What is Market Segmentation?
Market segmentation is the process of splitting an overall market into two or more groups of related consumers, where each of these related consumer groups (known as market segments if correctly defined) are somewhat similar to each other in terms of their buying characteristics and/or product needs.
A good way of thinking about market segmentation is that we want to create smaller and more defined markets from the overall market. That is, end up with several mini-markets which have highly interrelated and similar needs, rather than one overall market with a broad range of needs.
Market Segmentation is a Step in an Overall Process
Market segmentation is NOT implemented in isolation and is not an end in itself (other than for analytical and market insight purposes). This is because market segmentation is usually undertaken as the first step in the STP process.
In some marketing textbooks, the STP process is referred to at the STDP process, where the letters stand for:
- S = Segmentation of the consumers in the market into related groups to create market segments
- T = Target market selection = choosing the most appropriate segment for the company to pursue
- D = Differentiation of the product offering
- P = Positioning of the product offering
Please note that it is common for differentiation (D) to be part of positioning (P), but it is also sometimes listed as a separate component of the STDP process because it is critical to marketing success. However, most marketing textbooks will simply use the letters STP. Either way it refers to the same process.
The three phases of market segmentation, targeting and positioning are linked and are designed to be executed together and sequentially, as shown in the following diagram:
Market Segmentation is a Key Component of Marketing Strategy
Market segmentation is a critical and important component of developing any marketing program, because it is the stepping-stone to identifying and selecting target market/s for the firm. This is an important strategic decision which answers the question “where to compete?”
This is a key component of marketing strategy and helps the company focus upon selected market segments, rather than pursuing a mass-marketing strategy (which is typically not effective for most companies.)
On what Basis are Markets Segmented?
The prime purpose of market segmentation step in the STP process is to split an overall market into related sets of consumers based upon similarities of their individual characteristics. These characteristics, known as segmentation bases, typically includes one or more of the following:
- demographic information = how we can describe them, in terms of age, income, etc.
- geographic location = where they live or work
- psychographics = how they live their lives, values, attitudes, hobbies/activities
- consumer behavior = how they engage in the marketplace as a consumer, such as loyalty, brand preference, price sensitivity, and so on
- benefits sought = what benefits are they primarily seeking from products within a particular product category?
- or a combination of these characteristics, known as hybrid segmentation
Please keep in mind that the eventual goal of undertaking market segmentation is to progress to the next step in the process, where the marketer will then select one or more of identified segments to be the firm’s target market/s.
This target market selection step would be followed by the development and implementation of a precisely designed marketing strategy and marketing mix tactics. This final step would include the positioning and differentiation of the product offering, as per the diagram above.
Formal Definitions of Market Segmentation
It should be noted that the concept of market segmentation was first identified by Smith back in the 1950s. This academic was one of the first to recognize the importance of market segmentation, as shown in the following quote:
- “Market segmentation is based upon developments on the demand side of the market and represents a rational and more precise adjustment of product and marketing effort to consumer or user requirements.” (Smith, Journal of Marketing, Vol. 21, No. 1 Jul., 1956)
To clarify this statement in simple language, Smith saw market segmentation being an important tool to enable marketers to better meet customer needs.
Since that time, market segmentation has become a widely accepted and used marketing approach. Here are some definitions of market segmentation:
- “Market segmentation is the process of splitting customers, or potential customers, in a market into different groups, or segments, within which customers share a similar level of interest in the same, or comparable, set of needs satisfied by a distinct marketing proposition” (McDonald & Dunbar, 2004)
- “Market segmentation involves aggregating prospective buyers into groups that (1) have common needs and (2) will respond similarly to a market action.” (Kerin, 2011)
Both of these definitions highlight that:
- market segmentation is designed to split customers into similar groups
- market segmentation is a step in the process of identifying and evaluating potential target markets
- marketing is improved by splitting the overall market into smaller, related groups of consumers
Here is another definition as developed by the Market Segmentation Study Guide:
- Market segmentation is the process of splitting a market into smaller groups with similar product needs or identifiable characteristics, for the purpose of selecting appropriate target markets. (Fripp 2023)
- Market segmentation ideas (a list of generic segments for most markets)
- Market segmentation example for fitness centers
- Reasons to Use Market Segmentation
- Criteria for Effective Market Segmentation
- Market segmentation examples