Market Segmentation

Market segmentation is a marketing concept of dividing the market into sub-sets which consist of prospective buyers with similar product needs. Unlike the mass-marketing approach, market segmentation aims to better match individuals' needs. By targeting more narrowly defined consumer segments, companies seek to boost competitiveness and profitability. Market segmentation is used in targeting ...

Market segmentation is a marketing concept of dividing the market into sub-sets which consist of prospective buyers with similar product needs. Unlike the mass-marketing approach, market segmentation aims to better match individuals' needs. By targeting more narrowly defined consumer segments, companies seek to boost competitiveness and profitability. Market segmentation is used in targeting strategies and is a key concept for companies' positioning on the market.

According to its first definition, market segmentation is "a condition of growth when core markets have already been developed on a generalized basis to the point where additional promotional expenditures are yielding diminishing returns" (Smith, 1956).

The marketing segmentation approach is an underlying principle in successful marketing strategies as it leverages limited resources. This approach guarantees that the marketing mix – which includes price, distribution, products and promotion – meets the needs of certain customers and effectively focuses on specific buyers' needs.

Market segmentation can be based on a wide range of criteria, including gender, pricing and interests. An example of segment-based marketing is the advertising of luxury property among high-income potential buyers.

The distinctive features of a market segment are homogeneity, distinction and reaction. These categories mean that needs within the segment should be identified as similar, the segment has to be distinctively different from other segments and people and organisations included in the segment have to show a similar response to the market.

Market segmentation is closely related to product differentiation – the concept of distinguishing a product in order to make it more appealing to certain target market. Companies try to differentiate their products and services both from rivals' offering and from other products and services in their own portfolio.

To conquer different segments, the company has to adapt its products or services to each of these segments, which involves product differentiation. In this sense, marketers design their offering to meet customer demand rather that to meet their production needs. Fashion retailers, for example, choose color, fabrics and hemline according to the age group they target.

The market segmentation approach can be implemented through either the breakdown method or the build-up method. The breakdown method regards customers as basically the same and hence divides the market into groups which share certain differences. The build-up method postulates that all customers are different and so market segmentation is based on similarities. The breakdown approach is more widespread. Meanwhile, both methods aim to detect the distinctive feature of the segment compared to other segments and the homogeneity of segment members.

In consumer markets market segmentation takes into account customers' profile, behavior and psychological criteria. Their profile includes demographic data, socio-economic and geographic information. Psychological factors include lifestyle, perception, attitudes, while behavioral factors cover media and technology usage as well as consumption patterns.

Market segmentation in business-to-business offerings takes into account two major sub-sets of interrelated variables – organisational and buyer characteristics.

Market segmentation theorists outline the major mistakes companies make in their marketing strategies. One of the mistakes may be the segmentation of a segment. Usually, very small segments are not of value for the company, research shows. Therefore, the broad definition of a market is more effective in segmentation.

Marketing strategies which target all segments are also problematic, especially if companies target mutually exclusive segments. In this case, the marketer can lose its identity because its presence in multiple segments can confuse the target audiences.

Marketing professionals also advise companies to consider the size and the profitability of the segment, as certain segments may represent a large share of the population, but might have a relatively small value. Companies should also bear in mind that consumers would rather buy a general-purpose product rather than one targeted at a segment different from their own.

To address these issues and to tailor their strategy, companies need to receive feedback on their market segmentation, which will give an idea to the marketer whether its products and services are well targeted. Formal feedback may include surveys.

Segmentation analysis is often based on cluster analysis, which is a set of defined statistical procedures which form groups of people depending on their ratings. In other cases, correlation analysis and regression analysis are used for better psychographic segmentation. Factor analysis is also another technique in market segmentation.