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Market segmentation is a marketing strategy that involves dividing a broad target market into subsets of consumers who have common needs, and then designing and implementing strategies to target their needs and desires using media channels and other touch-points that best allow reaching them.
Market segments allow companies to create product differentiation strategies to target them.
- 1 Criteria for segmenting
- 2 Methods for segmenting consumer markets
- 3 Using segmentation in customer retention
- 4 Price discrimination
- 5 Algorithms and approaches
- 6 See also
- 7 References
Criteria for segmenting
An ideal market segment meets all of the following criteria:
- It is possible to measure.
- It must be large enough to earn profit.
- It must be stable enough that it does not vanish after some time.
- It is possible to reach potential customers via the 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 consistently to a given market stimulus.
- It can be reached by market intervention in a cost-effective manner.
- It is useful in deciding on the marketing mix.
Methods for segmenting consumer markets
Marketers can segment according to geographic criteria—nations, states, regions, countries, cities, neighbourhoods, or postal codes. The geo-cluster approach combines demographic data with geographic data to create a more accurate or specific profile. With respect to region, in rainy regions merchants can sell things like raincoats, umbrellas and gumboots. In hot regions, one can sell summer wear. In cold regions, someone can sell warm clothes. A small business commodity store may target only customers from the local neighborhood, while a larger department store can target its marketing towards several neighborhoods in a larger city or area, while ignoring customers in other continents.
Behavioural segmentation divides consumers into groups according to their knowledge of, attitude towards, usage rate or response to a product 
Segmentation by occasions
Segmentation according to occasions relies on the special needs and desires of consumers on various occasions - for example, for products for use in relation with a certain holiday. Products such as Christmas decorations or Diwali lamps are marketed almost exclusively in the time leading up to the related event, and will not generally be available all year round. Another type of occasional market segments are people preparing for a wedding or a funeral, occasions which only occur a few times in a person's lifetime, but which happen so often in a large population that ongoing general demand makes for a worthwhile market segment.
Segmentation by benefits
Segmentation can take place according to benefits sought by the consumer or according to perceived benefits which a product/service may provide.
Using segmentation in customer retention
The basic approach to retention-based segmentation is that a company tags each of its active customers with three values:
- 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.
- Is this customer worth retaining?
- What retention tactics should be used to retain this customer?
For customers who are deemed worthy of saving, it is 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.
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.
Algorithms and approaches
Any existing discrete variable is a segmentation - this is called "a priori" segmentation, as opposed to "post-hoc" segmentation resulting from a research project commissioned to collect data on many customer attributes. Customers can be segmented by gender ('Male' or 'Female') or attitudes ('progressive' or 'conservative'), but also by discretized numeric variables, such as by age ("<30" or ">=30") or income ("The 99% (AGI<US $300,000)" vs "The 1% (AGI >= US $300,000)").
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
- Demographic profile
- Mass marketing
- Niche market
- Precision marketing
- Target market
- Industrial market segmentation
- Sagacity Segmentation
- 'What is geographic segmentation' Kotler, Philip, and Kevin Lane Keller. Marketing Management. Prentice Hall, 2006. ISBN 978-0-13-145757-7
- Fripp, Geoff.“Market Segmentation Bases”Market Segmentation Study Guide
Segmentation by Demography
Segmentation according to demography is based on variables such as age, gender, occupation and education level.
Reid, Robert D.; Bojanic, David C. (2009). Hospitality Marketing Management (5 ed.). John Wiley and Sons. p. 139. ISBN 9780470088586. Retrieved 2013-06-08. "[...] market segmentation can be based on the benefits that consumers are seeking when they purchase a product."
- Gupta, Sunil. Lehmann, Donald R. Managing Customers as Investments: The Strategic Value of Customers in the Long Run, pages 70-77 (“Customer Retention” section). Upper Saddle River, NJ: Pearson Education/Wharton School Publishing, 2005. ISBN 0-13-142895-0
- Goldstein, Doug. “What is Customer Segmentation?” MindofMarketing.net, May 2007. New York, NY.