Download Product Differentiation and Market Segmentation as Alternative

Product Differentiation and Market Segmentation as Alternative Marketing Strategies
Author(s): Wendell R. Smith
Source: Journal of Marketing, Vol. 21, No. 1 (Jul., 1956), pp. 3-8
Published by: American Marketing Association
Stable URL: http://www.jstor.org/stable/1247695
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Journal of Marketing
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PRODUCT DIFFERENTIATION AND MARKET
SEGMENTATION AS ALTERNATIVE
MARKETING STRATEGIES
WENDELL R. SMITH
A lderson & Sessions
URING the decade of the 1930's, the
work of Robinson and Chamberlin
resulted in a revitalization of economic
duces a diversity in supply that is inconsistent with the assumptions of earlier
theory. The reasons for the presence of di-
theory. While classical and neoclassical
versity in specific markets are many and
theory provided a useful frameworkinclude
for
the following:
economic analysis, the theories of perfect
1. Variations in the production equipment
competition and pure monopoly had beand methods or processes used by differcome inadequate as explanations of the
ent manufacturers of products designed
contemporary business scene. The theory
for the same or similar uses.
of perfect competition assumes homoge2. Specialized or superior resources enneity among the components of both thejoyed by favorably situated manufacfacturers.
demand and supply sides of the market,
but diversity or heterogeneity had come
3. Unequal progress among competitors in
design, development, and improvement
to be the rule rather than the exception.
of products.
This analysis reviews major marketing
4. The
strategy alternatives that are available
to inability of manufacturers in some
industries
to eliminate product variaplanners and merchandisers of products
tions
even
through the application of
in an environment characterized by imquality control techniques.
perfect competition.
5. Variations in producers' estimates of the
Diversity in Supply
nature of market demand with reference
to such matters as price sensitivity, color,
material, or package size.
That there is a lack of homogeneity
or close similarity among the items of-
Because of these and other factors,
fered to the market by individual manuboth planned and uncontrollable differfacturers of various products is obvious
ences exist in the products of an industry.
in any variety store, department store, or
As a result, sellers make different apshopping center. In many cases the impeals in support of their marketing efpact of this diversity is amplified byforts.
advertising and promotional activities. Today's advertising and promotion tends to
Diversity or Variations in Consumer Deemphasize appeals to selective rather
mand
than primary buying motives and to
point out the distinctive or differentiatUnder present-day conditions of iming features of the advertiser's product
perfect competition, marketing managers
or service offer.
are generally responsible for selecting the
The presence of differences in the sales
over-all marketing strategy or combinaoffers made by competing suppliers protion of strategies best suited to a firm's
3
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THE
JOURNAL
OF MARKETING
4 THE
JOURNAL
OF MARKETING
July 1956~~~~~~~~~~~~~~~~~~~~~ July 1956
4
requirements at any particular point in
time. The strategy selected may consist
of a program designed to bring about the
Diversity on the demand side of the
market is nothing new to sales manage-
ment. It has always been accepted as a
convergence of individual market de-
fact to be dealt with in industrial mar-
single or limited offering to the market.
than for the market is common. Here,
mands for a variety of products upon a
kets where production to order rather
This is often accomplished by the
however, the loss of precision in the satachievement of product differentiation isfying of customer requirements that
through advertising and promotion. In would be necessitated by attempts to
this way, variations in the demands of bring about convergence of demand is
individual consumers are minimized or
often impractical and, in some cases, imbrought into line by means of effective
possible. However, even in industrial
marketing, the strategy of product differuse of appealing product claims designed
entiation should be considered in cases
to make a satisfactory volume of demand
converge upon the product or product
where products are applicable to several
industries and may have horizontal marline being promoted. This strategy was
once believed to be essential as the mar-
kets of substantial size.
keting counterpart to standardization
Long-Term Implications
and mass production in manufacturing
because of the rigidities imposed by proWhile contemporary economic theory
duction cost considerations.
deals with the nature of product differIn some cases, however, the marketer
entiation and its effects upon the opera-
may determine that it is better to accept tion of the total economy, the alternative
divergent demand as a market character- strategies of product differentiation and
istic and to adjust product lines and mar- market segmentation have received less
keting strategy accordingly. This implies attention. Empirical analysis of contem-
ability to merchandise to a heterogene- porary marketing activity supports the
ous market by emphasizing the precision hypothesis that, while product differenwith which a firm's products can satisfy tiation and market segmentation are
the requirements of one or more distin- closely related (perhaps even inseparaguishable market segments. The strategy ble) concepts, attempts to distinguish beof product differentiation here gives way tween these approaches may be producto marketing programs based upon meas- tive of clarity in theory as well as greater
urement and definition of market differ-
ences.
precision in the planning of marketing
operations. Not only do strategies of dif-
Lack of homogeneity on theferentiation
demand and segmentation call for
side may be based upon different
differingcussystems of action at any point in
toms, desire for variety, or desire
for
time,
butexthe dynamics of markets and
clusiveness or may arise frommarketing
basic difunderscore the importance of
ferences in user needs. Some divergence
varying degrees of diversity through time
in demand is the result of shopping
errors
and suggest
that the rational selection of
in the market. Not all consumers have
marketing strategies is a requirement for
the achievement of maximum functional
the desire or the ability to shop in a sufficiently efficient or rational manner
as
effectiveness
in the economy as a whole.
to bring about selection of the most
If a rational selection of strategies is
needed or most wanted goods or services.
to be made, an integrated approach to
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PRODUCT DIFFERENTIATION AND MARKET SEGMENTATION
5
the minimizing of total costsbecome
must take
soluble by doing something
precedence over separate approaches
to
about marketing
programs and product
minimization of production costs
policies
on
that
the
overgeneralize both markets
one hand and marketing costs
on the effort. These are situaand marketing
other. Strategy determination
must
be intensive promotion detions
where
regarded as an over-all management
signed to dedifferentiate the company's
cision which will influence and
require
products
was not accomplishing its objecfacilitating policies affectingtive-cases
both prowhere failure to recognize
duction and marketing activities.
the reality of market segments was resulting in loss of market position.
While
successful product differentiaDifferences Between Strategies
of Diftion
will
result in giving the marketer a
ferentiation and Segmentation
horizontal
share of a broad and generalProduct differentiation and market
ized market, equally successful applicasegmentation are both consistent with
tion of the strategy of market segmentathe framework of imperfect competition tends to produce depth of market
tion.' In its simplest terms, product difposition in the segments that are effecferentiation is concerned with the bendtively defined and penetrated. The difing of demand to the will of supply. It
ferentiator seeks to secure a layer of the
is an attempt to shift or to change the
market cake, whereas one who employs
slope of the demand curve for the market
market segmentation strives to secure
offering of an individual supplier. This
one or more wedge-shaped pieces.
strategy may also be employed by a group
Many examples of market segmentaof suppliers such as a farm cooperative,
tion can be cited; the cigarette and autothe members of which have agreed to
act industries are well-known illusmobile
together. It results from the desire to
trations. Similar developments exist in
establish a kind of equilibrium in the
greater or lesser degree in almost all
market by bringing about adjustment of
product areas. Recent introduction of a
market demand to supply conditions fa-
vorable to the seller.
refrigerator with no storage compartment
for frozen foods was in response to the
Segmentation is based upon developdistinguishable preferences of the segments on the demand side of the market
ment of the refrigerator market made up
and represents a rational and more preof home freezer owners whose frozen
cise adjustment of product and marketfood storage needs had already been met.
ing effort to consumer or user requireStrategies of segmentation and differments. In the language of the economist,
entiation may be employed simultanesegmentation is disaggregative in its efously, but more commonly they are apfects and tends to bring about recogniplied in sequence in response to changtion of several demand schedules where
ing market conditions. In one sense, segonly one was recognized before.
mentation is a momentary or short-term
phenomenon in that effective use of this
of analysis by the increasing number of
strategy may lead to more formal recogcases in which business problems have
nition of the reality of market segments
Attention has been drawn to this area
Imperfect competition assumes lack of uniformthrough
redefinition of the segments as
individual
markets. Redefinition may reuals that comprise the demand or supply sides of
a market.
sult in a swing back to differentiation.
ity in the size and influence of the firms or individ-
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6
6I
I
THE JOURANAL OF
MARKETING
OF
MAKTN
JOUNA
July
1956
1
jul
The literature of both economics and
market that will not be denied. It may
result from trial and error in the sense
marketing abounds in formal definitions
of product differentiation. From a stratthat generalized programs of product
egy viewpoint, product differentiationdifferentiation
is
may turn out to be efsecuring a measure of control over the
fective in some segments of the market
demand for a product by advertisingand
orineffective in others. Recognition of,
promoting differences between a product
and intelligent response to, such a situaand the products of competing sellers.
tion necessarily involves a shift in emIt is basically the result of sellers' desires
phasis. On the other hand, it may develop
to establish firm market positions and/or
that products involved in marketing
to insulate their businesses against price
programs designed for particular market
competition. Differentiation tends tosegments
be
may achieve a broader acceptcharacterized by heavy use of advertising
ance than originally planned, thus re-
and promotion and to result in prices
vealing a basis for convergence of de-
that are somewhat above the equilibrium
mand and a more generalized marketing
levels associated with perfectly competiapproach. The challenge to planning
tive market conditions. It may be classiarises from the importance of determinfied as a promotional strategy or ing,
ap- preferably in advance, the level or
proach to marketing.
degree of segmentation that can be exMarket segmentation, on the other
ploited with profit.
hand, consists of viewing a heterogeneous
There appear to be many reasons why
market (one characterized by divergent formal recognition of market segmentademand) as a number of smaller homoge- tion as a strategy is beginning to emerge.
neous markets in response to differing One of the most important of these is deproduct preferences among important crease in the size of the minimum effimarket segments. It is attributable to the cient producing or manufacturing unit
desires of consumers or users for more required in some product areas. Amer-
precise satisfaction of their varying ican industry has also established the
wants. Like differentiation, segmenta- technical base for product diversity by
tion often involves substantial use of ad- gaining release from some of the rigidivertising and promotion. This is to in- ties imposed by earlier approaches to
form market segments of the availability mass production. Hence, there is less
of goods or services produced for or pre- need today for generalization of markets
sented as meeting their needs with pre- in response to the necessity for long procision. Under these circumstances, prices duction runs of identical items.
tend to be somewhat closer to perfectly Present emphasis upon the minimiz-
competitive equilibrium. Market seg- ing of marketing costs through self-serv-
mentation is essentially a merchandising ice and similar developments tends to
strategy, merchandising being used here
impose a requirement for better adjustin its technical sense as representing the ment of products to consumer demand.
adjustment of market offerings to con- The retailing structure, in its efforts to
sumer or user requirements.
achieve improved efficiency, is providing
less and less sales push at point of sale.
The Emergence of the Segmentation This increases the premium placed by
Strategy
To a certain extent, market segmentation may be regarded as a force in the
retailers upon products that are presold
by their producers and are readily recognized by consumers as meeting their
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PRODUCT DIFFERENTIATION AND MARKET SEGMENTATION
I
I
_
_
7
differentiation under such circumstances
requirements as measured by satisfactory
is undesirable, since market share avail-
rates of stock turnover.
It has been suggested that the
able present
as a result of such a promotionoriented
approach
tends to be variable
level of discretionary buying
power
is
over comparitime. Much may hinge, for example,
productive of sharper shopping
sons, particularly for items that
are
above
upon
week-to-week
audience ratings of
the need level. General prosperity
the television
alsoshows of competitors who
seek"to
to outdifferentiate
each other. Excreates increased willingness
pay a
little more" to get "just whatploitation
I wanted."
of market segments, which
provides for
greater maximization of conAttention to market segmentation
has
sumerascendor user satisfactions, tends to build
also been enhanced by the recent
more
secure market position and to
ancy of product competitiona to
a posilead to greater
tion of great economic importance.
An over-all stability. While
expanded array of goods andtraditionally,
services ishigh fixed costs (regarded
competing for the consumer's
dollar.
primarily
from the production viewhave created pressures for exMore specifically, advancing point)
technology
is creating competition between
panded
new
sale and
of standardized items through
traditional materials with reference to
differentiation, the possible shifting of
metals, construction materials, textile
certain marketing costs into the fixed
products, and in many other areas. Whilearea of the total cost structure tends to
such competition is confusing and dif-minimize this pressure.
ficult to analyze in its early stages, it
tends to achieve a kind of balance as
Conclusion
various competing materials find their
Success in planning marketing activimarkets of maximum potential as
a requires
reties
precise utilization of both
sult of recognition of differencesproduct
in the differentiation and market segrequirements of market segments.
mentation as components of marketing
Many companies are reaching thestrategy.
stage
It is fortunate that available
in their development where attention
to
techniques
of marketing research make
market segmentation may be regarded
as
unplanned
market exploration largely
a condition or cost of growth. Their
core
unnecessary.
It is the obligation of those
markets have already been developed
on
responsible
for sales and marketing ad-
a generalized basis to the point where
administration
to keep the strategy mix in
ditional advertising and selling expendiadjustment with market structure at any
tures are yielding diminishing returns.
point in time and to produce in marketAttention to smaller or fringe market
ing strategy at least as much dynamism as
segments, which may have small is
potenpresent in the market. The ability of
tials individually but are of crucial
im- to plan in this way is dependent
business
portance in the aggregate, may be
indiupon the maintenance of a flow of marcated.
ket information that can be provided by
Finally, some business firms are be- marketing research as well as the full utiginning to regard an increasing share of
lization of available techniques of cost
their total costs of operation as being
accounting and cost analysis.
fixed in character. The higher costs of Cost information is critical because the
maintaining market position in the chan- upper limit to which market segmentanels of distribution illustrate this change.tion can be carried is largely defined by
Total reliance upon a strategy of product
production cost considerations. There is
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THE JOURNAL OF MARKETING
8
July 1956
encesofbetween product differentiation
a limit to which diversity in market
and market segmentation as marketing
ferings can be carried without driving
production costs beyond practicalstrategies,
limits. they are closely related concepts in the settingof an imperfectly comSimilarly, the employment of product
differentiation as a strategy tends
to be market. The differences have
petitive
restricted by the achievement of levels
been highlighted
of
in the interest of enmarketing cost that are untenable.
hancing
Theseclarity in theory and precision
cost factors tend to define the limits of
in practice. The emergence of market
segmentation as a strategy once again
the zone within which the employment
of marketing strategies or a strategy mix
provides evidence of the consumer's predictated by the nature of the marketeminence
is
in the contemporary American
permissive.
economy and the richness of the rewards
It should be emphasized that while that
we can result from the application of
have here been concerned with the differscience to marketing problems.
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