How Market Segments Work: Identification and Example

Market Segment

Investopedia / Ellen Lindner

What Is a Market Segment?

The term market segment refers to people who are grouped together for marketing purposes. Market segments are part of a larger market, often lumping individuals together based on one or more similar characteristics. Corporations and their marketing teams use various criteria to develop a target market for their products and services. Marketing professionals approach each segment differently, but only after they fully understand the needs, lifestyles, demographics, and personality of the target consumer.

Key Takeaways

  • A market segment is a group of people who share one or more similar characteristics.
  • Corporations and marketing teams use various criteria to develop target markets for their products and services.
  • The criteria for a market segment include homogeneity among the segment's main needs, uniqueness, and a common reaction to marketing tactics.
  • The reaction from market segments to marketing plans or strategies is typically very predictable.
  • Common market segment traits include interests, lifestyle, age, and gender.

How Market Segments Work

How Market Segments Work

A market segment is a category of customers who have similar likes and dislikes in an otherwise homogeneous market. These customers can be individuals, families, businesses, organizations, or a blend of multiple types.

Market segments are known to respond somewhat predictably to a marketing strategy, plan, or promotion. This is why marketers use segmentation when deciding on a target market. As its name suggests, market segmentation is the process of separating a market into sub-groups, in which its members share common characteristics.

To meet the most basic criteria of a market segment, three characteristics must be present:

  • there must be homogeneity among the common needs of the segment
  • there needs to be a distinction that makes the segment unique from other groups
  • the presence of a common reaction or a similar and somewhat predictable response to marketing is required

Common characteristics of a market segment include interests, lifestyle, age, gender, etc. Common examples of market segmentation include geographic, demographic, psychographic, and behavioral.

Companies that understand market segments can prove themselves to be effective marketers while earning a greater return on their investments.

Examples of Market Segments and Market Segmentation

The banking industry provides a very good example of how a company markets to specific market segments. All commercial banks service a wide range of people, many of whom have relatable life situations and monetary goals. If a bank wants to market to baby boomers, it conducts research and may find that retirement planning is the most important aspect of their financial needs. The bank can then market tax-deferred accounts to this consumer segment.

If the same bank wants to effectively market products and services to millennials, Roth IRAs and 401(k)s may not be the best option. Instead, the bank may conduct in-depth market research and discover most millennials are planning to have a family. The bank uses that data to market college-friendly savings and investment accounts to this consumer segment.

Sometimes a company already has a product but may not yet have its target consumer segment. In this scenario, it is up to the business to define its market and cater its offering to its target group. Restaurants are a good example. If a restaurant is near a college, it can market its food in such a way as to entice college students to enjoy happy hour rather than trying to attract high-value business customers.

How Are Market Segments Used?

Commonly used in marketing strategies, market segments help companies optimize their products and services to suit the needs of a given segment. Market segments are often used to identify a target market.

How Do You Identify Market Segments?

Broadly speaking, identifying a market segment requires the following three criteria. To start, the main needs of a sub-group must be homogenous. Second, the segment must share distinct characteristics. Finally, the segment produces a similar response to marketing techniques. Prospective buyers are grouped into various segments, often based on how much value they place on a product or service.

What Is an Example of a Market Segment?

Consider a company that markets health and beauty products to both men and women. These products, such as razors or skin care, are typically more expensive for women than they are for men. The product packaging also differs—products targeted to women having pinks and floral accents that align with gender stereotypes. On the other hand, the company's male-targeted products are characterized by more rugged blacks and greys. 

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