# How Market Segments Work: Identification and Example

> **Definition**
>
> A market segment is a group of people who share similar characteristics and are aggregated for analysis or target purposes based on that shared commonality.

## What Is a Market Segment?

The term "market segment" refers to people who are organized as one group for marketing purposes by those with products and services to sell. When people share one or more similar characteristics, they may all become a market segment. Corporations and their marketing teams use various criteria to develop target markets for their products and services.

### Key Takeaways

*   A market segment is a group of people who share one or more similar characteristics that serve as a baseline for a business decision.
*   Corporations and [marketing](https://www.investopedia.com/terms/m/marketing.asp) teams use various criteria, including [demographics](https://www.investopedia.com/terms/d/demographics.asp), to develop target markets for their products and services.  
    
*   The criteria for a market segment include homogeneity among the segment's main needs, uniqueness, and a common reaction to marketing tactics.
*   The reaction from market segments to marketing plans or strategies is typically very predictable.
*   Common market segment traits include interests, lifestyle, age, and gender.

![Market Segment](https://www.investopedia.com/thmb/mixZ_SY3xXRoJEilP_lqEZJce94=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/market-segment.asp-0843c3bafd314324b294bc6c94327680.jpg)

*— Investopedia / Ellen Lindner*

## How Market Segments Work

A market segment is a category of customers who have similar likes and dislikes in an otherwise homogeneous [market](https://www.investopedia.com/terms/m/market.asp). These customers can be individuals, families, businesses, organizations, or a blend of multiple types.

Market segments are known to respond somewhat predictably to a [marketing strategy](https://www.investopedia.com/terms/m/marketing-strategy.asp), plan, or promotion. This is why marketers use segmentation when deciding on a [target market](https://www.investopedia.com/terms/t/target-market.asp).

As its name suggests, market segmentation is the process of separating a market into sub-groups, the members of which share common characteristics.

### Defining a Market Segment

To meet the most basic criteria of a market segment, three characteristics are required:

*   There must be homogeneity among the needs of those in the segment
*   A certain distinction must make the segment unique
*   A common reaction or a similar and somewhat predictable response to marketing is required

Well-known characteristics of a market segment include interests, lifestyle, age, and gender. [Market segmentation](https://www.investopedia.com/terms/m/marketsegmentation.asp) can be organized by geographic, demographic, psychographic, and behavioral parameters.

> **Fast Fact**
>
> Companies that understand market segments can prove themselves to be effective marketers and earn a greater return on their investments.

## Examples of Market Segments

The banking industry is a very good example of how a company markets to specific market segments.

Commercial banks provide services to a wide range of people, many of whom have related life situations and monetary goals.

### Baby Boomers

If a bank wants to market to [baby boomers](https://www.investopedia.com/terms/b/baby_boomer.asp), it conducts research and may find that [retirement planning](https://www.investopedia.com/terms/r/retirement-planning.asp) is the most important aspect of their financial needs. The bank can then market tax-deferred accounts to this consumer segment.

### Millennials

If the same bank wants to market products and services to millennials effectively, [Roth IRAs](https://www.investopedia.com/terms/r/rothira.asp) and [401(k)s](https://www.investopedia.com/terms/1/401kplan.asp) may not be the best option. The bank may conduct in-depth [market research](https://www.investopedia.com/terms/m/market-research.asp) and discover that most millennials are planning to have a family. Using that data, the bank may decide to market college-friendly savings and investment accounts to this consumer segment.

### College Students

Sometimes a company already has a product but may not yet have its target consumer segment. In this scenario, it is up to the business to define its market and cater its offering to its target group.

Restaurants are a good example. If a restaurant is near a college, it can market its food in such a way as to entice college students to enjoy happy hour rather than trying to attract high-value business customers.

## How Are Market Segments Used?

Commonly used in marketing strategies, market segments help companies optimize their products, services, and advertising to suit the needs of a given segment and reach them with their offer. Market segments are often used to identify a target market.

## How Do You Identify Market Segments?

Broadly speaking, identifying a market segment requires the following three criteria. To start, the main needs of a sub-group must be the same or similar. Second, the segment must share distinct characteristics—e.g., individuals are all under 21 and attending college. Finally, all in the segment should have a similar response to marketing techniques. Prospective buyers are grouped into various segments, often based on how much value they place on a product or service.

## What Is an Example of a Market Segment?

Consider a company that markets health and beauty products to both men and women. These people represent two market segments, differentiated by gender. The products, such as razors or skin care, are typically more expensive for women than they are for men. The product packaging also differs—products targeting women may have pinks and floral accents that align with gender stereotypes. On the other hand, the company's male-targeted products are characterized by more rugged blacks and greys. 

## The Bottom Line

A market segment is a group of individuals with similar characteristics that companies target with marketing and advertising. Market segments work by organizing people in ways that can make targeting them with advertising and other marketing efforts most effective and efficient.

Marketers have learned that those in a particular market segment should respond in a predictable way to marketing that targets them.

> **Article Sources**
>
> 1.  Science Direct. "[Market Segmentation: Marketing, Bertrand C. Liang MD, PHD, MBA, in The Pragmatic MBA for Scientific and Technical Executives, 2013](https://www.sciencedirect.com/topics/economics-econometrics-and-finance/market-segmentation)."