Chapter 35 · Market Segmentation
Learn how businesses divide markets into customer groups, use geographical, demographic and lifestyle segmentation, and select the customers they can serve most effectively.
Learning objectives
- Understand how businesses use market segmentation to target customers.
- Understand the different methods of segmentation: location, demographics (including income and age) and lifestyle.
- Apply the ideas to the example’s Accor, Toyota and JQBC cases and judge the benefits for businesses.
What Is Meant by Market Segmentation?
Customers in the same market do not necessarily want identical products. They may have different incomes, live in different places, belong to different age groups or have different interests. Market segmentation means dividing a market into smaller groups of customers with similar characteristics or needs. A business can then design and market a product or service for one or more of those groups.
There are three broad approaches to serving market segments. A firm may specialise in one segment, supply different products to several segments, or make products intended for almost all consumers. The correct choice depends on demand, competitors, the firm’s resources and its objectives.
- One market segment: Rolls-Royce Motor Cars, which targets wealthy customers seeking luxury cars.
- Several segments: Accor operates hotel brands at different prices and service levels to appeal to different travellers.
- Nearly all consumers: broad food brands, such as Heinz in this example example, may aim their products at a mass market.
Example: Accor
Accor, the hotel chain based in Paris, as having 19 hotel brands serving different customer groups. Rather than treating every traveller the same, its brands offer different combinations of price, service, comfort and luxury. The following historical brands illustrate different hotel market segments:
| Accor hotel brand | lesson description | Indicative room price in the book |
|---|---|---|
| Hotel F1 | One-star, low-cost, basic accommodation and amenities | From about €19 per night |
| Mercure | Comfortable, welcoming rooms with quality furniture | From about €60 per night |
| Pullman | Four- and five-star hotels for sophisticated, well-connected travellers | From about €120 per night |
| Raffles | High-end, distinctive hotels offering exceptional luxury | About €800+ for Raffles Singapore |
This is an example of market segmentation by income, lifestyle and expectations of service. A budget traveller may value low prices and basic facilities, while a luxury traveller may pay much more for exclusivity and service. Accor could attract a wider range of customers without forcing everyone into one standard hotel product.
If Accor offered only its top-end luxury hotels, it could lose customers who want inexpensive accommodation. If it offered only budget hotels, it might miss profitable opportunities among affluent travellers. Managing several brands, however, also increases marketing and operational complexity.
Segmentation is useful because customers with similar needs may respond in similar ways to particular products or promotions. But no customer fits perfectly into one category: for example, a wealthy traveller might still prefer a low-cost hotel for a short stopover.
Methods of Market Segmentation
three main methods of segmentation: location (geographical), demographics and lifestyle (psychographic). They are different ways of identifying groups, and a business can combine them—for example, targeting environmentally concerned young professionals living in large cities.
Location (Geographical) Segmentation
Geographical segmentation divides customers according to where they live or buy goods and services. Countries, regions, cities, rural communities and local climates may create different needs.
- Climate: customers in very hot places, such as the Middle East in this example example, may need products different from those bought in cooler parts of Europe.
- Regional culture: tastes in food can vary between different regions of India.
- Urban versus rural: water-resistant footwear may be in greater demand in rural communities, while compact furniture may suit people living in smaller urban homes.
A clothing retailer could stock lighter clothes in a tropical region and winter coats in a colder area. The retailer may also use different promotions in different markets, making its spending more relevant to local buyers.
Geography alone may not explain every customer’s choices: two people in the same city may have different incomes, families and hobbies. Businesses therefore often combine location with another segmentation method.
Demographic Segmentation
Demographic segmentation divides customers according to characteristics such as age, gender, income, occupation, ethnic background and religion. These characteristics may help identify different needs, but they do not determine the preferences of every individual.
- Age: infants, teenagers, young adults and people over 65 often want different clothing, leisure activities or holidays. For example, toys and children’s TV are aimed at younger age groups.
- Gender: some businesses design and promote products differently for male and female customers, for example fashion and personal-care products. Individual preferences still vary widely.
- Income: people with different budgets may value different price and quality combinations. For example, Chanel sells luxury handbags, whereas Lidl offers lower-priced supermarket products.
- Social class: firms may group consumers by occupational or socio-economic category, using this as one possible indicator of spending patterns and preferences.
- Ethnic origin: culture and heritage may affect preferences for particular foods, clothing or services. Businesses should research actual demand rather than assume everyone in a community wants the same products.
- Religion: religious practices may create specific product requirements, including halal or kosher food and particular festival goods.
Table 35.1: Socio-economic Groups
A historical UK socio-economic classification grouped households mainly by occupation. Its categories were A, B, C1, C2, D and E. The percentages below are historical estimates, not current UK statistics. These broad categories should not be used to judge individuals.
| Grade | lesson category | Approx. UK share |
|---|---|---|
| A | Upper middle | 4% |
| B | Middle class | 12% |
| C1 | Lower middle class | 22% |
| C2 | Skilled working class | 33% |
| D | Working class | 19% |
| E | “The poor” (book’s historical label) | 10% |
For example, C2 includes skilled manual workers such as carpenters, plumbers, cooks and train drivers in this example. This group accounts for 33% in the illustrated distribution. The values add to 100% (4 + 12 + 22 + 33 + 19 + 10). A marketer might use this segmentation alongside location and lifestyle when planning advertising or choosing product specifications.
Example 1: Toyota
four Toyota vehicles to demonstrate why one manufacturer offers several products within the car market. In its historical case, Toyota sold 10.15 million vehicles in 2015 and offered a range of models suited to different requirements.
| Vehicle | lesson price (historical) | Potential customer segment |
|---|---|---|
| Prius | £24,115 | Drivers concerned about fuel use and environmental impact; hybrid power |
| Proace | £18,669 | Businesses or drivers needing a practical commercial vehicle |
| AYGO | £8,995 | City motorists seeking a small, inexpensive, easy-to-park car |
| Land Cruiser | £37,230 | Buyers needing a larger, higher-priced four-wheel-drive vehicle |
Toyota can use several criteria at once. The AYGO could appeal to drivers on a tighter budget and people living in crowded urban areas; the Land Cruiser could suit customers who want off-road capability. The Prius can appeal to customers with particular environmental or fuel-saving priorities. Different needs and lifestyles may matter more than age or income alone.
Using historical illustrative UK prices, the Land Cruiser costs £37,230 − £8,995 = £28,235 more than the AYGO. This gap supports the argument that the two models serve customers looking for very different specifications and budgets. The figures are not current vehicle prices.
Check your understanding · Halfway
Answer each question before selecting Show suggested answer to check your understanding.
Define market segmentation and explain why different customers may need different products.
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Market segmentation divides a market into customer groups with similar characteristics or needs. People have different budgets, lifestyles, locations and preferences, so one product may not satisfy everyone.
Explain how Accor targets different market segments using the Hotel F1 and Raffles brands.
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Hotel F1 offers inexpensive, basic accommodation for more price-sensitive travellers, while Raffles provides high-end luxury and service for customers prepared to pay much more. Accor differentiates price and service level for different needs.
Give two examples of geographical segmentation in this example and explain each.
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A retailer may offer clothing suited to a hot Middle Eastern climate rather than cold Germany; another may offer compact furniture for city homes and waterproof boots for rural customers. Location changes likely needs.
List four demographic characteristics businesses may use to segment their markets.
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Examples include age, gender, income, social class, ethnic origin and religion. Any four are acceptable.
According to Table 35.1, which socio-economic grade includes skilled manual workers, and what percentage of the UK population did the historical estimate for that group?
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C2 as skilled working class, representing approximately 33% in its historical table.
Using the Toyota example, explain why the AYGO and Land Cruiser are aimed at different customer groups.
Show suggested answer
The AYGO is small, relatively inexpensive and easy to park, appealing to city drivers and price-sensitive buyers. The Land Cruiser is a much higher-priced four-wheel-drive vehicle for buyers wanting more space, capability or comfort. Customer needs and budgets differ.
Lifestyle (or Psychographic) Segmentation
People who are alike in age, gender and location can still have very different interests. Psychographic segmentation groups customers by lifestyle, hobbies, attitudes, tastes and interests, which can reveal needs not visible from demographics.
- Sport enthusiasts: television channels may be designed for people who enjoy particular sports.
- Fine dining: restaurants may target people who enjoy sophisticated menus, high-quality ingredients and fine wines.
- Adventure travel: holiday providers may target customers who like taking risks, exploring and trying new experiences.
- Environmental concern: organic food may appeal to buyers interested in how farming affects the environment.
an example of two young women aged 18–30 living in Berlin. Despite being the same age, gender and location, their spending patterns may be entirely different. Segmentation by lifestyle can reveal these differences and allow a business to offer products and promotions better suited to each customer.
A specialist outdoor-tour operator could use adventure interests and preferred activities to reach its likely customers. Simply advertising to every person aged 18–30 in a city might waste more money because many people in that demographic do not want adventure holidays.
Benefits of Market Segmentation
Market segmentation helps firms design products, prices and promotions that fit the needs of particular customer groups. four especially important benefits. Whether these advantages outweigh the additional costs depends on the size of the segment, the level of competition and the business’s resources.
- Higher revenue from different customer groups: businesses can sell different versions or levels of service at different prices. Airlines illustrate this by offering economy, business and first-class travel. For example, historical London–Dubai fares were approximately £450 for economy and over £3,000 for first class.
- Greater customer loyalty: a product carefully tailored to a segment may meet its needs better. Savile Row tailors making individually designed suits for affluent customers as an example.
- Less wasted promotion: businesses can target advertising at likely buyers instead of paying to reach everybody. A sports magazine, for example, is better promoted to golfers or sports enthusiasts than to an entirely random audience.
- Wider overall customer coverage: one firm can operate several products for different segments. Accor’s hotel brands illustrate how serving different groups can create more sales opportunities.
Segmentation also involves trade-offs. Designing several products, maintaining separate brands and researching many customer groups can increase costs. If a segment is too small, the business might not sell enough to cover these expenses. Some categories overlap, and customer tastes can change.
A traveller who primarily wants a low price may choose an economy ticket, while another is willing to pay extra for more space, comfort or flexibility. Offering several fare classes lets an airline serve different budgets. But each class requires appropriate service, staffing and operating costs.
Large vs Small Businesses
Market segmentation matters to both large and small businesses, although they may apply it differently.
- Small businesses: a limited budget or specialist skill may encourage a business to focus on a niche market. For example, a local bakery could sell specialised cakes to a well-defined customer group rather than compete with a whole supermarket range. The business can get to know its customers, but it may depend heavily on a small market.
- Large businesses: firms may have the finance, production capacity and research teams to serve many segments simultaneously. Accor’s hotel brands and Toyota’s different vehicles illustrate this. The advantage is wider coverage; the challenge is managing greater complexity and cost.
A smaller firm can still target several segments, and a large firm may choose to specialise in one segment. The key difference is the scale of resources available and which strategy best meets customer needs at an acceptable cost.
Segmentation is worthwhile when the firm can identify a customer group, understand its needs and serve it more effectively or profitably than a less-focused competitor. It should not divide customers so narrowly that research and operating costs exceed the likely benefits.
End-of-chapter questions
Answer each question before selecting Show suggested answer to check your understanding.
What is lifestyle (psychographic) segmentation? Explain why age alone may not reveal a customer’s interests.
Show suggested answer
It groups consumers by activities, attitudes, interests and lifestyle. Two people of the same age may have completely different interests, such as sport versus fine dining, and therefore buy different products.
A sports television station promotes itself to sports enthusiasts rather than everybody. Identify the segmentation method and explain why it might be effective.
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It is psychographic/lifestyle segmentation. The promotion reaches people more likely to watch sports, so the business can reduce wasted advertising and attract suitable subscribers.
Using Table 35.1, calculate the combined estimated population share of categories A, B and C1.
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4% + 12% + 22% = 38%. These are historical estimates, not current UK statistics.
Why might a business combine geographical and demographic segmentation when designing its product range?
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Geography captures local climate, culture and urban/rural differences, while demographics capture age, income or other characteristics. Combining them can describe needs more accurately than either category alone, though it adds research complexity.
Use the Toyota case to calculate how much more the Land Cruiser (£37,230) costs than the AYGO (£8,995). What does this tell us?
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£37,230 − £8,995 = £28,235. The significant price difference is consistent with Toyota targeting customers with different budgets and vehicle requirements. The figures are historical.
Explain two advantages of market segmentation to a hotel chain such as Accor.
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It can match the hotel service and price to different guests, improving satisfaction and potentially loyalty. It can also increase overall revenue by attracting both budget and luxury travellers. The chain must still manage the costs of multiple brands.
Evaluate one possible disadvantage of selling several products to different segments.
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Each product may require separate research, promotion, operations or stock, increasing costs and managerial complexity. If demand for a segment is too small, the additional revenue may not cover those costs. The disadvantage is less severe if the firm has large economies of scale.
A broadcaster offers children’s programmes, live sports and lifestyle shows on separate channels. Identify one segmentation method for each channel.
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Children’s programmes target an age (demographic) segment; sports target an interest or lifestyle (psychographic) segment; lifestyle shows can target consumer interests and preferences. These segments may overlap.
A streaming service finds that 78% of its sports viewers are male. In a representative sample of 2,500 viewers, how many would this percentage represent?
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2,500 × 78 ÷ 100 = 1,950 viewers. The result assumes the sample reflects the observed proportion.
Explain how a retailer could use socio-economic groups to decide which product ranges and promotional methods to offer.
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The retailer could examine how occupation and spending power relate to customers’ needs, then offer different price points and channels. However, broad classifications can hide important differences within each group. Use recent research rather than relying on stereotypes.
Assess the benefits and risks of offering separate products for different market segments, making a justified recommendation.
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Segmentation can improve product fit, make promotion more efficient and attract customers with different needs. It can also increase research, production and marketing costs and create overlap between products. The best approach targets segments large and profitable enough to justify the extra expense.
Chapter 35 recap
Market segmentation divides customers into groups with similar needs or characteristics. Methods include geographical, demographic and lifestyle (psychographic) segmentation. Good segmentation can improve product fit, customer loyalty and advertising efficiency, although it may increase research and operating costs. Large firms may serve several segments while small firms often specialise in a niche. The best approach depends on customer needs and business resources.
Source reference: Pearson Edexcel International GCSE Business (9–1), Chapter 35. Historical figures are included for educational illustration. IGCSE360 is an independent learning website and is not affiliated with Pearson.