Market segmentation is a concept in economics and marketing.

A market segment is a sub-set of a market

made up of people or organizations with one or more characteristics that cause them to demand similar
product and/or services based on qualities of those products such as price or function. A true market
segment meets all of the following criteria: it is distinct from other segments (different segments have
different needs), it is homogeneous within the segment (exhibits common needs); it responds similarly to a
market stimulus, and it can be reached by a market intervention. The term is also used when consumers
with identical product and/or service needs are divided up into groups so they can be charged different
amounts. These can broadly be viewed as 'positive' and 'negative' applications of the same idea, splitting
up the market into smaller groups.
Examples:
• Gender
• Price
• Interests
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.
"Positive" market segmentation
Market segmenting is dividing the market into groups of individual markets with similar wants or needs
that a company divides the market into distinct groups who have distinct needs, wants, behavior or who
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 . With the right
segmentation, the right lists can be purchased, advertising results can be improved and customer
satisfaction can be increased leading to better reputation.
[edit] Positioning
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.
[edit] Using Segmentation in Customer Retention
Segmentation is commonly used by organizations to improve their customer retention programs and help
ensure that they are:
• Focused on retaining their most profitable customers
 • Employing those tactics most likely to retain these customers
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 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. [1] [2]
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.
[edit] Process for tagging customers
The basic approach to tagging customers is to utilize historical retention data to make predictions about
active customers regarding:
• Whether they are at high risk of canceling their service
• Whether they are profitable to retain
• What retention tactics are likely to be most effective
The idea is to match up active customers with customers from historic retention data who share similar
attributes. Using the theory that “birds of a feather flock together”, the approach is based on the
assumption that active customers will have similar retention outcomes as those of their comparable
predecessor.