Segment definition

What is a segment?

A segment is a component of a business that generates its own revenue and creates its own products, product lines, or service offerings. Segments typically have discrete associated costs and operations. Segments are also called “business segments”.

Generally, if a unit of a company can separate or withdraw from the company as a whole and remain self-sufficient, it satisfies the criteria for classification as a business segment. Financial information must be available for the activities and performance of each segment separately.

Traditionally, each individual segment is periodically reviewed by company management before a decision can be made regarding the amount of capital to be allocated for a particular operating period.

Key takeaways

  • A segment is a term used to describe a component of a business that generates its own revenue and creates its own products or product lines.
  • Segments often have their own discrete associated costs and operations.
  • Generally, if a unit of a company can separate itself from the entire company and remain self-sufficient, it can be classified as its own segment.
  • Business segments can provide businesses with the income they need to succeed when others fail.
  • Companies often report the performance of each segment separately.

Understand the segments

A business segment is a part of a business that generates income by selling a product or product line, or by providing a service that is separate from the main line of business focus. For accounting purposes, SFAS 131 from the Financial Accounting Standards Board (FASB) is the definitive source when it comes to accounting practices that involve segments.

A company can segment its business by region in the same way that Apple has a silo for North and South America, another for Europe (which includes all European countries, the Middle East and Africa) and another separate segment just for Japan.

Segment benefits

Companies with different business segments can gain a competitive advantage by capturing markets that their core operations did not previously target. They can also build customer loyalty, as your existing customer base can become new customers from your additional business segments. This is particularly true when business segments complement each other.

Business units are often identified by their products or geographic locations.

Perhaps one of the main benefits of segmentation is that managers can better identify profit drivers, as well as segments that need improvement. Profitable business segments can offset losses suffered by others. Since each segment produces its own performance results, managers can decide whether the underperforming business segments should be retired or upgraded.

In addition, companies can better follow trends and respond to them through segmentation, which allows them to better serve the needs of their customers.

Example of a segment

Let’s say XYZ Corporation makes widget presses. After years of sticking with the production of this flagship product, you decide that you can easily use the widget presses to make the actual widgets as well. If the company successfully produces widgets and puts them on store shelves for retail consumption, the widget division can be viewed as its own business segment because it generates its own revenue and incurs its own expenses.

Another telltale sign that a company has isolated a function such as its own segment can be seen when its sales figures do not have a direct impact on the profitability of the company’s core operations. In this case, if widget sales fail, but widget press sales rise, the widget arm can justifiably be considered a standalone segment.

Keep in mind that not every component of a company constitutes a segment. For example, the marketing division of XYZ Corp. would not be considered a segment because it does not conduct direct revenue-generating operations.

Real world example

Apple Inc. is known for making phones, tablets, computers, music players, and many other items. Each of these areas can be considered its own segment. This is useful to allow Apple management to determine which area is enjoying the most success and which areas show slow sales figures. The company can then adjust its marketing and research and development efforts accordingly, in an attempt to stimulate the overall profitability of the company.

The bottom line

Business segments are the individual businesses within a company that generate their own income from their various products and / or services. The gains from these segments can offset the losses of others, in addition to providing the company with a competitive advantage over its competitors.

Segment FAQs

What is a market segmentation?

Market segmentation is the act of segmenting a consumer market into groups based on their preferences or shared characteristics or behaviors.

What are the types of market segmentation?

The four main types of market segmentation are demographic, psychographic, behavioral, and geographic. Demographic segmentation includes measurable data such as age, gender, income, and education. Psychographic targeting provides details about consumer personas. Behavioral targeting refers to how people behave, and geographic targeting refers to the different locations of consumers.

Why is market segmentation important?

Market segmentation enables marketers to better allocate company time and resources to understand customer needs and deliver products and services that meet those needs.

What are the steps in the market segmentation process?

The market segmentation process includes placing potential buyers into segments, segmenting products into categories, identifying which products need to be marketed in the segments and what those market sizes are, choosing which markets to target, and marketing to those target markets.

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Mark Holland

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