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Little of what is best in marketing theory and practice works without correct market segmentation. It is one of the most fundamental concepts in marketing and your choice of which approach to adopt will directly affect the impact of segmentation on your business.

Market segmentation, correctly applied, is about understanding the needs of customers and, therefore, how they decide between one offer and another. This insight is used to form groups of customers who share the same or very similar value criteria. A company is then able to determine which groups of customers it is best suited to serve and which product and service offers will both meet the needs of its selected segments and outperform the competition.

The primary objective of segmentation, therefore, must be how to win and retain the customers you want to serve. This underpins the approach taken by The Market Segmentation Company (tMSC).

'Market Segmentation' definition

The process of splitting customers, or potential customers, in a market into different groups, or segments, within which customers share a similar level of interest in the same or comparable set of needs satisfied by a distinct marketing proposition.

Marketing proposition; the 'tools' or means available to the organization to improve the match between benefits sought by customers and those offered by the organization so as to obtain a differential advantage. Often referred to as the four Ps, this is usually the appropriate mix of product features, price, promotion and place (service and distribution). For the customer, this manifests itself as benefits, cost, relevant image and convenience; in other words, a customer value proposition.

A customer's view of segmentation - meet my needs!

Customers segment themselves and take no notice of how companies segment their market(s). When choosing between competing products and services, customers select the proposition that meets their needs better than any other. To win market share, therefore, a company must ensure that their offers meet these needs better than any other at a price they perceive as providing superior value for money (which does not necessarily mean it has to be the cheapest). As this is how customers operate in a market, then a segmentation project should have these as its segmentation criteria.

On its own this approach to segmentation, while able to provide you with an invaluable insight into how to win a customer's business, still requires you to know how to reach them. The input to this part of a winning proposition, provided by a detailed understanding of who the customers are and where they are to be found, is clearly very important and plays a crucial part in our segmentation process. In addition, by really understanding what underpins a customer's choice we gain an insight into their motivations, which will lead you to understand what promotional stance to take.

Interestingly, all the reputable marketing books and marketing courses which look at the alternative approaches to segmenting markets include 'needs-based' segmentation (sometimes called 'benefit' segmentation) in their reviews. They also conclude that 'needs-based' segmentation is by far the most successful approach. This is the approach taken by The Market Segmentation Company, for which we have developed a series of practical steps, tried and tested in numerous markets around the world, and incorporated into our segmentation process.

Alternative approaches to market segmentation

Some of the alternative approaches to segmentation found in many marketing textbooks and followed by numerous companies around the world are listed below. A brief comment appears for each of them. Please select any you would like to review, and compare them with The Market Segmentation Company's approach - market segmentation by customer needs.

1. Segmentation by products and services

2. Segmentation by demographics/firmographics

3. Segmentation by geography

4. Segmentation by channel

5. Segmentation by psychographics

6. Segmentation by customer needs - The Market Segmentation Company's approach (it's also how customers segment themselves)

Segmentation by products and services

There are three issues to consider here:

1. By solely looking at the products or services bought you may be ignoring other aspects of the purchase which are important to the customer. This often includes, for example, the convenience of sourcing the item (often associated with the preferred distribution channel), or even the reputation of the channel they are buying it from (I buy it because 'Retailer XYZ' stocks it and I trust their choice).

2. By looking at the product or service as a whole there is a danger that you may be overlooking what in particular is attracting the customer to one offer as opposed to another. Understanding the particular features customers use to discriminate between competing offers will help you do this.

3. However, in choosing between competing products or services and their associated features, customers make their decision based on which offer best satisfies their needs. Segmentation cannot, therefore, be left at the product/service level, it has to be taken one step further. This additional step is to understand what it is that the customer is really trying to achieve from the particular features they choose. The expression, 'don't sell the features; sell the benefits' captures this essential extra step.

The products and services produced (and the distribution channels used) are a company's attempt to ensure they win profitable customer business, both now and in the future. Product/service preferences provide a crucial input into segmentation but in a supportive role rather than a determining role. These preferences are best used to help identify the real buying criteria of customers (see customer needs).

Segmentation by demographics/firmographics

('Firmographics' is sometimes used when referring to 'demographics' in business-to-business markets.)

The demographic/firmographic approach assumes that customers differ according to some criteria about either themselves or about the company they work in. So, every 30-35-year-old can be targeted with the same offer or everyone who works in a particular industry or in a company