Market segmentation involves splitting a market into segments and developing different tactics and strategies for the segments. The term market segmentation is often used interchangeably with the terms segmentation, segmentation study, customer segmentation, segmentation strategy, and segmentation algorithms, although there are meaningful distinctions between each of these terms.
Applications of market segmentation
All firms segment their markets and many people in business spend their days developing and working with segments. For example:
- Marketers use market segmentation in their planning (e.g., Coca-Cola develops some products for the diet segment).
- Advertising agencies use segmentation to assist in developing advertising strategies. For example, working out which message will resonate best with different segments.
- Media companies use segmentation as a tool to assist in efficient media buying. This could be purchasing Facebook advertisements to target moms, and ads in games to target young men.
- Direct marketers use segmentation to better target their campaigns. For example, targeting more campaigns at the segment of households that have historically been found to respond more regularly and/or spend larger amounts.
- Call centers use segmentation to work out the best way of adapting their scripts to differences between customers.
- Retailers use segmentation to work out which items to put next to which others on shelves.
- Pricing departments use segmentation to identify how to maximize the amount that every customer pays (e.g., offering discount airfares at inconvenient times to price-conscious flyers).
- Sales departments use segmentation to set sales territories.
- Data miners use segmentation as a way of summarizing vast quantities of data.
- Management consultants use segmentation as a way of better aligning organizations with customers.
Customer segmentation is the same basic idea as market segmentation, except that the scope is limited to a company's actual customers. That is, people who are not customers are excluded from segmentation. Typically, customer segmentations are based on data held in a company’s internal databases (e.g., CRM and transaction databases).
Segmentation study/Market segmentation research
A segmentation study typically refers to a survey that is used to collect data, where the data is analyzed via a segmentation algorithm to identify segments in the market.
A segmentation algorithm is an algorithm which is designed for aggregating observations (e.g., people) into groups, where the groups are typically referred to as segments, clusters, classes, or taxa. The most widely used segmentation algorithms are k-means cluster analysis and latent class analysis.
Segmentation strategy refers both to the decision regarding which of multiple possible segmentations to use, and decisions regarding how to allocate resources to segments.
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