In marketing, market segmentation or customer segmentation is the process of dividing a consumer or business market into meaningful sub-groups of current or potential customers, known as segments. The objective is to identify profitable and growing segments that a company can target with tailored marketing strategies.
When segmenting markets, researchers typically examine common characteristics such as shared needs, interests, lifestyles, or demographic profiles. The goal is to identify high-yield segments—those likely to be the most profitable or exhibiting growth potential—so they can be prioritized as target markets.
Different approaches to segmentation exist depending on the market context. Business-to-business (B2B) marketers may segment markets based on company type, industry, or geographic location, while business-to-consumer (B2C) marketers often segment customers by demographic, behavioral, lifestyle, or socioeconomic criteria.
Market segmentation assumes that different market segments require different marketing programs – that is, different offers, prices, promotions, distribution, or some combination of marketing variables. Market segmentation is not only designed to identify the most profitable segments but also to develop profiles of key segments to better understand their needs and purchase motivations. Insights from segmentation analysis are subsequently used to support marketing strategy development and planning.
In practice, marketers implement market segmentation using the S-T-P framework, which stands for Segmentation → Targeting → Positioning. That is, partitioning a market into one or more consumer categories, of which some are further selected for targeting, and products or services are positioned in a way that resonates with the selected target market or markets.
Definition and brief explanation
Market segmentation is the process of dividing mass markets into groups with similar needs and wants.Pride, W., Ferrell, O.C., Lukas, B.A., Schembri, S., Niininen, O. and Cassidy, R., Marketing Principles, 3rd Asia-Pacific ed, Cengage, 2018, p. 200 The rationale for market segmentation is that in order to achieve competitive advantage and superior performance, firms should: "(1) identify segments of industry demand, (2) target specific segments of demand, and (3) develop specific 'marketing mixes' for each targeted market segment. "Madhavaram, S., & Hunt, S. D., "The Service-dominant Logic and a Hierarchy of Operant Resources: Developing Masterful Operant Resources and Implications for Marketing Strategy, " Journal Of The Academy Of Marketing Science, Vol. 36, No. 1, 2008, pp 67-82. From an economic perspective, segmentation is built on the assumption that heterogeneity in demand allows for demand to be disaggregated into segments with distinct demand functions.Dickson, Peter R.; Ginter, James L., "Market Segmentation, Product Differentiation, and Marketing Strategy, " Journal of Marketing, Vol. 51, No. 2, 1987, p. 1
History
The business historian Richard S. Tedlow identifies four stages in the evolution of market segmentation:In New and Improved: The Story of Mass Marketing in America, Basic Books, N.Y. 1990 pp. 4–12, Richard Tedlow outlines first three stages: fragmentation, unification, and segmentation. In a subsequent work, published three years later, Tedlow and his co-author thought that they had seen evidence of a new trend and added a fourth era, termed Hyper-segmentation (post-1980s); See Tedlow, R.A. and Jones, G., The Rise and Fall of Mass Marketing, Routledge, N.Y., 1993, Chapter 2
Fragmentation (pre-1880s): The economy was characterized by small regional suppliers who sold goods on a local or regional basis. Unification or mass marketing (1880s–1920s): As transportation systems improved, the economy became unified. Standardized, branded goods were distributed at a national level. Manufacturers tended to insist on strict standardization to achieve scale economies to penetrate markets in the early stages of a product's lifecycle. e.g. the Model T Ford. Segmentation (the 1920s–1980s): As market size increased, manufacturers were able to produce different models pitched at different quality points to meet the needs of various demographic and psychographic market segments. This is the era of market differentiation based on demographic, socio-economic, and lifestyle factors. Hyper-segmentation (post-1980s): a shift towards the definition of ever more narrow market segments. Technological advancements, especially in the area of digital communications, allow marketers to communicate with individual consumers or very small groups. This is sometimes known as one-to-one marketing.
The practice of market segmentation emerged well before marketers thought about it at a theoretical level.Fullerton, R., "Segmentation in Practice: An Overview of the Eighteenth and Nineteenth Centuries," in Jones, D.G.B. and Tadajewski, M. (eds), The Routledge Companion to Marketing History, Oxon, Routledge, 2016, p. 94 Archaeological evidence suggests that Bronze Age traders segmented trade routes according to geographical circuits.Alberti, M. E., "Trade and Weighing Systems in the Southern Aegean from the Early Bronze Age to the Iron Age: How Changing Circuits Influenced Glocal Measures," in Molloy, B. (ed.), Of Odysseys and Oddities: Scales and Modes of Interaction Between Prehistoric Aegean Societies and their Neighbours, [Sheffield Studies in Aegean Archaeology], Oxford, Oxbow, (E-Book), 2016 Other evidence suggests that the practice of modern market segmentation was developed incrementally from the 16th century onwards. Retailers, operating outside the major metropolitan cities, could not afford to serve one type of clientele exclusively, yet retailers needed to find ways to separate the wealthier clientele from the "riff-raff". One simple technique was to have a window opening out onto the street from which customers could be served. This allowed the sale of goods to the common people, without encouraging them to come inside. Another solution, that came into vogue starting in the late sixteenth century, was to invite favored customers into a back room of the store, where goods were permanently on display. Yet another technique that emerged around the same time was to hold a showcase of goods in the shopkeeper's private home for the benefit of wealthier clients. Samuel Pepys, for example, writing in 1660, describes being invited to the home of a retailer to view a wooden jack.Cox, N.C. and Dannehl, K., Perceptions of Retailing in Early Modern England, Aldershot, Hampshire, Ashgate, 2007, pp. 155–59 The eighteenth-century English entrepreneurs, Josiah Wedgewood and Matthew Boulton, both staged expansive showcases of their wares in their private residences or in rented halls to which only the upper classes were invited while Wedgewood used a team of itinerant salesmen to sell wares to the masses.McKendrick, N., Brewer, J. and Plumb, J.H., The Birth of a Consumer Society: The Commercialization of Eighteenth Century England, London, 1982.
Evidence of early marketing segmentation has also been noted elsewhere in Europe. A study of the German book trade found examples of both product differentiation and market segmentation in the 1820s.Fullerton, R.A., "Segmentation Strategies and Practices in the 19th-Century German Book Trade: A Case Study in the Development of a Major Marketing Technique", in Historical Perspectives in Consumer Research: National and International Perspectives, Jagdish N. Sheth and Chin Tiong Tan (eds), Singapore, Association for Consumer Research, pp 135-139 From the 1880s, German toy manufacturers were producing models of tin toys for specific geographic markets; London omnibuses and ambulances destined for the British market; French postal delivery vans for Continental Europe and American locomotives intended for sale in America.Pressland, David, Book of Penny Toys, Pei International, 1991; Cross, G., Kids' Stuff: Toys and the Changing World of American Childhood, Harvard University Press, 2009, pp 95-96 Such activities suggest that basic forms of market segmentation have been practiced since the 17th century and possibly earlier.
Contemporary market segmentation emerged in the first decades of the twentieth century as marketers responded to two pressing issues. Demographic and purchasing data were available for groups but rarely for individuals and secondly, advertising and distribution channels were available for groups, but rarely for single consumers. Between 1902 and 1910, George B Waldron, working at Mahin's Advertising Agency in the United States used tax registers, city directories, and census data to show advertisers the proportion of educated vs illiterate consumers and the earning capacity of different occupations, etc. in a very early example of simple market segmentation.Jones, G.D.B. and Tadajewski, M. (eds), The Routledge Companion to Marketing History, Oxon, Routledge, 2016, p. 66Lockley, L.C., "Notes on the History of Marketing Research", Journal of Marketing, Vol. 14, No. 5, 1950, pp. 733–736 In 1924 Paul Cherington developed the 'ABCD' household typology; the first socio-demographic segmentation tool.Lockley, L.C., "Notes on the History of Marketing Research", Journal of Marketing, vol. 14, no. 5, 1950, p. 71 By the 1930s, market researchers such as Ernest Dichter recognized that demographics alone were insufficient to explain different marketing behaviors and began exploring the use of lifestyles, attitudes, values, beliefs and culture to segment markets.Wilson B. S. and Levy, J., "A History of the Concept of Branding: Practice and Theory", Journal of Historical Research in Marketing, vol. 4, no. 3, 2012, pp. 347-368; DOI: 10.1108/17557501211252934 With access to group-level data only, brand marketers approached the task from a tactical viewpoint. Thus, segmentation was essentially a brand-driven process.
Wendell R. Smith is generally credited with being the first to introduce the concept of market segmentation into the marketing literature in 1956 with the publication of his article, "Product Differentiation and Market Segmentation as Alternative Marketing Strategies." Smith's article makes it clear that he had observed "many examples of segmentation" emerging and to a certain extent saw this as a "natural force" in the market that would "not be denied." As Schwarzkopf points out, Smith was codifying implicit knowledge that had been used in advertising and brand management since at least the 1920s.Schwarzkopf, S., "Turning Trade Marks into Brands: How Advertising Agencies Created Brands in the Global Market Place, 1900–1930" CGR Working Paper, Queen Mary University, London, 18 August 2008
Until relatively recently, most segmentation approaches have retained a tactical perspective in that they address immediate short-term decisions; such as describing the current "market served" and are concerned with informing marketing mix decisions. However, with the advent of digital communications and mass data storage, it has been possible for marketers to conceive of segmenting at the level of the individual consumer. Extensive data is now available to support segmentation in very narrow groups or even for a single customer, allowing marketers to devise a customized offer with an individual price that can be disseminated via real-time communications.Kara, A. and Kaynak, E., "Markets of a Single Customer: Exploiting Conceptual Developments in Market Segmentation", European Journal of Marketing, vol. 31, no. 11/12, 1997, pp. 873–895, DOI: https://dx.doi.org/10.1108/03090569710190587 Some scholars have argued that the fragmentation of markets has rendered traditional approaches to market segmentation less useful.Firat, A.F. and Shultz, C.J., "From Segmentation to Fragmentation: Markets and Marketing Strategy in the Postmodern Era," European Journal of Marketing, vol. 31 no. 3/4, 1997, pp 183-207
Criticisms