What is market segmentation?

Definition: Market segmentation is the process of evaluating and categorizing customer groups to enable targeted marketing efforts. Businesses of every size undergo market segmentation to better understand and satisfy the needs of different consumers, also called target demographics, to improve marketing efforts and offer the best products.

Mass marketing, conversely, treats the entire market as homogenous. The business offers the same marketing mix to everyone, scaling efforts and saving costs through a single mass production, distribution and communication strategy. Mass marketing was a much more common business practice before consumer data became more widely accessible.

The marketplace today is fragmented by a plethora of choices that grows by the day. People have more options for goods and services than ever before, and they've become accustomed to personalizing products that cater to their individual tastes. Streaming music services and cellphone apps are a great example of this.

As this trend toward "product personalization" grows, market segmentation is an indispensable tool for creating brand awareness and loyalty. Businesses must use data to focus on narrower slices of the marketplace, identifying shared attributes in a group of people and using it to reach them on a more personal, and hopefully profitable, level.

Four common ways to segment a target market

Customers can be segmented by many values or criteria. The following four categories include hundreds of various dimensions which can be used to pinpoint specific customer groups.

1. Geographic: People in different places often have widely varying needs and shopping patterns. Segmenting by country, region, state, and city — depending on the scope of a business — can inform a business' marketing efforts. For example, if most customers are from Southern California, local advertisements may generate positive ROI.
2. Demographic: Socio-economic factors also play a role in how people behave as consumers. Differences in gender, age, income, education level and race often influence buyer behavior.
3. Psychographic: People have different values and beliefs, which can often influence their purchasing decisions. Values are often influenced by - but not limited to - geography, lifestyle, age and religious beliefs.
4. Behavior: Not every consumer buys the same way. Some people research their options carefully for months, while others are impulse buyers who are comfortable making snap decisions. Some people prefer brick-and-mortar stores where they can touch the product before buying, and others prefer the convenience of shopping online. Knowing how well your marketing will match the target group's behavior will have a big impact on your success.

Requirements of a market segment

In order for a market segment to be useful, it must have measurable characteristics. If a business owner wants to effectively target a specific market segment, he or she needs to carefully evaluate those characteristics to ensure money is not wasted on trying to reach the wrong people.

• Definition - The attributes of the market segment must be clear and well defined. It's important to differentiate one segment from the next to avoid any overlap in marketing activities that cause inefficiencies and waste. People in one segment should also respond differently than another when presented with the same marketing mix. If the two respond similarly then the definition is blurred, suggesting that they are not so different after all.
• Accessibility - The segment must be reachable. The business owner needs to consider the unique media habits of the target customer and a communication strategy that could influence them. Geography and distribution channels also need to be considered. A segment of people who live in states with no internet sales tax may be more valuable to an ecommerce retailer, for instance.
• Size and applicability - It's important to measure the size of the market segment and evaluate whether the sales potential exceeds the cost of marketing to it. The marketer should also consider whether this group is likely to buy the product and if it has the financial resources to do so.
• Action - this raises the question of whether the business can actually satisfy the needs of the market segment. A segment may look like an attractive target, but if the business lacks the capacity to fulfill what the market demands, it's best to choose another area to focus on.