Market segmentation

In marketing, market segmentation or customer segmentation is the process of dividing a consumer or business market into meaningful sub-groups of current or potential customers, known as segments. The objective is to identify profitable and growing segments that a company can target with tailored marketing strategies. When segmenting markets, researchers typically examine common characteristics such as shared needs, interests, lifestyles, or demographic profiles. The goal is to identify high-yield segments—those likely to be the most profitable or exhibiting growth potential—so they can be prioritized as target markets.

Different approaches to segmentation exist depending on the market context. Business-to-business (B2B) marketers may segment markets based on company type, industry, or geographic location, while business-to-consumer (B2C) marketers often segment customers by demographic, behavioral, lifestyle, or socioeconomic criteria. Market segmentation assumes that different market segments require different marketing programs – that is, different offers, prices, promotions, distribution, or some combination of marketing variables. Market segmentation is not only designed to identify the most profitable segments but also to develop profiles of key segments to better understand their needs and purchase motivations. Insights from segmentation analysis are subsequently used to support marketing strategy development and planning. In practice, marketers implement market segmentation using the S-T-P framework, which stands for Segmentation → Targeting → Positioning. That is, partitioning a market into one or more consumer categories, of which some are further selected for targeting, and products or services are positioned in a way that resonates with the selected target market or markets.

Definition and brief explanation Market segmentation is the process of dividing mass markets into groups with similar needs and wants. The rationale for market segmentation is that in order to achieve competitive advantage and superior performance, firms should: "(1) identify segments of industry demand, (2) target specific segments of demand, and (3) develop specific 'marketing mixes' for each targeted market segment. " From an economic perspective, segmentation is built on the assumption that heterogeneity in demand allows for demand to be disaggregated into segments with distinct demand functions.

History

The business historian Richard S. Tedlow identifies four stages in the evolution of market segmentation:

Fragmentation (pre-1880s): The economy was characterized by small regional suppliers who sold goods on a local or regional basis. Unification or mass marketing (1880s–1920s): As transportation systems improved, the economy became unified. Standardized, branded goods were distributed at a national level. Manufacturers tended to insist on strict standardization to achieve scale economies to penetrate markets in the early stages of a product's lifecycle. e.g. the Model T Ford. Segmentation (the 1920s–1980s): As market size increased, manufacturers were able to produce different models pitched at different quality points to meet the needs of various demographic and psychographic market segments. This is the era of market differentiation based on demographic, socio-economic, and lifestyle factors. Hyper-segmentation (post-1980s): a shift towards the definition of ever more narrow market segments. Technological advancements, especially in the area of digital communications, allow marketers to communicate with individual consumers or very small groups. This is sometimes known as one-to-one marketing.

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