Market segmentation involves dividing a broad target market into subsets of consumers who have common needs and applications for relevant goods and services. The document discusses criteria for effective market segments and various bases for segmenting consumer and industrial markets, including geographic, demographic, psychographic, and behavioral factors. Segmentation allows firms to better understand customer diversity and satisfy customer needs through targeted marketing strategies.

1. Market segmentation
While there may be theoretically 'ideal' market segments, in reality every organization engaged in a market will
develop different ways of imagining market segments, and create product differentiation strategies to exploit these
segments. The market segmentation and corresponding product differentiation strategy can give a firm a temporary
commercial advantage.
Criteria for Segmenting
An ideal market segment meets all of the following criteria:
It is possible to measure.
It has to be large enough to earn profit.
It has to be stable enough that it does not vanish after some time.
It is possible to reach potential customer via organization's promotion and distribution channel.
It is internally homogeneous (potential customers in the same segment prefer the same product qualities).
It is externally heterogeneous, that is, potential customers from different segments have different quality
preferences.
It responds similarly to a market stimulus.
It can be reached by market intervention in a cost-effective manner.
useful in deciding on marketing mix
Market segmentation is a marketing strategy that involves dividing a broad target market into subsets of consumers
who have common needs and applications for the relevant goods and services. Depending on the specific
characteristics of the product, these subsets may be divided by criteria such as age and gender, or other distinctions,
like location or income. Marketing campaigns can then be designed and implemented to target these specific
customer segments.
Basis for segmenting consumer markets
Geographic segmentation
The market is segmented according to geographic criteria—nations, states, regions, countries, cities, neighborhoods,
or zip codes. Geo-cluster approach combines demographic data with geographic data to create a more accurate
profile of specific [1] With respect to region, in rainy regions you can sell things like raincoats, umbrellas and
gumboots. In hot regions you can sell summer wear. In cold regions you can sell warm clothes.
Demographic Segmentation
Demographic segmentation consists of dividing the market into groups based on variables such as age, gender, family
size, income, occupation, education, religion, race and nationality. As one might expect, demographic segmentation
variables are amongst the most popular bases for segmenting customer groups. This is partly because customer
wants are closely linked to variables such as income and age. Also, for practical reasons, there is often much more
data available to help with the demographic segmentation process.

2. Psychographic Segmentation
Psychographics is the science of using psychology and demographics to better understand consumers. Psychographic
segmentation: consumer are divided according to their lifestyle, personality, values. Aliens within the same
demographic group can exhibit very different psychographic profiles.[2]
"Positive" market segmentation
Market segmenting is dividing the market into groups of individual markets with similar wants or needs that a
company divides into distinct groups which have distinct needs, wants, behavior or which might want different
products & services. Broadly, markets can be divided according to a number of general criteria, such as by industry or
public versus private. Although industrial market segmentation is quite different from consumer market
segmentation, both have similar objectives. All of these methods of segmentation are merely proxies for true
segments, which don't always fit into convenient demographic boundaries.
Consumer-based market segmentation can be performed on a product specific basis, to provide a close match
between specific products and individuals. However, a number of generic market segment systems also exist, e.g. the
system provides a broad segmentation of the population of the United States based on the statistical analysis of
household and geodemographic data.
The process of segmentation is distinct from positioning (designing an appropriate marketing mix for each segment).
The overall intent is to identify groups of similar customers and potential customers; to prioritize the groups to
address; to understand their behavior; and to respond with appropriate marketing strategies that satisfy the different
preferences of each chosen segment. Revenues are thus improved.
Improved segmentation can lead to significantly improved marketing effectiveness. Distinct segments can have
different industry structures and thus have higher or lower attractiveness
Once a market segment has been identified (via segmentation), and targeted (in which the viability of servicing the
market intended), the segment is then subject to positioning. Positioning involves ascertaining how a product or a
company is perceived in the minds of consumers.
This part of the segmentation process consists of drawing up a perceptual map, which highlights rival goods within
one's industry according to perceived quality and price. After the perceptual map has been devised, a firm would
consider the marketing communications mix best suited to the product in question.
Behavioral Segmentation
In behavioral segmentation, consumers are divided into groups according to their knowledge of, attitude towards,
use of or response to a product. It is actually based on the behavior of the consumer.
Occasions
Segmentation according to occasions. We segment the market according to the occasions of use. For example,
whether the product will be used alone or in a group, or whether it is being purchased as a present or for personal
use.

3. Benefits
Segmentations according to benefits sought by the consumer.
Using Segmentation in Customer Retention
The basic approach to retention-based segmentation is that a company tags each of its active customers with 3
values:
Tag #1: Is this customer at high risk of canceling the company's service? One of the most common indicators of high-
risk customers is a drop off in usage of the company's service. For example, in the credit card industry this could be
signaled through a customer's decline in spending on his or her card.
Tag #2: Is this customer worth retaining? This determination boils down to whether the post-retention profit
generated from the customer is predicted to be greater than the cost incurred to retain the customer. Managing
Customers as Investments.[3][4]
Tag #3: What retention tactics should be used to retain this customer? For customers who are deemed “save-
worthy”, it’s essential for the company to know which save tactics are most likely to be successful. Tactics commonly
used range from providing “special” customer discounts to sending customers communications that reinforce the
value proposition of the given service.
Process for tagging customers
Niche Marketing
A niche is a more narrowly defined customer group who seek a distinct set of benefits. İdentified by dividing a
segment into subsegments,distinct and unique set of needs,requires specialization, and is not likely to attract too
many competitors.
Local Marketing
Marketing programs tailored to the needs of local customer groups.
Price discrimination
Main article: Price discrimination
Where a monopoly exists, the price of a product is likely to be higher than in a competitive market and the quantity
sold less, generating monopoly profits for the seller. These profits can be increased further if the market can be
segmented with different prices charged to different segments charging higher prices to those segments willing and
able to pay more and charging less to those whose demand is price elastic. The price discriminator might need to
create rate fences that will prevent members of a higher price segment from purchasing at the prices available to
members of a lower price segment. This behavior is rational on the part of the monopolist, but is often seen by
competition authorities as an abuse of a monopoly position, whether or not the monopoly itself is sanctioned. Areas
in which this price discrimination is seen range from transportation to pharmaceuticals.[citation needed]

4. Algorithms and Approaches
Any discrete variable is a segmentation. For instance, customers might be segmented by gender ('Male' or 'Female')
or attitudes ('progressive' or 'conservative'). Numeric variables may be discretized to become segmentations, such as
age ("<30" or ">=30") or income ("The 99% (AGI<US $300,000)" vs "The 1% (AGI >= US $300,000)").
Segmentations can be obtained by any number of approaches. Minimally, an existing discrete variable may be chosen
as a segmentation, also called "a priori" segmentation. At the other extreme, a research project may be
commissioned to collect data on many attributes and use statistical analyses to derive a segmentation, also called
"post-hoc" segmentation. In between, qualitative knowledge of the market based on experience may be used to
identify divisions that are likely to be useful.
Common statistical techniques for segmentation analysis include:
Clustering algorithms such as K-means or other Cluster analysis
Statistical mixture models such as Latent Class Analysis
Ensemble approaches such as Random Forests
Latent class analysis and k-means analysis may be viewed as identifying new variables that maximize the sum of
mutual information between the segmentation variable and a set of basis variables.[5]
Market Segmentation
Market segmentation is the identification of portions of the market that are different from one another.
Segmentation allows the firm to better satisfy the needs of its potential customers.
The Need for Market Segmentation
The marketing concept calls for understanding customers and satisfying their needs better than the competition. But
different customers have different needs, and it rarely is possible to satisfy all customers by treating them alike.
Mass marketing refers to treatment of the market as a homogenous group and offering the same marketing mix to all
customers. Mass marketing allows economies of scale to be realized through mass production, mass distribution, and
mass communication. The drawback of mass marketing is that customer needs and preferences differ and the same
offering is unlikely to be viewed as optimal by all customers. If firms ignored the differing customer needs, another
firm likely would enter the market with a product that serves a specific group, and the incumbant firms would lose
those customers.
Target marketing on the other hand recognizes the diversity of customers and does not try to please all of them with
the same offering. The first step in target marketing is to identify different market segments and their needs.
Requirements of Market Segments
In addition to having different needs, for segments to be practical they should be evaluated against the following
criteria:
Identifiable: the differentiating attributes of the segments must be measurable so that they can be identified.
Accessible: the segments must be reachable through communication and distribution channels.

5. Substantial: the segments should be sufficiently large to justify the resources required to target them.
Unique needs: to justify separate offerings, the segments must respond differently to the different marketing
mixes.
Durable: the segments should be relatively stable to minimize the cost of frequent changes.
A good market segmentation will result in segment members that are internally homogenous and externally
heterogeneous; that is, as similar as possible within the segment, and as different as possible between segments.
Bases for Segmentation in Consumer Markets
Consumer markets can be segmented on the following customer characteristics.
Geographic
Demographic
Psychographic
Behavioralistic
Geographic Segmentation
The following are some examples of geographic variables often used in segmentation.
Region: by continent, country, state, or even neighborhood
Size of metropolitan area: segmented according to size of population
Population density: often classified as urban, suburban, or rural
Climate: according to weather patterns common to certain geographic regions
Demographic Segmentation
Some demographic segmentation variables include:
Age
Gender
Family size
Family lifecycle
Generation: baby-boomers, Generation X, etc.
Income
Occupation
Education
Ethnicity
Nationality
Religion
Social class
Many of these variables have standard categories for their values. For example, family lifecycle often is expressed as
bachelor, married with no children (DINKS: Double Income, No Kids), full-nest, empty-nest, or solitary survivor. Some
of these categories have several stages, for example, full-nest I, II, or III depending on the age of the children.
Psychographic Segmentation

6. Psychographic segmentation groups customers according to their lifestyle. Activities, interests, and opinions (AIO)
surveys are one tool for measuring lifestyle. Some psychographic variables include:
Activities
Interests
Opinions
Attitudes
Values
Behavioralistic Segmentation
Behavioral segmentation is based on actual customer behavior toward products. Some behavioralistic variables
include:
Benefits sought
Usage rate
Brand loyalty
User status: potential, first-time, regular, etc.
Readiness to buy
Occasions: holidays and events that stimulate purchases
Behavioral segmentation has the advantage of using variables that are closely related to the product itself. It is a
fairly direct starting point for market segmentation.
Bases for Segmentation in Industrial Markets
In contrast to consumers, industrial customers tend to be fewer in number and purchase larger quantities. They
evaluate offerings in more detail, and the decision process usually involves more than one person. These
characteristics apply to organizations such as manufacturers and service providers, as well as resellers, governments,
and institutions.
Many of the consumer market segmentation variables can be applied to industrial markets. Industrial markets might
be segmented on characteristics such as:
Location
Company type
Behavioral characteristics
Location
In industrial markets, customer location may be important in some cases. Shipping costs may be a purchase factor for
vendor selection for products having a high bulk to value ratio, so distance from the vendor may be critical. In some
industries firms tend to cluster together geographically and therefore may have similar needs within a region.
Company Type
Business customers can be classified according to type as follows:
Company size
Industry

7. Decision making unit
Purchase Criteria
Behavioral Characteristics
In industrial markets, patterns of purchase behavior can be a basis for segmentation. Such behavioral characteristics
may include:
Usage rate
Buying status: potential, first-time, regular, etc.
Purchase procedure: sealed bids, negotiations, etc.