Market Segmentation

Definition

Market segmentation is the process of dividing a broad consumer or business market into sub-groups of consumers (segments) based on shared characteristics. This allows organizations to better understand and target their ideal customers with tailored products, services, and marketing strategies.

5 Must Know Facts For Your Next Test

1. Market segmentation allows organizations to better understand their customers' needs, preferences, and behaviors, enabling them to develop more effective marketing strategies.
2. Effective market segmentation is crucial for small businesses to compete against larger competitors by focusing on specific niche markets.
3. Segmentation is a key consideration for multinational firms when expanding globally, as cultural, economic, and regulatory differences can require tailored approaches.
4. Analyzing a firm's external environment, including industry trends and competitor actions, is essential for informing effective market segmentation strategies.
5. The strategic analysis process involves evaluating market segmentation as part of understanding a firm's competitive position and formulating an appropriate business strategy.

Review Questions

• Explain how market segmentation can help a small business gain a competitive advantage.
  • Market segmentation allows small businesses to focus their limited resources on serving the specific needs and preferences of a well-defined target market. By deeply understanding and catering to the unique characteristics of a niche segment, small firms can differentiate themselves from larger competitors and build strong customer loyalty, even when they lack the scale and resources of industry giants.
• Describe how a firm's external environment analysis can inform its market segmentation strategy when expanding globally.
  • When expanding into new international markets, a firm must carefully analyze the external environment, including cultural, economic, regulatory, and competitive factors. This analysis will reveal key differences between the new market and the firm's domestic market, which should then guide the segmentation approach. The firm may need to adapt its segmentation criteria, targeting different demographic, psychographic, or behavioral characteristics to effectively reach and serve customers in the new environment.
• Evaluate the role of market segmentation in the strategic analysis and strategy formulation process.
  • Market segmentation is a critical input to the strategic analysis phase, as it helps the firm understand the composition and dynamics of its target market(s). By identifying distinct customer groups and their unique needs, the firm can assess its competitive positioning and develop strategies to better serve those segments. The segmentation analysis informs decisions around product development, pricing, distribution, and promotion, ultimately shaping the firm's overall business strategy. Ongoing monitoring and refinement of market segmentation is essential for maintaining a competitive edge and responding to changing market conditions.

Related terms

Target Market:

The specific group of customers that a business has decided to aim its marketing efforts and products/services towards, based on the results of market segmentation.

Demographic Segmentation: Dividing the market based on characteristics such as age, gender, income, education, occupation, and family status.

Psychographic Segmentation: Dividing the market based on lifestyle, personality traits, attitudes, interests, values, and opinions.