Describe market segmentation theory

Market segmentation theory is also known as the segmented markets theory. It is based on the
belief that the market for each segment of bond maturities is largely populated by investors with a particular preference for investing in securities within that maturity time frame – short-term, intermediate-term or long-term.

Market segmentation theory is a fundamental theory regarding interest rates and yield curves,
expressing the idea that there is no inherent relationship between the levels of short-term and
long-term rates. According to market segmentation theory, the prevailing interest rates for short-term, intermediate-term and long-term bonds should be viewed separately, as items in different markets for debt securities.

Market segmentation theory further asserts that the buyers and sellers who make up the market
for short-term securities have different characteristics and investment motivations than the bulk of buyers and sellers of intermediate-term or long-term maturity securities, and they should not be considered interchangeable. The theory is partially based on the investment habits of different types of institutional investors, such as banks and insurance companies. Banks tend to favor investing in short-term securities, while insurance companies favor long-term securities.

Three criteria can generally be used to identify different market segments: homogeneity, or
common needs within a segment; distinction, or being unique from other groups; and reaction, or
a similar response to the market. For example, an athletic footwear company might have market
segments for basketball players and long-distance runners. As distinct groups, basketball players and long-distance runners respond to very different advertisements.

Market segmentation is an extension of market research that seeks to identify targeted groups of consumers for the purpose of tailoring products and branding in a way that is attractive to the group. The objective of market segmentation is to minimize risk to the company by determining which products have the best chances for gaining a share of a given target market, and determining the best way to deliver the products to the market. This allows the company to
increase its overall efficiency by focusing its limited resources on efforts that produce the best return on investment.

Markets consist of buyers, and buyers differ in one or more ways. They may differ in their wants, resources, locations, buying attitudes and buying practices. Through market segmentation, companies divide large, heterogeneous markets into smaller segments that can be reached more efficiently with products and services that match their unique needs.

There are seven important segmentation topics: levels of market segmentation, segmenting
consumer markets, segmenting business markets, segmenting international markets, multivariate
segmentation, developing market segments and requirements for effective segmentation.

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Titany answered the question on November 12, 2021 at 07:37