Market segmentation is the analytical process of dividing a heterogeneous market into smaller segments or groups that have similar needs, preferences, or characteristics. It allows businesses to target different categories of consumers who perceive the full value of certain products and services differently from one another. Effective market segmentation is a fundamental strategy in marketing and business planning, enabling companies to tailor their marketing efforts and product offerings to specific groups to meet customer needs more precisely and efficiently.

The segmentation process involves identifying the broad market for a product or service and then dividing it into sub-markets or segments based on various criteria such as demographics (age, gender, family size), psychographics (values, attitudes, interests), geographic location, behavior (purchasing habits, brand interactions), and other factors. Each segment is unique and would respond to different marketing mixes.

By focusing on market segments, companies can concentrate their resources on the audience most likely to respond to their value proposition, thus optimizing marketing budgets and potentially achieving a better return on investment (ROI). Market segmentation also helps in creating more effective communication strategies that resonate with the target audience, developing stronger customer relationships, and identifying new product development opportunities.

In practice, market segmentation can lead to the creation of niche markets, a more focused sales approach, and improved customer retention through personalized experiences. It's a strategic tool that, when used effectively, can give a company a competitive edge by identifying underserved segments and catering to them in ways the competition is not.