between the echo cohort and the boomers when the boomers were in their 20’s, depending on their situation. Many of the echo generation are much more brand conscious, they are more Internet and computer savvy, and they have more money. They are more brand conscious because of the amount of advertising they have been exposed to. They are more computer savvy because they grew up with home computers, and they have more money because the fertility rate has declined in recent years. The parents of the boomers had more children per family than the boomers had. This leaves more family income available per child. The echo cohort is therefore more likely to know exactly what type and brand of product they want and at which price, than the boomers were. Today, there is even more variety of products to choose from than in previous decades and many of the echo cohort are aware of them. In terms of the apparel industry, many in the echo cohort are interested in brand name products and even designer fashions, more so than their parents were.

Age and Apparel Retailing

As people approach middle age, their tastes and preferences in clothing changes. First of all, most take a larger size than they once did. They have less desire and less time to spend in the shopping malls to find the ultimate outfit. They become more interested in comfort. Clothes that have material that stretches are more appealing. Also, they may be less interested in spending money on clothes than when they were in their late 20’s, depending on their situation. Middle aged people may be less interested in the latest trends in fashion and more interested in classic styles. They are more likely to start shopping in a higher-priced, higher-service boutique than in a large franchised shopping mall store. They are more likely to pay for custom-fit clothing. These changes in taste and preferences happen to many of us when we move into middle age. As a retailer, if you are targeting the baby boom segment of the market, you will sell more merchandise if you paid attention to the wants and needs of your customers than if you just operated on an uninformed trial and error basis. As always, listen to your customers and provide them with what they want.

Machine Learning

If you have data available about your market, you might want to try a machine learning technique called clustering to group your customers. How would you do that? Two methods are K-means and DBSCAN. DBSCAN stands for density-based spatial clustering of applications with noise. There are of course other clustering algorithms, such as hierarchical DBSCAN (HDBSCAN), agglomerative clustering, BIRCH (balanced iterative reducing and clustering using hierarchies), mean-shift, affinity propagation, and spectral clustering. We also have A Gaussian mixture model (GMM) is a probabilistic model that assumes that the instances were generated from a mixture of several Gaussian distributions whose parameters are unknown. All the instances generated from a single Gaussian distribution form a cluster that typically looks like an ellipsoid.