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Market Segmentation - Meaning, Importance, Types & Example

Published by MBA Skool Team in Marketing and Strategy Terms Last Updated: October 30, 2023Read time:

What is Market Segmentation?

Market segmentation is a process of dividing the entire market population into multiple meaningful segments based on variables like demographics, geographic, psychographics, lifestyle, benefit, occasion, income etc. It can be used by a company to sell their product/service more effectively. Once an entire population is divided into market segments or groups, companies can target them more accurately and design their positioning accordingly collectively known as STP (Segmentation, Targeting strategy and Positioning).

Market Segmentation is the first important step in defining the overall business strategy of a product or service.

Importance of Market Segmentation

Market segmentation is an important aspect for any business as it helps them slice the market into smaller groups or segments, which can then be identified based on their needs and can be catered to. It reduces the population in the market and gives a much more addressable audience rather than giving random groups of people. Having similar groups would enable companies to be more focused in terms of their product offerings, product differentiation strategies, marketing strategies, pricing strategies etc.

This would help companies mitigate unnecessary risks, reduce costs, target customers better, have better retention and generate more profits.

Hence, segmenting the entire population of market is essentially critical and important for any business to prosper.

Market Segmentation Types

The most important variables in market segmentation are based on demographics, geographic, psychographics & behavioral. These are explained in detail below:

1. Demographic Segmentation

Slicing the market on criteria based on demographics like age, gender, income, family members, educational qualification, socio-economic status etc., is called demographic segmentation and it helps in profiling the customers based on demographic parameters & help to form homogeneous groups.

2. Geographic Segmentation

When a population is divided on the basis on geographies i.e. country, state, city, village, region, postal code etc., it is referred to as geographic segmentation. This helps form clusters based on location, topography, location etc.

3. Psychographics Segmentation

Market segmentation done based on personality of people, their characteristics, their lifestyle, social status etc. is called as psychographic segmentation.

Market Segmentation

The above image shows the types of market segmentation

4. Behavioral Segmentation

When companies divide the market based on the customer behavior or usage patterns, it is known as behavioral segmentation and considers the past behavior of consumers.

Advantages & Disadvantages of Market Segmentation

Market segmentation can have many benefits for companies which can benefit their business. Some are discussed below:

1. Segmenting a market gives focus to company as it helps to understand the market better

2. Unnecessary costs are avoided as only the required population can be tapped

3. Segmentation can help companies identify newer markets where existing products can be launched

4. If certain overlapping markets are identified, companies can create new products to capture them

5. Once proper segmentation is done, after identifying target groups accurately, advertising & marketing can be more effective rather than having loosely created ad campaigns

6. Homogeneous groups can themselves promote the products or services even more if they like it

7. It helps in market expansion and also helps in customer retention

Apart from the several advantages, there are also certain drawbacks of market segmentation. Some disadvantages are:

1. A company having multiple segments would have to cater to them separately i.e. more costs

2. Giving products/ services to multiple segments can be a time-consuming process for companies

3. If a company selects a wrong segment, their entire business can collapse

4. Smaller clusters/ niche markets often get neglected in the bigger scheme of things

Market Segmentation Example

Let us take an example of a brand of chocolate biscuits. If we have to launch these biscuits in the market. We need to see whether we need to target everyone or some specific people in the population. Here is where market segmentation will help us get the answer. Let us consider the market. Market can be considered as a country if it is a local launch. 

The marketer can use various variable as discussed above to slice the market. Should we use demographics or psychographics here? 

Chocolate chip biscuit is not a lifestyle or complicated product nor is it going to be very costly product. So demographic segmentation can help.

A marketer can use age and geography as variables to divide the market into multiple segments. Companies can get data for the population and then can use various statistical methods like multi dimensional scaling and factor analysis to come at simple variables. In this case, we can have segments like:

1. Geography: Urban / Rural

2. Age(years): 5 to 10/ 10 to 18/ 18 to 25/ 25 to 40/ 40 to 50/ 50+ 

Now the product being a chocolate biscuit, people in the age group of 40 and above can be removed from both rural and urban. Also, as the product has chocolate, marketer can chose to target only to urban population for initial launch. Now 10 year old to 25 year old segment in urban can have people who love chocolate and would be willing to buy biscuits on a regular basis. Now this can form a decent target group. In practice the process is much more complicated, here it has been simply put.

Hence, this concludes the definition of Market Segmentation along with its overview.

This article has been researched & authored by the Business Concepts Team which comprises of MBA students, management professionals, and industry experts. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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