Step 1: Identify Market Segments

The first step in targeting markets is to separate customers who make up large, general markets into smaller groupings based on selected characteristics or variables (also referred to as bases of segmentation) shared by those in the group. General markets are most often associated with basic product groups, such as automobile, beverage, footwear, home entertainment, etc. The purpose of segmentation is to look deeper within the general market in order to locate customers with more specific needs within the product group (e.g., seek hybrid automobiles) AND who also share similar characteristics (e.g., college educated, support environmental issues, etc.). When grouped together these customers may form a smaller segment of the general market. By focusing market research on these smaller segments the marketer can learn a great deal about these customers and with this information can begin to craft highly targeted marketing campaigns.

For this tutorial, we take the approach that the variables used to segment markets can be classified into a three-stage hierarchy with higher stages building on information obtained from lower stages in order to reach greater precision in identifying shared characteristics. Yet, the more precise a marketer wishes to be with their segmentation efforts the more this process requires sufficient funding and strong research capabilities. For instance, a marketer entering a new market may not have the ability to segment beyond the first two stages since the precision available in Stage 3 segmentation may demand an established relationship with customers in the market.


The three-stage segmentation process presented below works for both consumer and business markets (e.g., manufacturers, reseller, etc.), though, as one might expect, the variables used to segment these markets may be different. Each segmentation stage includes an explanation along with suggestions for variables the marketer should consider. This is not meant to be an exhaustive list, as other variables are potentially available, but for marketers who are new to segmentation these will offer a good starting point for segmenting markets.

Target Markets and Market Segmentation
Stage 1 Segmentation Variables