Market segmentation is a concept used in marketing and economics to identify subsets of a market. A subset or market segment is a group of customers or businesses that have many things in common and several elements that set them apart from the rest of the market.
In terms of customers, college educated consumers may be considered a market segment. People who live in snowy climates are another market segment. From a business standpoint, businesses catering to automobile owners are considered a market segment as are businesses producing products exclusively for vegetarians.
Market segmentation is the way people and businesses are divided based on the products and services they need or the products and services they provide.
Understanding market segmentation is very important in marketing. Each group of people or segment of the market has specific needs. People who live in snowy climates need snow shovels. Understanding the needs of a particular market segment can save a company time and money. A company making snow shovels can direct it’s advertising to people who live in snowy climates and not waste time and money attempting to sell snow shovels in Miami.
For purposes of identifying and predicting trends in the larger economy businesses are also broken down into market segments. A company that makes clothing represents a different segment of the market than a company producing oil, natural gas and other petroleum products. This type of market segmentation allows economists to study production and consumption patterns and determine if the price of snow shovels or gasoline will rise or fall. Studying sales data from specific parts or segments of the economy can help identify trends and inform companies of the need to increase or decrease production of their produce based on identified trends in the part of the market they serve.