What is Market Segmentation?

Definition: Market segmentation is a procedure where a homogeneous market is divided in different groups that share a set of characteristics. In other words, it is a process of classification where different customer groups are identified within a single market.

What Does Market Segmentation Mean?

Market segmentation is a method used by business to identify peer groups within a given market. There might be many different needs within the whole universe of customers and these needs may vary by age, gender, income or marital status. Businesses use market segmentation strategies to classify customers and meet their individual needs more effectively. The process normally starts with a market research project, where a sample of the population is studied in order to identify which segments currently exist.

The potential customers within each segment share similar characteristics and habits that make them unique in comparison to other segments. Normally, individuals are described and classified according to the information obtained from four different perspectives: behavior, demographics, psychographics and geography. After the groups are adequately identified, the company can measure the potential buying power of each cluster to target the ones that are profitable for the business.

Example

A company called Audio Solutions Co. is currently designing a new line of professional microphones. They want to target the professional audio market but they need to understand the market better in order to develop products that actually meet the needs of at least a number of different market segments. A consulting firm provided a market research report about professional audio customers and the report showed that 50% of the clients were firms that supplied audio equipment to a vast range of clients.

These firms had two particular concerns when they bought new equipment, budget consciousness and quality. According to this report, this segment accounted for 80% of the total market revenues. After reading this report, Audio Solutions decided to develop 4 different models of microphones, from a basic cheap model with average quality, to a high-grade adequately priced model with top quality. This last model was designed specifically for this segment and it had a price lower than the competition. This model was a success since Audio Solutions picked properly the market segment they wanted to serve.