What is Market Segmentation?

Market segmentation is a marketing strategy that involves dividing a broad target market into subsets of consumers who have common needs and applications for the relevant goods and services. Depending on the specific characteristics of the product, these subsets may be divided by criteria such as age and gender, or other distinctions, like location or income. Marketing campaigns can then be designed and implemented to target these specific customer segments.

One of the main reasons for using market segmentation is to help companies to better understand the needs of a specific customer base. Mass marketing assumes that all customers are the same and will respond to the same advertising. By looking at ways in which potential customer groups are different from each other, the marketing message can be better targeted to the needs and wants of those people.

Often, dividing consumers by clearly defined criteria will help the company identify other applications for their products that may not have been obvious before. These revelations often help the company target a larger audience in that same demographic classification, improving market share among a specific base. Segmenting the market can also serve to identify smaller groups of people who make up their own, previously unknown subsets, further improving the overall efficiency of the company's marketing efforts.

According to experts, in order to be a good market segment, a group should meet five criteria:

Market segmentation strategies that meet these criteria can cover wide range of consumer characteristics. Subsets may be defined by basic demographics like age, race, or gender, for example. Other qualities, like educational background or income can also be used, as can location. Some of the potentially most powerful variables by which to segment a market are behavioral ones, including social class, lifestyle, and interests.

In most scenarios, there will be at least a few established customers who fall into more than one category, but marketing strategists normally allow for this phenomenon. In fact, the overlap in criteria among consumers often leads to additional segmentation and requires adjusted marketing strategies. A marketing plan that targets people who fall into several groups — like women over 30 who earn a high income, for example — may be more successful than one that focuses on just one limited characteristic.

Along with playing a role in the development of new marketing approaches, market segmentation can also help a company identify ways to enhance customer loyalty with existing clients. As part of the process of identifying specific groups within the larger client base, the company will often run surveys which encourage customers to suggest ways of improving the company's products or services. This may lead to changes in packaging or other similar cosmetic changes that do not necessarily impact the core product, but sometimes making a few simple changes in the appearance sends a clear message to consumers that recognizing their needs is as important to the company as making sales. This demonstration of good might go a long way to strengthen the ties between the consumer and the producer.

Market segmentation is not only beneficial to the manufacturer or retailer, but can also have benefits to a consumer as well. People in a particular market segment may get special deals on products as the company focuses on that group, or find that those products are available more widely. When a company responds to consumer feedback, it can mean that those people get changes in composition or packaging that better meet the user's needs.

One of the biggest disadvantages of this marketing technique is the expense. A great deal of research often needs to be done to correctly identify those subsets that are most important for a company, and this takes time and money. Once the key subsets are identified, different marketing messages usually need to be developed for each. In addition, changing the appearance of a product based on which segment it is being sold to adds to the production costs. If the market isn't segmented effectively, then all this money will be wasted.

When the market segments that are identified are too narrow, it may be difficult for a company to be profitable. Niche marketing can work for some industries, but if the tastes of that subset change or a stronger competitor enters the field, a company that has focused too much on the one segment can lose its customer base quickly. Targeting smaller segments also means that potential consumers outside of those groups may be ignored and their business lost.