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Product Differentiation and Market Segmentation as Alternative Marketing Strategies

Author(s): Wendell R. Smith


Source: The 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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PRODUCT DIFFERENTIATION AND MARKET
SEGMENTATION AS ALTERNATIVE
MARKETING STRATEGIES
WENDELL R. SMITH
A lderson & Sessions

URING the decade of the 1930's, the duces a diversity in supply that is incon-
work of Robinson and Chamberlin sistent with the assumptions of earlier
resulted in a revitalization of economic theory. The reasons for the presence of di-
theory. While classical and neoclassical versity in specific markets are many and
theory provided a useful framework for include the following:
economic analysis, the theories of perfect
1. Variationsin the production equipment
competition and pure monopoly had be- and methods or processesused by differ-
come inadequate as explanations of the ent manufacturersof products designed
contemporary business scene. The theory for the same or similar uses.
of perfect competition assumes homoge- 2.
Specialized or superior resources en-
neity among the components of both the joyed by favorably situated manufac-
demand and supply sides of the market, facturers.
but diversity or heterogeneity had come 3. Unequal progressamong competitorsin
to be the rule rather than the exception. design, development, and improvement
This analysis reviews major marketing of products.
strategy alternatives that are available to 4. The inability of manufacturersin some
planners and merchandisers of industries to eliminate product varia-
products tions even
in an environment characterized by im- through the application of
quality control techniques.
perfect competition.
5. Variationsin producers'estimatesof the
nature of marketdemand with reference
Diversity in Supply to such mattersas price sensitivity,color,
That there is a lack of homogeneity material,or packagesize.
or close similarity among the items of-
fered to the market by individual manu- Because of these and other factors,
both planned and uncontrollable differ-
facturers of various products is obvious
in any variety store, department store, or ences exist in the products of an industry.
As a result, sellers make different ap-
shopping center. In many cases the im-
peals in support of their marketing ef-
pact of this diversity is amplified by ad- forts.
vertising and promotional activities. To-
day's advertising and promotion tends to
or Variations in Consumer De-
emphasize appeals to selective rather Diversity
than primary buying motives and to mand
point out the distinctive or differentiat- Under present-day conditions of im-
ing 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 combina-
offers made by competing suppliers pro- tion of strategies best suited to a firm's
3
4 4 THE JOURNAL OF MARKETING 1956
July 1956~~~~~~~~

requirements at any particular point in Diversity on the demand side of the


time. The strategy selected may consist market is nothing new to sales manage-
of a program designed to bring about the ment. It has always been accepted as a
convergence of individual market de- fact to be dealt with in industrial mar-
mands for a variety of products upon a kets where production to order rather
single or limited offering to the market. than for the market is common. Here,
This is often accomplished by the however, the loss of precision in the sat-
achievement 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, im-
brought into line by means of effective possible. However, even in industrial
use of appealing product claims designed marketing, the strategy of product differ-
to make a satisfactory volume of demand entiation should be considered in cases
converge upon the product or product where products are applicable to several
line being promoted. This strategy was industries and may have horizontal mar-
once believed to be essential as the mar- kets of substantial size.
keting counterpart to standardization
and mass production in manufacturing Long-Term Implications
because of the rigidities imposed by pro- While contemporary economic theory
duction cost considerations. deals with the nature of product differ-
In 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
with which a firm's products can satisfy hypothesis that, while product differen-
tiation and market segmentation are
the requirements of one or more distin-
closely related (perhaps even insepara-
guishable market segments. The strategy ble) concepts, attempts to distinguish be-
of product differentiation here gives way tween these approaches may be produc-
to marketing programs based upon meas- tive of clarity in theory as well as greater
urement and definition of market differ- precision in the planning of marketing
ences. operations. Not only do strategies of dif-
Lack of homogeneity on the demand ferentiation and segmentation call for
side may be based upon different cus- differing systems of action at any point in
toms, desire for variety, or desire for ex- time, but the dynamics of markets and
clusiveness or may arise from basic dif- marketing underscore 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 desire or the ability to shop in a suf- the achievement of maximum functional
ficiently 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
PRODUCT DIFFERENTIATION AND MARKET SEGMENTATION 5

the minimizing of total costs must take become soluble by doing something
precedence over separate approaches to about marketing programs and product
minimization of production costs on the policies that overgeneralize both markets
one hand and marketing costs on the and marketing effort. These are situa-
other. Strategy determination must be tions where intensive promotion de-
regarded as an over-all management de- signed to differentiate the company's
cision which will influence and require products was not accomplishing its objec-
facilitating policies affecting both pro- tive-cases where failure to recognize
duction and marketing activities. the reality of market segments was re-
sulting in loss of market position.
Differences Between Strategies of Dif- While successful product differentia-
ferentiation and Segmentation tion will result in giving the marketer a
horizontal share of a broad and general-
Product differentiation and market
ized market, equally successful applica-
segmentation are both consistent with tion of the
the framework of imperfect competi- strategy of market segmenta-
tion tends to produce depth of market
tion.' In its simplest terms, product dif-
in the segments that are effec-
ferentiation is concerned with the bend- position defined and penetrated. The dif-
tively
ing of demand to the will of supply. It ferentiator seeks to secure a
is an attempt to shift or to change the layer of 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 of market segmenta-
of suppliers such as a farm cooperative, Many examples
tion can be cited; the cigarette and auto-
the members of which have agreed to act
mobile industries are well-known illus-
together. It results from the desire to trations. Similar
establish a kind of equilibrium in the developments exist in
or lesser degree in almost all
market by bringing about adjustment of greater
product areas. Recent introduction of a
market demand to supply conditions fa-
refrigerator with no storage compartment
vorable to the seller.
for frozen foods was in response to the
Segmentation is based upon develop-
ments on the demand side of the market distinguishable preferences of the seg-
and represents a rational and more pre- ment of the refrigerator market made up
cise adjustment of product and market- of home freezer owners whose frozen
food storage needs had already been met.
ing effort to consumer or user require-
ments. In the language of the economist, Strategies of segmentation and differ-
entiation may be employed simultane-
segmentation is disaggregative in its ef- but more commonly they are ap-
fects and tends to bring about recogni- ously,
tion of several demand schedules where plied in sequence in response to chang-
ing market conditions. In one sense, seg-
only one was recognized before.
Attention has been drawn to this area mentation is a momentary or short-term
of analysis by the increasing number of phenomenon in that effective use of this
cases in which business problems have strategy may lead to more formal recog-
nition of the reality of market segments
Imperfect competition assumes lack of uniform- through redefinition of the segments as
ity in the size and influence of the firms or individ- individual markets. Redefinition may re-
uals that comprise the demand or supply sides of
a market. sult in a swing back to differentiation.
6 THE JOURANAL
JOUNA OF
OF MARKETING
MAKTN July
jul 11956
6I I

The literature of both economics and market that will not be denied. It may
marketing abounds in formal definitions result from trial and error in the sense
of product differentiation. From a strat- that generalized programs of product
egy viewpoint, product differentiation is differentiation may turn out to be ef-
securing a measure of control over the fective in some segments of the market
demand for a product by advertising or and ineffective in others. Recognition of,
promoting differences between a product and intelligent response to, such a situa-
and the products of competing sellers. tion necessarily involves a shift in em-
It 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 priceprograms designed for particular market
competition. Differentiation tends to be segments may achieve a broader accept-
characterized by heavy use of advertisingance 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 competi-approach. The challenge to planning
tive market conditions. It may be classi-arises from the importance of determin-
fied as a promotional strategy or ap- ing, preferably in advance, the level or
proach to marketing. degree of segmentation that can be ex-
Market 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 segmenta-
demand) 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 de-
product preferences among important crease in the size of the minimum effi-
market 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 rigidi-
vertising 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 pro-
cision. Under these circumstances, pricesduction 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 adjust-
in 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 at point of sale.
The Emergence of the Segmentation This increases thepush
premium placed by
Strategy retailers upon products that are presold
To a certain extent, market segmenta- by their producers and are readily rec-
tion may be regarded as a force in the ognized by consumers as
meeting their
PRODUCT DIFFERENTIATION
I AND MARKET
I SEGMENTATION 7
_ _
requirements as measured by satisfactory differentiation under such circumstances
rates of stock turnover. is undesirable, since market share avail-
It has been suggested that the present able as a result of such a promotion-
level of discretionary buying power is oriented approach tends to be variable
productive of sharper shopping compari- over time. Much may hinge, for example,
sons, particularly for items that are above upon week-to-week audience ratings of
the need level. General prosperity also the television shows of competitors who
creates increased willingness "to pay a seek to outdifferentiate each other. Ex-
little more" to get "just what I wanted." ploitation of market segments, which
Attention to market segmentation has provides for greater maximization of con-
also been enhanced by the recent ascend- sumer or user satisfactions, tends to build
ancy of product competition to a posi- a more secure market position and to
tion of great economic importance. An lead to greater over-all stability. While
expanded array of goods and services is traditionally, high fixed costs (regarded
competing for the consumer's dollar. primarily from the production view-
More specifically, advancing technology point) have created pressures for ex-
is creating competition between new and panded sale 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. While area 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 activi-
markets of maximum potential as a re- ties requires precise utilization of both
sult of recognition of differences in the
product differentiation and market seg-
requirements of market segments. mentation as components of marketing
Many companies are reaching the stage strategy. It is fortunate that available
in their development where attention to
market segmentation may be regarded as techniques of marketing research make
a condition or cost of growth. Their core unplanned market exploration largely
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 ad- ministration to keep the strategy mix in
ditional advertising and selling expendi-
adjustment with market structure at any
tures are yielding diminishing returns.
point in time and to produce in market-
Attention to smaller or fringe market
ing strategy at least as much dynamism as
segments, which may have small poten- is present in the market. The ability of
tials individually but are of crucial im- business to plan in this way is dependent
portance in the aggregate, may be indi- upon the maintenance of a flow of mar-
cated. ket information that can be provided by
Finally, some business firms are be- marketing research as well as the full uti-
ginning 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 segmenta-
nels 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
8 THE JOURNAL OF MARKETING July 1956

a limit to which diversity in market of- ences between product differentiation


ferings can be carried without driving and market segmentation as marketing
production costs beyond practical limits. strategies, they are closely related con-
Similarly, the employment of product cepts in the settingof an imperfectly com-
differentiation as a strategy tends to be petitive market. The differences have
restricted by the achievement of levels ofbeen highlighted in the interest of en-
marketing cost that are untenable. These hancing clarity in theory and precision
cost factors tend to define the limits of in practice. The emergence of market
the zone within which the employment segmentation as a strategy once again
of marketing strategies or a strategy mix provides evidence of the consumer's pre-
dictated by the nature of the market is eminence in the contemporary American
permissive. economy and the richness of the rewards
It should be emphasized that while we that can result from the application of
have here been concerned with the differ- science to marketing problems.

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