Market segmentation is the process in which a market is split into groups or niches. Segmentation commonly occurs in mature markets, such as the soft drink market -- for example, Original Coke, Cherry Coke, Caffeine-free Coke, Diet Coke. A market segment consists of individuals, groups or organizations whose characteristics cause them to have fairly similar product needs. As part of any marketing strategy, a business must examine the effects of market segmentation.
An important advantage of selling products to more than one market segment is that companies can utilize excess production capacity by shifting it to additional segments. The overall business risk is, therefore, lowered because the company is no longer relying on just one market for sales revenue. However, this multisegment strategy will require more production processes. Costs and resource requirements will also increase. The company must determine whether the incremental increase in cost is offset by the increase in revenue.
One of the most profound changes in market segmentation occurred with distribution channels and the maturing of the Internet. More small businesses can afford to enter a very fine-tuned marketing niche, thanks to the Internet, and to compete directly against large companies. In fact, a predominant growth strategy among startups is to become a market leader in a niche, then sell the company to a larger one. The main benefit of the Internet is that niche products reach a wider audience since the Internet has no geographic boundaries.
For a segment to be viable, there must be a certain amount of homogeneity among its members, and those members must be reachable via some vehicle of the marketing mix, such as advertising, promotion and direct marketing. With a viable segment, the business can gain the same market coverage as with mass marketing. However, segmentation will cause increased marketing costs, because the business must sell through different channels and promote more brands. Each brand will have its own marketing plan and use different packaging.
Companies can maintain price differentials among different brands through market segmentation. An example of multisegment price branding is in the hotel industry. Several hotel market leaders have developed completely different brands with wide differences in pricing, and targeting very specific market segments. For example, Marriott International has fine-tuned segmentation in the hotel market with brands such as JW Marriott, its top-of-the-line luxury brand; Marriott Vacation Club for the vacation ownership market; Fairfield Inn for the economy lodging market; Residence Inn for extended stays, typically business class; and even AC Hotels by Marriott, targeting the design conscious traveler. Consumers in each segment may be willing to pay a premium for the custom product.