by Wendell R. Smith

Product Differentiation andMarket Segmentation As

Alternative Marketing StrategiesAlthough closely related, the two concepts

have important differences.

During the 1930s, the work ofRobinson and Chamber!inresulted in a revitalization ofeconomic theory. Whileclassical and neoclassical

theory provided a useful framework foreconomic analysis, the theories of perfectcompetition and pure monopoly hadbecome inadequate as explanations of thecontemporary business scene.

The theory of perfect competitionassumes homogeneity among the compo-nents of both the demand and supply sidesof the market., but diversity or heterogene-ity is now the rule rather than the excep-tion. Major marketing strategy alterna-tives are available to planners and mer-chandisers of products in an environmentcharacterized by impertect competition.

Diversity in Supply

That there is a lack of homogeneityor close similarity among the itemsoffered to the market by individual

manufacturers of various products isobvious in any variety store, departmentstore, or shopping center. In many cases,the impact of this diversity is amplifiedby advertising and promotional activities.

Today's advertising and promotion tendsto emphtisize appeals to selective rather thanprimary buying motives and to point out thedistinctive or differentiating features of theadvertiser's product or service offer.

The presence of differences in the salesoffers made by competing suppliers pro-duces a diversity in supply that is inconsis-tent with the assumptions of earlier theory.

The reasons for the presence of diversityin sj>ecific markets are many and includethe following:

• Variations in the production equipmentand methods or processes used by differ-ent manufacturers of products designedfor the same or similar uses,

• Specialized or superior resources enjoyedby favorably situated manufacturers.

• Unequal progress among competitors indesign, development, and improvement ofproducts,

• The inability of manufacturers in someindustries to eliminate product variationseven through the application of qualitycontrol techniques.

• Variations in producers' estimates of

the nature of market demand with refer-ence to such matters as price sensitivity,color, material, or package size.

Because of these and other factors,both planned and uncontrollable differ-ences exist in the products of an industry.As a result, sellers make different appealsin support of their marketing efforts.

Diversity in Demand

Under present-day conditions ofimperfect competition, marketingmanagers are generally responsible

for selecting the overall marketing strategyor combination of strategies best suited to afmn's requirements at any particular time.The strategy selected may consist of a pro-gram designed to britig about the conver-gence of individual market demands for avariety of products upon a single or limitedoffering to the market, Tliis is often accom-

EXECUTIVE BRIEFINO/

u each issue of Marketing Management we reprint an iinportant arti-cle from a past issue of one of our sister puhlications. This article,

from the July 1956 issue of Journal of Marketing, won JM's AlphaKappa Psi Award as the most significant practical marketing article ofthat year. An influential marketing educator, corporate executive, andresearch consultant. Smith was 1958-59 president of AMA and the firstpresident of the Marketing Science Institute, serving from 1962-69.

plishcd by the achievement of product dif-ferentiation through advertising and pro-motinn. In this way, variations in thedemands of individual consumers are mini-mized or brought into line by means ofeffective use of appealing product claimsdesigned to make a satisfactory volume ofdemand converge upon tlie product orproduct line being promoted. This strategywa.s once believed to be essential as themarketing counterpart to standardizationand mass production in manufacturingbecause of the rigidities imposed by pro-duction cost considerations.

In some cases, however, the marketermay detennine that it is better to acceptdivergent demand as a market characteris-tic and to adjust product lines and market-ing strategy accordingly. This implies abil-ity to merchandise to a heterogeneousmarket by emphasizing the precision withwhich a firm's products can satisfy therequirements of one or more distinguish-able market segments. The strategy ofproduct differentiation here gives way tomarketing differences.

Lack of homogeneity on the demandside may be based upon different cus-toms, desire for variety, or desire forexclusiveness or may arise from basicdifferences in user needs. Some diver-gence in demand is ihe result of shoppingerrors in the market. Not all consumershave the desire or the ability to shop in asufficiently efficienl or rational manneras to bring about selection of the mostneeded or most wanted goods or services.

Diversity on the demand side of themarket is nothing new to sales manage-ment. It has always been accepted as a factto be dealt with in industrial marketswhere production to order rather than forthe market is common. Here, however,even in industrial marketing, the strategyof product differentiation should be con-sidered in cases where products are applic-able to several industries and may havehorizontal markets of substantial size.

Long-Term Implications

While contemporary economictheory deals with the nature ofproduct differentiation and its

effects upon the operation ofthe totaleconomy, the altemative strategies ofproduct differentiation and market seg-mentation have received less attention.Empirical analysis of contemporary mar-keting activity supports the hypothesisthat, while product differentiation andmarket segmentation are closely related(perhaps even inseparable) concepts.

attempts to distinguish between theseapproaches may be productive of clarityin theory as well as greater precision inthe planning of marketing operations. Notonly do strategies of differentiation andsegmentation call for differing systems ofaction at any point in time, but thedynamics of markets and marketingunderscore the importance of varyingdegrees of diversity through time andsuggest that the rational selection of mar-keting strategies is a requirement for theachievement of maximum functionaleffectiveness in the economy as a whole.

If a rational selection of strategies is tobe made, an integrated approach to theminimizing of total costs must takeprecedence over separate approaches tominimization of production costs on theone hand and marketing costs on theother. Strategy determination must beregarded as an overall management deci-sion which will influence and requirefacilitating policies affecting both pro-duction and marketing activities.

Differences Between Strategies

Prtxluct differentiation and market seg-mentation are both consistent with theframework of imperfect competition.

Imperfect competition assumes lack of uni-fonnity in the size and influence ofthe firmsor individuals that constitute the deiiiand orsupply sides of a market.

In its simplest terms, product differen-tiation is concerned with the bending ofdemand to the will of supply. It is anattempt to shift or to change the slope ofthe demand curve for the market offeringof an individual supplier, This strategymay also be employed by a group of sup-pliers such as a farm cooperative, themembers of which have agreed to acttogether. It results from the desire toestablish a kind of equilibrium in themarket by bringing about adjustment ofmarket demand to supply conditionsfavorable to the seller.

Segmentation is based upon develop-ments on the demand side of the market andrepresents a rational and more precise adjust-ment of product and marketing effort to con-sumer or user requirements. In the languageofthe economist, segmentation is disag-gregative in its effects and tends to bringabout recognition of several demand sched-ules where only one was recognized before.

Attention has been drawn to this area ofanalysis by the increasing number of casesin which business problems have becomesoluble by doing something about market-ing programs and product policies that

overgeneralize both markets and marketingeffort. Tliese are situations where intensivepromotion designed to differentiate thecompany's products was not accomplish-ing its objective—cases where failure torecognize the reality of market segmentswas resulting in loss of market j^isition.

While successful product differentia-tion will result in giving the marketer ahorizontal share of a broad and general-ized market, equally successful applica-tion of the strategy of market segmenta-tion tends to produce depth of marketposition in the segments that are effec-tively defined and penetrated. The differ-entiator seeks to secure a layer of themarket cake, whereas one who employsmarket segmentation strives to secure oneor more wedge-shaped pieces.

Many examples of market segmenta-tion can be cited; the cigarette and auto-mobile industries are well-known illustra-tions. Similar developments exist ingreater or lesser degree in almost all prod-uct areas. Recent introduction of a refrig-erator with no storage compartment forfrozen foods was in response to the distin-guishable preferences of the segment ofthe refrigerator market made up of homefreezer owners whose frozen food storageneeds had already been met.

Strategies of segmentation and differ-entiation may be employed simultaneous-ly, but more commonly they are appliedin sequence in response to changing mar-ket conditions. In one sense, segmentationis a momentary or short-term phenome-non in tliat effective use of this strategymay lead to more formal recognition ofthe reality of market segments throughredefinition of the segments as individualmarkets. Redefinition may result in aswing back to differentiation.

The literature of both economics andmarketing abounds in fonnal definitions ofproduct differentiation. From a strategyviewpoint, product differentiation is secur-ing a measure of control over the demandfor a product by advertising or promotingdifferences between a pnxiuct and theprixlucts of competing sellers. It is basical-ly the result of sellers" desires to establishfirm market positions and/or to insulatetheir businesses against price competition.

Differentiation tends to be characterizedby heavy use of advertising and promotionand to result in prices that are somewhatabove the equilibrium levels as.scx;iatedwith perfectly competitive tnarket condi-tions. It may be classified as a promotionalstrategy or approach to marketing.

Market segmentation consists of viewing

64 UARKITING MANAOEMENJ

a heterogeneous market (one characterizedby divergent demand) as a number of small-er homogeneous markets in response to dif-fering product preferences among importantmarket segments. It is attributable to diedesires of consumers or users for more pre-cise satisfaction of their varying wants.

Like differentiation, segmentation ofteninvolves substantial use of advertising andpromotion. This is to inform market seg-ments of the availability of goods or ser-vices produced for or presented as meetingtheir needs with precision. Under these cir-cumstances, prices tend to be somewhatcloser to perfectly competitive equilibrium,Market segmentation is essentially a mer-chandising strategy, merchandising beitigused here in its technical sense as repre-senting the adjustment of market offeringsto consumer or user requirements.

Segmentation Emerging

To a certain extent, market segmenta-tion may be regarded as a force inthe market that will not be denied. It

may result from trial and error in the sensethat generalized programs of product dif-ferentiation may tum out to be effective insome segments of the marketing and inef-fective in others. Recognition of and intel-ligent response to such a situation neces-sarily involves a shift in emphasis.

Or it may develop that productsinvolved in marketing programs designedtor particular market segments mayachieve a broader acceptance than origi-nally planned, thus revealing a basis forconvergence of demand and a more gen-eralized marketing approach. The chal-lenge to planning arises from the impor-tance of determining, preferably inadvance, the level or degree of segmenta-tion that can be exploited with profit.

There appear to be many reasons whyformal recognition of market segmentationas a strategy is beginning to emerge. Oneof the most important of these is decreasein the size of the minimum efficient pro-ducing or manufacturing unit required insome product areas. American industryhas also established the technical base forproduct diversity by gaining release fromsome of the rigidities imposed by earlierapproaches to mass production. Hence,there is less need today for generalizationof markets in response to the necessity forlong production runs of identical items.

Present emphasis on the minimizing ofmarketing costs through self-service andsimilar developments tends to impose arequirement for better adjustment of prod-ucts to consumer demand. The retailing

structure, in its efforts lo achieve improvedefficiency, is providing less and less salespush at point of sale. This increases thepremium placed by retailers on productsthat are presold by their producers and arereadily recognized by consumers as meet-ing their requirements as measured by sat-isfactory rates of stock turnover.

It has been suggested that the presentlevel of discretionary buying power isproductive of sharper shopping compar-isons, particularly for items that areabove the need level. General prosperityalso creates increased willingness "to paya little more" to get "just what I wanted."

Attention to market segmentation hasalso been enhanced by the recent ascen-dancy of product competition to a posi-tion of great economic importance. Anexpanded array of goods and services iscompeting for the consumer's dollar.More specifically, advancing technologyis creating competition between new andtraditional materials with reference tometals, construction materials, textileproducts, and in many other areas.

While such competition is confusingand difficult to analyze in its early stages,it tends to achieve a kind of balance asvarious competing materials find theirmarkets of maximum potential as a resultof recognition of differences in therequirements of market segments.

Many companies are reaching thestage in their development where atten-tion to market segmentation may beregarded as a condition or cost of growth.Their core markets have already beendeveloped on a generalized basis to thepoint where additional advertising andselling expenditures are yielding dimin-ishing returns. Attention to smaller orfringe market segments, which may havesmall potential individually but are cru-cial in the aggregate, may be indicated.

Finally, some firms are beginning toregard an increasing share of their totalcosts of operation as being fixed in char-acter. The higher costs of maintainingmarket position in the channels of distrib-ution illustrate this change. Total relianceon a strategy of product differentiationunder such circumstances is undesirablebecause market share available as a resultof such a promotion-oriented approachtends to be variable over time.

Much may hinge, for example, on week-to-week audience ratings of the televisionshows of competitors who seek to outdiffer-entiate each other. Exploitation of marketsegments, which provides for greater maxi-mization of consumer or user satisfaction.

tends to build a more secure market positionand to lead to greater overall stability. Wliile,traditionally, high fixed ctwts (regarded pri-marily from the production viewpt>inl) havecreated pressures for expiuided sale of stan-dardized items through differentiation, thepossible shifting of certain marketing costsinto tlie fixed area of the total cost structuretends to minimize this pressure.

Conclusion

Success in planning marketing activi-ties requires precise utilization ofboth product differentiation and mar-

ket segmentation as components of mar-keting strategy. It is fortunate that avail-able techniques of marketing researchmake unplanned market exploration large-ly unnecessary. It is the obligation of thoseresponsible for sales and marketingadministration to keep the strategy mix inadjustment with market structure at anypoint in time and to produce in marketingstrategy at least as much dynamism as ispresent in the market.

The ability of business to plan in thisway is dependent upon the maintenance ofa fiow of market infonnation that can beprovided by marketing research as well asthe full utilization of available techniquesof cost accounting and ccwt analysis.

Cost infonnation is critical because theupper limit to which market segmentationcan be carried is largely defined by pro-duction cost considerations. Tliere is alimit to which diversity in market offer-ings can be carried without driving pro-duction costs beyond practical limits. Sim-ilarly, the employment of product differen-tiation as a strategy tends to be restrictedby the achievement of levels of marketingcost that are untenable. These cost factorstend to define the limits of the zone withinwhich the employment of marketingstrategies or a strategy mix dictated by thenature of the market is pennissivc.

It should be emphasized that while Ihave been here concerned with the differ-ences between product differentiation andmarket segmentation as marketing strate-gies, they are closely related concepts inthe setting of an imperfectly competitivemarket. The differences have been high-lighted in the interest of enhancing elarityin theory and precision in practice.

The emergence of market segmenta-tion as a strategy once again provides evi-dence of the consumer's preeminence inthe contemporary American economyand the richness of the rewards that canresult from the application of science tomarketing problems. CEO

fHARKlTINGMAmEMENJ 1995Jol.4Jo.3bS