With the ongoing reforms in the Indian financial sector and the plethora of new developments taking place in the global financial markets, the Indian banking industry has a point to prove in serving different segments of customers.

Market segmentation is dividing a heterogeneous large market into smaller homogeneous market segments with similar characteristics. It is `The process of splitting customers in a market into different groups, or segments, within which customers share a similar level of interest in the same or comparable set of needs satisfied by a distinct marketing proposition.' According to Dr. Phillip Kotler, market segmentation is "The task of breaking the total market into segments that share common properties. The market segmentation is the act of dividing a market into distinct groups of buyers who might merit separate products and/or marketing mixes." While market segmentation can be applied to various fields as a successful marketing strategy, its application in bank marketing poses some unique challenges to the marketers. However, like in all other fields, such as FMCG marketing, services marketing, market segmentation also plays an equally important role in marketing bank products successfully.

In the banking parlance, by market segmentation one means dividing the targeted `large market, characterized by varied customer profiles/occupational status/customer needs', into `smaller homogeneous marketing segments with identical features/requirements.' This is a proactive approach of the banks to cater to the needs of their prospective and current customers and also to attract and retain them for longer periods. The need for market segmentation can be due to differences in customers' needs/knowledge levels/purchase process/differences in their profiles. The needs of the customer groups with higher education/higher status may sharply differ from the needs of the customers with lesser education or having lower status. These differences in their status/knowledge also impact their purchase process as well. For instance, a knowledgeable customer may search for more information before his purchase and may be aggressive in communicating his post-purchase satisfaction/dissonance when compared to his less-knowledgeable compatriot. Likewise, the impact of Reference Group also differs among different customer groups and cannot be undermined as well.

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