Market segmentation is a concept in economics and marketing.
A market segment is a sub-set of a market made up of people or organizations with one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function.
A true market segment meets all of the following criteria: it is distinct from other segments (different segments have different needs), it is homogeneous within the segment (exhibits common needs); it responds similarly to a market stimulus, and it can be reached by a market intervention.
The term is also used when consumers with identical product and/or service needs are divided up into groups so they can be charged different amounts. The people in a given segment are supposed to be similar in terms of criteria by which they are segmented and different from other segments in terms of these criteria. These can broadly be viewed as 'positive' and 'negative' applications of the same idea, splitting up the market into smaller groups.
The purpose for segmenting a market is to allow your marketing/sales program to focus on the subset(s) of prospects that are "most likely" to purchase your offering. If done properly this will help to insure the highest return for your marketing/sales expenditures. Depending on whether you are selling your offering to individual consumers or a business, there are definite differences in what you will consider when defining market segments.
For more information about how you can segment your markets for online marketing campaigns see the Theme Zoom Vertical Online Market Analysis Tool.