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Market Segmentation: Definition, Example, Types, Benefits – Investopedia





Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.
Investopedia / Matthew Collins
Market segmentation is a marketing term that refers to aggregating prospective buyers into groups or segments with common needs and who respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.
Companies can generally use three criteria to identify different market segments:
For example, an athletic footwear company might have market segments for basketball players and long-distance runners. As distinct groups, basketball players and long-distance runners respond to very different advertisements. Understanding these different market segments enables the athletic footwear company to market its branding appropriately.
Market segmentation is an extension of market research that seeks to identify targeted groups of consumers to tailor products and branding in a way that is attractive to the group. The objective of market segmentation is to minimize risk by determining which products have the best chances of gaining a share of a target market and determining the best way to deliver the products to the market. This allows the company to increase its overall efficiency by focusing limited resources on efforts that produce the best return on investment (ROI).
Market segmentation allows a company to increase its overall efficiency by focusing limited resources on efforts that produce the best return on investment (ROI).
There are four primary types of market segmentation. However, one type can usually be split into an individual segment and an organization segment. Therefore, below are five common types of market segmentation.
Demographic segmentation is one of the simple, common methods of market segmentation. It involves breaking the market into customer demographics as age, income, gender, race, education, or occupation. This market segmentation strategy assumes that individuals with similar demographics will have similar needs.
Example: The market segmentation strategy for a new video game console may reveal that most users are young males with disposable income.
Firmographic segmentation is the same concept as demographic segmentation. However, instead of analyzing individuals, this strategy looks at organizations and looks at a company’s number of employees, number of customers, number of offices, or annual revenue.
Example: A corporate software provider may approach a multinational firm with a more diverse, customizable suite while approaching smaller companies with a fixed fee, more simple product.
Geographic segmentation is technically a subset of demographic segmentation. This approach groups customers by physical location, assuming that people within a given geographical area may have similar needs. This strategy is more useful for larger companies seeking to expand into different branches, offices, or locations.
Example: A clothing retailer may display more raingear in their Pacific Northwest locations compared to their Southwest locations.
Behavioral segmentation relies heavily on market data, consumer actions, and decision-making patterns of customers. This approach groups consumers based on how they have previously interacted with markets and products. This approach assumes that consumers prior spending habits are an indicator of what they may buy in the future, though spending habits may change over time or in response to global events.
Example: Millennial consumers traditionally buy more craft beer, while older generations are traditionally more likely to buy national brands.
Often the most difficult market segmentation approach, psychographic segmentation strives to classify consumers based on their lifestyle, personality, opinions, and interests. This may be more difficult to achieve, as these traits (1) may change easily and (2) may not have readily available objective data. However, this approach may yield strongest market segment results as it groups individuals based on intrinsic motivators as opposed to external data points.
Example: A fitness apparel company may target individuals based on their interest in playing or watching a variety of sports.
Other less notable examples of types of segmentation include volume (i.e. how much a consumer spends), use-related (i.e. how loyal a customer is), or other customer traits (i.e. how innovative or risk-favorable a customer is).
There's no single universally accepted way to perform market segmentation. To determine your market segments, it's common for companies to ask themselves the following questions along their market segmentation journey.
Phase I: Setting Expectations/Objectives
Phase 2: Identify Customer Segments
Phase 3: Evaluate Potential Segments
Phase 4: Develop Segment Strategy
Phase 5: Launch and Monitor
Marketing segmentation takes effort and resources to implement. However, successful marketing segmentation campaigns can increase the long-term profitability and health of a company. Several benefits of market segmentation include;
Market segmentation exists outside of business. There has been extensive research using market segmentation strategies to promote overcoming COVID-19 vaccination hesitancy and other health initiatives.
The benefits above can't be achieved with some potential downsides. Here are some disadvantages to consider when considering implementing market segmentation strategies.
Market segmentation is evident in the products, marketing, and advertising that people use every day. Auto manufacturers thrive on their ability to identify market segments correctly and create products and advertising campaigns that appeal to those segments.
Cereal producers market actively to three or four market segments at a time, pushing traditional brands that appeal to older consumers and healthy brands to health-conscious consumers, while building brand loyalty among the youngest consumers by tying their products to, say, popular children’s movie themes.
A sports-shoe manufacturer might define several market segments that include elite athletes, frequent gym-goers, fashion-conscious women, and middle-aged men who want quality and comfort in their shoes. In all cases, the manufacturer's marketing intelligence about each segment enables it to develop and advertise products with a high appeal more efficiently than trying to appeal to the broader masses.
Market segmentation is a marketing strategy in which select groups of consumers are identified so that certain products or product lines can be presented to them in a way that appeals to their interests.
Market segmentation realizes that not all customers have the same interests, purchasing power, or consumer needs. Instead of catering to all prospective clients broadly, market segmentation is important because it strives to make a company's marketing endeavors more strategic and refined. By developing specific plans for specific products with target audiences in mind, a company can increase its chances of generating sales and being more efficient with resources.
Types of segmentation include homogeneity, which looks at a segment's common needs, distinction, which looks at how the particular group stands apart from others, and reaction, or how certain groups respond to the market.
Strategies include targeting a group by location, by demographics—such as age or gender—by social class or lifestyle, or behaviorally—such as by use or response.
Upon analysis of its target audience and desired brand image, Crypto.com entered into an agreement with Matt Damon to promote their platform and cryptocurrency investing. With backdrops of space exploration and historical feats of innovation, Crypto.com's market segmentation targeted younger, bolder, more risk-accepting individuals.
Market segmentation is a process companies use to break their potential customers into different sections. This allows the company to allocate the appropriate resource to each individual segment which allows for more accurate targeting across a variety of marketing campaigns.

PubsOnline. "Millennials and the Takeoff of Craft Brands."
Crypto.com. "Fortune Favors the Bold."
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