What is a Segmented Market?

A segmented market is a market that is isolated from other markets in some manner. The isolation may be complete, or it may be partial and somewhat fluid. The process of creating a segmented market may be an intentional marketing strategy that is designed to maximize information flow and generate sales in a secondary or niche market, or come about due to unforeseen market imperfections.

When a market is segmented intentionally, the reason usually has to do with determining the direction that a company will take with the design, manufacture, and ultimate sale of its product line. By breaking down or segmenting a larger market into a smaller and more easily managed pool of potential customers, it is easier to design products that will attract that group of consumers. As part of the process, those who make up the segmented market are somewhat removed or isolated from the competition, and remain loyal based on factors like brand recognition, quality, and price.

An intentional segmented market also has the advantage of making better use of limited marketing resources. By focusing more on this unique market, rather than taking a mass-market approach, it is easier to determine how available resources can best be used to reach the intended customer base, and thus increase the potential for producing sales and revenue. Small businesses sometimes use this model when the product line is relevant to only specific types of consumers, but large corporations that are looking to break into new markets before their competitors will sometimes employ this same strategy when designing and launching a new product.

When the presence of the segmented market is not based on deliberate choices, the outcome can be somewhat less rewarding. The ability to establish a functioning level of communication between producers and consumers is impaired, which in turn leads to less effective use of labor, capital, and other resources. Market imperfections of this type must be identified and solutions found before the situation can be turned into a true opportunity for everyone involved.

The idea of a segmented market is also found with investing opportunities. An approach known as a segmented market hypothesis holds that it is not possible to substitute specific instruments for those with different terms. A classic example has to do with long-term and short-term investments. If the investor wants the investment portfolio to be somewhat liquid, then focusing on short-term opportunities that will produce a return in less than a year will be the better option. Long-term investments that may take more than a year to yield a desirable return would be avoided, since the terms for those opportunities are different from those of the short-term investments, and thus do not produce the desired result.