List segmentation is exactly what it sounds like -- you divide up your contacts into a bunch of smaller lists, or segments, based on criteria you set.
These segments can be cut and combined in a number of different ways based on lead intelligence. For instance, you can segment your contacts based on psychographics, demographics, industry, company size -- you name it.
Segmentation is important because it helps you better target and personalize your campaigns and content. With better targeting comes better conversion rates -- because you're sending the most relevant information possible to your contacts.