What Is Market Segmentation?

Market segmentation is a marketing term that refers to aggregating prospective buyers into groups or segments with common needs and who respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.

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Market Segmentation

Understanding Market Segmentation

Companies can generally use three criteria to identify different market segments:

  1. Homogeneity, or common needs within a segment
  2. Distinction, or being unique from other groups
  3. Reaction, or a similar response to the market

For example, an athletic footwear company might have market segments for basketball players and long-distance runners. As distinct groups, basketball players and long-distance runners respond to very different advertisements.

Market segmentation is an extension of market research that seeks to identify targeted groups of consumers to tailor products and branding in a way that is attractive to the group. The objective of market segmentation is to minimize risk by determining which products have the best chances for gaining a share of a target market and determining the best way to deliver the products to the market. This allows the company to increase its overall efficiency by focusing limited resources on efforts that produce the best return on investment (ROI).

Companies can segment markets in several ways:

  • Geographically by region or area
  • Demographically by age, gender, family size, income, or life cycle
  • Psychographically by social class, lifestyle, or personality
  • Behaviorally by benefit, use, or response

The objective is to enable the company to differentiate its products or message according to the common dimensions of the market segment.

Market segmentation allows a company to increase its overall efficiency by focusing limited resources on efforts that produce the best return on investment (ROI).

Examples of Market Segmentation

Market segmentation is evident in the products, marketing, and advertising that people use every day. Auto manufacturers thrive on their ability to identify market segments correctly and create products and advertising campaigns that appeal to those segments.

Cereal producers market actively to three or four market segments at a time, pushing traditional brands that appeal to older consumers and healthy brands to health-conscious consumers, while building brand loyalty among the youngest consumers by tying their products to, say, popular children's movie themes.

Key Takeaways

  • Market segmentation seeks to identify targeted groups of consumers to tailor products and branding in a way that is attractive to the group.
  • Markets can be segmented in several ways such as geographically, demographically, or behaviorally.
  • Market segmentation allows a company to focus its resources on efforts that can be the most profitable.

A sports-shoe manufacturer might define several market segments that include elite athletes, frequent gym-goers, fashion-conscious women, and middle-aged men who want quality and comfort in their shoes. In all cases, the manufacturer's marketing intelligence about each segment enables it to develop and advertise products with a high appeal more efficiently than trying to appeal to the broader masses.