Overview of Market Segmentation Theory [History, Process & Theory]

Do you know about market segmentation theory? If not, this post is definitely for you. Market segmentation theory is one of the essential theories in marketing. Businesses need to understand and target specific market segments to increase profits.

This blog post will look closely at the history and process of market segmentation theory. We’ll also discuss some of the benefits and challenges of this marketing strategy. So let’s get started!

What Is Market Segmentation Theory?

Market segmentation theory is the process of dividing a market into segments that share similar needs and want. Businesses can then target these specific segments with marketing programs tailored to their needs.

The theory is based on the idea that not all customers are the same. They have different needs, wants, behaviors, attitudes, etc. Therefore, businesses need to understand these differences and target specific segments with marketing campaigns that appeal to them.

History of Market Segmentation Theory

American economist John Mathew Culbertson (1921-2001) introduced the Segmented Markets Theory in his 1957 paper titled “The Term Structure of Interest Rates.” In his article, Culbertson opposed Irving Fisher’s expectations. He has driven the term structure model and developed his theory of how investors price fixed-income securities.

Culbertson was the first to divide demand curves into “normal” and “segmented” components, suggesting two different groups of customers with unique characteristics respond differently to changes in prices. He used this model to explain how bond yields vary due to market factors.

Explanation of Market Segmentation Theory

Market segmentation theory states that yield curves are determined by supply and demand forces within each market/category of debt security maturities and that yields for one variety of maturities cannot predict the yields for a different category of maturity.

It is essential to understand that “segmented” and “separated” are often confused. Separated markets refer to distinct markets in all aspects, including their products, competition, and customers. Segmented markets refer to groups with unique characteristics but still act as one market.

For example, the UK comprises four segments: London, Northern England, Wales, and Scotland. These regions are linked due to similar economic factors and certain commonalities in culture and language. But each region still has unique characteristics that separate it from the rest of the country.

How does Market Segmentation Theory work?

Segmentation is the process of splitting up a market into smaller groups with similar characteristics. For example, markets can be divided by different factors such as demographic factors like age and gender, geographic location, or psychographic traits (lifestyles).

Market segments are used to produce marketing strategies aimed at specific consumers. These strategies are often referred to as market offerings. The use of the term “market offering” to describe a marketing program designed for a particular segment can be defined as “the presentation of information about a product or service in such a way that it is useful to potential customers who are considered similar to one another in terms of their needs, wants, or preferences.”

Types of Market Segmentation Criteria

1. Demographics (age, gender, race, etc.)

Market segmentation based on demographics is usually the most popular form of market segmentation. Demographic variables include age, gender, social class, occupation, and ethnic group.

2. Geography (urban vs. rural)

Marketing segmentation based on geography is used to differentiate markets by their geographical locations. For example, urban and rural areas may be targeted differently because the products or services available can vary significantly in both places. In addition, this type of market segmentation helps marketers identify differences in geographic regions concerning attitudes and lifestyles.

3. Psychographics (lifestyles, behaviors, and attitudes)

Psychographic segmentation is the study of consumers’ interests and opinions. It relates to attitudes, values, and lifestyles. This approach sets cultural groups according to their thinking, feeling, and behavior without distinguishing between demographics or geographical locations.

4. Behavioural Market Segmentation

Behavioral Market Segmentation is a market segmentation approach that groups consumers based on purchasing behavior. This type of segmentation uses consumer data, such as brand loyalty, product purchase patterns, etc., to identify different types of customers and develop appropriate marketing programs to suit their needs.

What is a Term Structure?

The duration of an asset’s cash flow is referred to as its term structure, also known as the yield curve when graphically represented. The interest rate paid by an asset (usually government bonds) is plotted on the vertical axis, and the time to maturity is plotted on the horizontal axis. Bonds are generally considered to have low risk. As a result, yields are higher for short-term bonds than long-term bonds.

Usually, interest rates and time to maturity are positively related. As a result, interest rates climb with an increase in the term structure. The term structure assumes a positive slope as a consequence. Therefore, the yield curve is often regarded as a confidence indicator for the economy’s health in the bond market.

Types of Yield Curve

The yield curve is a graphical representation of the term structure of interest rates. It shows the interest rate paid by an asset (usually government bonds) at different times.

There are two types of yield curves:

→ Normal yield curve

The normal yield curve is curved because it shows the interest rates paid by assets with different durations. The longer the duration of an asset, the higher the interest rate it pays.

→ Inverted yield curve

An inverted yield curve is when the shorter-term yields are higher than the longer-term ones, and it’s generally regarded as a negative economic indicator.

→ Flat Yield Curve

A flat yield curve is when the short-term and long-term interest rates are almost the same. This occurs when there is a high demand for short-term assets and a low demand for long-term assets. It is usually a sign that an economy is slowing down.

Market Segmentation Theory vs. Preferred Habitat Theory

Market segmentation theory divides people into different groups based on their demographic factors, lifestyle, activity, etc. For example, these segments have been labeled consistently across markets – ‘youth culture,’ for example.

In Preferred Habitat Theory, however, the focus is not on the consumer as it is on where they live. People are divided into groups based on where they live and the different types of people that live in each place. As a result, preferred Habitat Theory segments are usually much smaller than market segments because the locations are specific, for example, ‘people who live in rural areas.

Segmented Markets Theory Benefits

The benefits of market segmentation theory are beneficial for marketers because it helps them better understand their consumers. It’s also used for advertising, allowing advertisers to reach out to specific groups with targeted messages.

Marketers can develop appropriate marketing mix models based on the needs and wants of the different segments that they cater to. The right marketing mix can help them achieve their marketing objectives.

The marketer can also develop strategies to reach these segments, including media channels and advertising messages.

Related: Marketing Strategy

Market Segmentation Theory DrawBacks

Although the marketer’s reach is extended with the help of segmentation theory, some issues associated with it are:

The marketer can face trouble when a market segment doesn’t exist for a product or service that has been developed. In addition, some products don’t fall into any segments and require a unique group of people to enjoy them.

The marketer needs to determine the feasibility of expenditure necessary for market research and then advertise or market that segment, which can prove costly. The product may also fail if it is not accurately targeted at a specific segment because many factors are involved in this process.

Final Thoughts

In short, market segmentation theory is a market strategy that divides markets into groups based on demographics, activities, and characteristics. Marketers can then learn more about their products and consumers to determine the right marketing mix for them, including media channels and advertising messages. Although this strategy has many benefits, marketers should avoid its drawbacks.

We hope this article has been insightful for you. Please share it with your colleagues who want to learn about market segmentation theory if it was helpful. Thanks for reading!