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Market Segmentation
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Teaching Business
Market Segmentation
A clear guide to market segmentation, covering how businesses divide markets into groups of customers with similar needs, characteristics and buying behaviour.
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Created by an experienced Head of Business and examiner
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KEY POINTS
Market segmentation means dividing a market into groups of customers with similar needs or characteristics.
Businesses use segmentation to understand customers more clearly and target them more effectively.
Common segmentation methods include age, gender, income, lifestyle, location and behaviour.
Segmentation can help a business design products that better match customer needs.
Segmentation can also help a business choose suitable prices, promotional methods and distribution channels.
A target market is the specific customer group a business aims its product or marketing at.
Segmentation can make marketing more effective, but it may increase costs if different groups need different products or campaigns.
Strong segmentation helps a business avoid treating all customers as if they want the same thing.
KEY DEFINITION
Market Segmentation
Market segmentation is the process of dividing a market into groups of customers with similar needs, characteristics or buying behaviour.
Main Explanation
Market segmentation is the process of dividing a market into smaller groups of customers with similar needs, characteristics or buying behaviour. Instead of treating all customers as the same, a business uses segmentation to understand what different groups of customers want.
Segmentation is important because customers often have different needs. For example, younger customers may value low prices and convenience, while higher-income customers may be more interested in quality, service or brand image. A business that understands these differences can make better marketing decisions.
One common method is demographic segmentation. This divides customers by factors such as age, gender, income, family size or occupation. For example, a business selling clothing may create different products for teenagers, young professionals or older customers.
Geographic segmentation divides customers by location. This could include country, region, town, climate or urban and rural areas. A business may sell different products or use different marketing messages depending on where customers live.
Psychographic segmentation focuses on lifestyle, personality, interests, values and attitudes. This can be useful when customers buy products that reflect their identity or lifestyle, such as fitness clothing, environmentally friendly products or premium technology.
Behavioural segmentation divides customers according to how they act. This may include spending habits, brand loyalty, usage rate, benefits sought or response to promotions. For example, a business may target loyal customers with rewards, while new customers may receive introductory offers.
Segmentation helps businesses choose a target market. A target market is the specific group of customers that a business aims its product or marketing at. Once the target market is clear, the business can adapt its product, price, place and promotion to suit that group.
Market segmentation can improve marketing effectiveness because messages can be more relevant to customers. It may also help a business reduce wasted spending by focusing on the customers most likely to buy. However, segmentation can increase costs if a business creates different products, packaging or campaigns for too many groups.
Strong exam answers explain how segmentation affects business decisions. It is not enough to say that segmentation helps a business know its customers. You should explain how this knowledge improves decisions about products, pricing, promotion, place, customer satisfaction and competitiveness.
✎ EXAMINER TIP
Students often define segmentation but do not explain how it improves marketing decisions. Strong answers link the chosen segment to product, price, place, promotion and customer needs.
KEY FORMULAS(s)
Profit and Profitability Formulas
These key formulas help you calculate different profit measures and profitability ratios used in business.
Gross Profit
Gross profit = Revenue − Cost of sales
The profit made after deducting direct costs.
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Remember: profit shows how much money has been made, while profitability shows how efficiently revenue is being turned into profit.
DATA TABLE
Income Statement for North Coast Coffee Ltd
This statement shows how revenue is converted into gross profit, operating profit and net profit.
Revenue
£250,000
Output
Fixed Costs
Variable Costs
Total Costs
Revenue
Profit / Loss
0 candles £1,200 £0 £1,200 £0 -£1,200
Net profit is the final profit remaining after all costs and expenses have been deducted from revenue.
Comparing Customer Segments
This chart compares different customer segments and shows how their needs may vary by price sensitivity, product features, convenience and promotional message.
WORKED EXAMPLE
Worked Example: North Coast Coffee
How many coffees must be sold to break even?
Fixed Costs
£1,800
equity + long-term debt
Break-even output = Fixed costs ÷ Contribution per unit
Contribution per unit = Selling price − Variable cost
£3.50 − £1.10 = £2.40
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Step 1: Calculate contribution
£3.50 − £1.10 = £2.40
Contribution per unit is the amount each coffee contributes towards fixed costs.
BREAK-EVEN OUTPUT:
750 coffees per month
EXAM TIP
Always explain what the number means for the business. Do not just calculate the break-even point.
Types of Market Segmentation
This diagram shows the main ways businesses segment markets, including demographic, geographic, psychographic and behavioural segmentation. It explains how each method helps a business understand customer groups more clearly.
APPLICATION
Spotify
Spotify is a useful real-world example for understanding market segmentation because it offers different ways for customers to access music and audio content. Customers do not all have the same needs, so Spotify can use segmentation to target different groups more effectively.
One segment may be individual users who want their own account and are willing to pay for ad-free listening and extra features. Another segment may be students, who may have lower disposable income and may respond more strongly to a discounted student plan.
Spotify can also target households or couples through plans designed for more than one person. This recognises that some customers want better value when several people in the same home use the service. Different plans help Spotify appeal to different customer groups without offering only one standard option.
Segmentation can also affect promotion. Students may respond to messages about affordability, while families may respond to convenience and shared access. Individual users may be more interested in personalisation, music discovery and listening without adverts.
This example shows why segmentation matters. By understanding different customer groups, Spotify can adapt its pricing, product features and promotional messages to match customer needs more closely.
This independent educational case study is not affiliated with, endorsed by or sponsored by Greggs plc. Any financial figures used alongside this example should be treated as simplified or hypothetical estimates created for teaching purposes.
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ANALYSIS
EXAM FOCUS
Analysis questions require you to examine a business concept or issue in detail, breaking it down into its component parts. You should explain how and why something happens and consider its impact on the business.
How to Approach Analysis Questions
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Identify the key issue or concept
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Break it down
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Explain how and why
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Reach a reasoned conclusion
Read the question carefully and highlight the focus of the analysis.
Consider the different factors, causes or impacts related to the issue.
Provide clear explanations using business terms and links points to context.
Evaluate the overall implications for the business.
Example Analysis Question
North Coast Coffee is considering using break-even analysis before opening a second café.
Advantages
• Sales forecasts may be inaccurate.
• Assumes costs and revenue remain constant.
• External factors may reduce reliability.
• Ignores qualitative business factors.
Disadvantages
• Sales forecasts may be inaccurate.
• Assumes costs and revenue remain constant.
• External factors may reduce reliability.
• Ignores qualitative business factors.
Key Exam Tip
If you find it difficult to expand your answer and show the type of depth that an examiner is looking for in a top response, consider using the 'so what' approach.
Tesco carry out market research - so what? - this allows them to better understand customer needs - so what? as a result Tesco can provide goods more likely to sell - so what? - this will increase Tesco profit and ensure higher levels of customer satisfaction - so what? this means that customers are likely to become more loyal to Tesco.
Avoid These Exam Traps
Students often lose marks on calculation and analysis questions by making these mistakes. Watch out for them in your exam!
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Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
2
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
3
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Be precise. Read the question carefully. Show your working.
Small mistakes can cost big marks.
EXAM PRACTICE
Practice Question
Apply your knowledge of profit and profitability to answer this exam-style question.
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MINI CASE STUDY
North Coast Coffee Ltd is a premium coffee business which sells freshly roasted coffee beans through its online store and a small chain of independent cafés. The business has experienced strong sales growth due to increasing demand for high-quality speciality coffee products.
The business generates annual revenue of £250,000. Its cost of sales, including coffee beans, packaging and direct production costs, totals £100,000. North Coast Coffee Ltd also faces operating expenses of £80,000, including marketing, employee wages, rent and administration costs. In addition, the business pays £20,000 in interest and taxation each year.
The owner, Mia Thompson, is reviewing the company’s profitability because rising wage costs and increased competition in the premium coffee market have started to place pressure on operating profit margins. She is considering increasing prices slightly in order to protect profitability while still maintaining customer demand.
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EXAM QUESTION
Analyse the possible reasons for BrightBite’s falling profit margins and evaluate strategies it could use to improve profitability.
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HOW TO ANSWER
P
Point
E
Explain
A
Apply
C
Consequence
H
However...
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MODEL ANSWER
P
Point
Increasing prices could improve the profitability of North Coast Coffee Ltd because each sale would generate a larger amount of revenue and potentially increase profit margins.
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EXAMINER TIP
For full marks, make sure you analyse causes rather than just listing them, and evaluate realistic strategies with clear judgement. THINK: Which strategy would have the biggest impact and why?
CALCULATOR
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Market Segmentation
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