Market Segmentation, Product Differentiation, and Marketing Strategy

Author(s): Peter R. Dickson and James L. Ginter

Source: Journal of Marketing, Vol. 51, No. 2 (Apr., 1987), pp. 1-10
Published by: American Marketing Association
Stable URL: http://www.jstor.org/stable/1251125
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 Peter R. Dickson & James L. Ginter

Market Segmentation, Product

Differentiation, and
Marketing Strategy
Despite the pervasive use of the terms "market segmentation" and "product differentiation," the
been and continues to be considerable misunderstanding about their meaning and use. The au
attempt to lessen the confusion by the use of traditional and contemporary economic theory and pr
preference maps.

and Rosenberg 1981; Neidell 1983; Pride a

M ARKETS have been segmented and products
and services differentiated for as long as sup-1985; Stanton 1981) describe product diffe
pliers have differed in their methods of competing foras an alternative to market segmentation an
trade. The major advance in recent times has been thattexts (Abell and Hammond 1979; Buell 1984; Busch
market researchers are using economic and behavioral and Houston 1985; Cravens 1982; Dalrymple and Par-
sons 1983; DeLozier and Woodside 1978; Enis 1980;
theories and sophisticated analytical techniques in their
search for better ways of identifying market segmentsGuiltinan and Paul 1985; Hughes 1978; Kotler 1984;
and product differentiation opportunities. If sheer Reibstein 1985) describe it as a complement or means
amount of statistical analysis and psychological jar-of implementing market segmentation.1 In addition,
gon were the criterion, market segmentation could three
be of the texts (Evans and Berman 1982; Mandel
and Rosenberg 1981; Pride and Ferrell 1985) limit
judged to have shifted in status from an art to a sci-
ence.
product differentiation to only nonphysical product
We therefore might expect that by now characteristics.
the basic
purpose, definition of terms, and theory underlying The potential for misunderstanding is exacerbated
market segmentation and product differentiation would of "undifferentiated" and "differ-
by the discussion
have been consistently described and well entiated" marketing strategies. These terms are used
understood.
This is not the case. A review of 16 contemporary to indicate whether or not marketing strategy is based
marketing textbooks reveals considerable confusion.
on recognition of market segments. Where product
Five of the texts (Evans and Berman differentiation
1982; Mandel is discussed as an alternative to market
segmentation, it is described as being an undifferen-
tiated marketing strategy. This element of confusion
Peter R. Dickson is Assistant Professor and James L. Ginter is Professor,
Academic Faculty of Marketing, The Ohio State University. The authors
gratefully acknowledge the thoughtful comments and criticisms
'Four texts, on ear-
those of Assael (1985), Cunningham and Cunningham
(1981),
lier versions of the article provided by Brian Ratchford, McCarthy
Cynthia and Perreault (1984), and Scott, Warshaw, and
Fraser,
Alan Sawyer, Fred Sturdivant, W. Wayne Talarzyk, Taylor
Barton (1985) are notand
Weitz, included in the classification because they do
anonymous JM reviewers. not use the term "product differentiation" in the discussion of market
segmentation.

Journal of Marketing
Vol. 51 (April 1987), 1-10. Market Segmentation, Product Differentiation, and Marketing Strategy / 1

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arises from the fact that various authors discuss dif- knowledge or other market "frictions," but a reflec-
ferentiation of the market, products, and strategy, and tion of the unsuccessful and successful attempts of
the distinctions are seldom made clear. manufacturers to adapt their products to the needs and
We attempt to clarify the current misunderstand- tastes of different buyers.2 In his first edition, Cham-
ing by precisely defining and contrasting market seg- berlin stated that there seemed to be no particular rea-
mentation, product differentiation, and demand func- son why the demand curve would change when a
tion modification on both theoretical and practical product is differentiated. However, by his third edi-
dimensions. In the first section we present some of tion, Chamberlin had recognized that the demand curve
the theories and perspectives of market segmentation would move to the right and therefore become less
and product differentiation that have been developed price elastic when the differentiated product more ex-
by economists and marketers. We then offer a set of actly satisfied consumer needs.
definitions in an attempt to lessen the current confu- Porter (1976) also viewed product differentiation
sion in terminology. Finally, we use preference space as depending on both physical product characteristics
mapping and practical examples to illustrate the im- and other elements of the marketing mix. Like Cham-
portant differences and relationships between product berlin, he recognized that product differentiation can
differentiation and demand modification, given var- be based on perceived as well as actual physical and
ious states of demand heterogeneity. nonphysical product differences. Porter also adhered
to the traditional operational definition of product dif-
ferentiation as the degree of cross-price inelasticity with
Historical Perspectives respect to competing brands. In a demand equation
The concepts of product differentiation and market this cross-inelasticity is represented by a demand
segmentation have long been discussed in the litera- function for the firm's offering that is relatively un-
ture. One of the pioneers of marketing thought (Shaw affected by changes in the prices of competing brands.
1912) described the strategy of product differentiation Samuelson (1976) discussed what we term "de-
as meeting human wants more accurately than the mand function modification" when he asserted that
competition. The result is a "buildup of demand" for suppliers "deliberately fragment" industry demand
the producer's product and a potential for a price level curves into smaller segments through "contrived"
higher than that of the existing stock commodity. In product differentiation. His leading economics text thus
discussing the need to treat each distinct geographic takes the position that the supplier is the major cause
region as a separate distribution problem, Shaw em- of segmented market demand. Samuelson acknowl-
phasized as equally important the recognition of eco- edged that product differentiation can be a genuine
nomic and social market "contours" and the need also response to differing consumer needs, but he clearly
to treat these as separate marketing problems. Besides believed that most product differentiation is "artifi-
specifically recommending separate contour or seg- cial." He also repeated Galbraith's (1967) assertion
ment analysis, he pointed out that the law of dimin- that this is achieved by advertising that "distorts" con-
ishing returns imposes a limit on the practical value sumer demand.
to the company of catering to these different markets. In his classic article, Smith (1956) expressed a view
Also generally overlooked by both marketers and of product differentiation similar to Samuelson's posi-
economists has been what Chamberlin (1965) had to tion. He described product differentiation as an at-
say about market segmentation and product differen- tempt to alter the shape of the price-quantity demand
tiation in his theory of monopolistic competition, first curve facing the individual supplier using advertising
published in 1933. Product differentiation was de- and promotion. If Smith was referring to alteration of
fined simply as distinguishing the goods or services the consumer's demand function when he described
of one seller from those of another on any basis that product differentiation as being "concerned with the
is important to the buyer and leads to a preference. bending of demand to the will of supply," this de-
Chamberlin recognized the importance of both con- scription clearly differs from the view of Chamberlin
sumer perceptions and nonphysical product character- and Porter and fits what we subsequently term "de-
istics in observing that the basis of differentiation could mand function modification." If, however, Smith ac-
be real or imagined, arising from distinct product, tually was referring to alteration of the perceived vec-
packaging, or distribution differences, or the prestige tor of product characteristics, his argument is consistent
value of a trademark and trade name (e.g., Coca-Cola, with those of Chamberlin and Porter with the excep-
Kodak, or Calvin Klein). Chamberlin also recognized
that differences in buyer preferences result in a set of
different demand curves. The heterogeneity in the of-
2Frank, Massy, and Wind (1972) point out that many economists
fering, production, prices, and profits observed in the have viewed the existence of different prices as evidence of market
market was not, in his opinion, the result of imperfect imperfections. Chamberlin was a notable early exception.

2 / Journal of Marketing, April 1987

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tion that the latter authors also included alteration ofrather than defined as a management strategy. The
actual physical characteristics through product speci- purpose of such an analysis is to provide a foundation
fication. The creation of imaginary differences when for market segmentation strategy.
no real differences exist through such devices as prod- Rosen (1974) and Lancaster (1979) contributed to
uct names and skillful advertising has been labeled the development of an economic demand theory in
"pseudodifferentiation" by Lancaster (1979). which products are viewed as multicomponent pack-
Smith was, however, consistent with other writers ages of characteristics.3 Both of these authors ac-
in discussing several, rather than one, demand sched- knowledged the existence of a distribution of prefer-
ules. He went on to associate the term "market seg- ence functions or value systems across the consumer
mentation" with adjustment of product and marketing population. To the extent that this distribution has
effort to these differences in demand schedules. As a multiple regions of concentration surrounded by re-
result of his terminology, Smith positioned market gions of sparseness, market segments are acknowl-
segmentation and product differentiation as alterna- edged to exist. Both authors also clearly viewed prod-
tives rather than complements. This view was restated uct differentiation as the variety in the characteristics
in his contribution to the special Journal of Marketing offered by alternative goods. Rosen went on to argue
Research issue on market segmentation (Smith 1978). that "a variety of packages appear in product markets
The preceding discussion reveals that his position re- to satisfy differences in preferences among con-
sults from additional qualifiers he put on the two con- sumers, and the situation persists because no firm finds
cepts. First, he unnecessarily limited product differ- it advantageous to alter the quality content of its prod-
entiation efforts to promotion and advertising and ucts." He clearly viewed both product differentiation
discussed actual product specification only under mar- and market segmentation strategies as a consequence
ket segmentation. Second, he associated product dif- of the existence of market segments. This view is in
ferentiation with recognition of only one, rather than sharp contrast with Smith's description of product dif-
several, demand functions. Theoretical justification for ferentiation as an attempt to manipulate consumer
the inclusion of these additional conditions is not ap- preferences.
parent. Rosen, Lancaster, and others applied their hedonic
We can see now that the apparently inconsistent demand theories to analysis of competitive conditions
and confusing treatment of product differentiation in and developed theoretical optimal conditions. Mar-
contemporary texts is rooted in the differences be- keting application of these frameworks for product
tween the views expressed by Smith and Samuelson positioning was developed by Hauser and Simmie
and those of Shaw, Chamberlin, and Porter. The po- (1981), Hauser and Shugan (1983), and Hauser and
sition of Smith and Samuelson is reflected in the five Gaskin (1984). Alternative competitive environments
previously cited texts that describe product differen- and the relevant strategic options are described sub-
tiation as an alternative to market segmentation. The sequently. However, before proceeding with such a
views of Shaw, Chamberlin, and Porter are reflected discussion, we propose the following definitional con-
in the 11 texts that treat product differentiation as a ventions.
complement to or means of implementing a market
segmentation strategy. Definitions
In addition to the inconsistent treatment of the term
"product differentiation," the literature reflects a sim- The following definitional framework is offered as a
ilar confusion or lack of precision in use of the term basis for explaining and comparing the various uses
"market segmentation." This term often is used to re- of the terms "market segmentation" and "product dif-
fer to recognition of the existence of multiple demand ferentiation" in the literature. This framework is
founded in both the current theoretical economic work
functions and development of a marketing plan to match
one or more of these demand functions. In this usage, of Rosen (1974) and Lancaster (1979) and the more
market segmentation is described as a marketing strat- traditional economic theory described by Chamberlin
egy (e.g., Frank, Massy, and Wind 1972). Other writ- (1965). The definitions are stated in Table 1.
ers such as Mahajan and Jain (1978) refer to market The concepts of market segmentation, product dif-
ferentiation, and demand function modification can be
segmentation as a form of research analysis directed
at identification of, and allocation of resources among, defined and distinguished through reference to the
market segments. According to this use of the term, representation of market demand as
the segments with different demand functions are as-
sumed to exist, and the objectives are to identify and
cater to these groups rather than to alter or enhance
differences in their demand functions. Market seg- 3For an excellent statement and evaluation of the work of Rosen and
mentation thus is seen as a way of viewing the market Lancaster, see Ratchford (1975).

Market Segmentation, Product Differentiation, and Marketing Strategy / 3

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 TABLE 1
Definitions

Construct Definition Comments Examples

Market Heterogeneity in Q = F (p,xl, ... xn) The automobile market
segmentation demand functions = Qi The soap market
i
exists such that The camera market
market demand can
be disaggregated
into segments with
distinct demand
functions (Fi's)
Product A product offering is Perceptual differences created Mercedes Benz in the
differentiation perceived by the by usage experience, word of automobile market
consumer to differ mouth, and promotion People's Express as the first no-
from its Actual differences are created frills, low price airline
competition on any by product characteristics
physical or
nonphysical
product
characteristic
including price
Product Alteration of P&G advertises Charmin as
May be directed at entire market
differentiation perceptions so as or at one (or more) softer than competing brands
strategy to result in a state segment(s) Tylenol is promoted as effective
of product May utilize either physical or relief for persons who cannot
differentiation nonphysical product take aspirin
characteristics

Demand function Alteration of the Requires product differentiation Michelin promotes the
modification functional in existence or as a association of quality with
relationship complementary strategy safety for family
between perceived May be directed at entire market transportation (to increase
product or at one (or more) importance attached to
characteristics and segment(s) quality)
demand, i.e., May entail change in ideal point Dove promotes importance of
changing F or Fi location moisturizing qualities of skin
May entail change in soap
importance attached to a
physical or nonphysical
product characteristic
Segment Alteration of demand One particular form of demand Underalls draws attention to
development functions of a function modification unattractiveness of panty lines
strategy subset of Requires product differentiation and creates a segment of
consumers such in existence or as a panty-line-conscious
that they will complementary strategy consumers

become similar and Promotion of cancer preve

May entail change in ideal point
constitute a unique location qualities of breakfast cere
market segment May entail change in adults
importance attached to a
physical or nonphysical
product

tics of that offering, xl, ..., xn. These product char-

acteristics include both physical product attributes and
This demand function is consistent with the multiat- nonphysical attributes, which may reflect dimensions
tribute model commonly used in the marketing liter- of image and product performance. The nature of the
ature. It is also similar to the hedonic economic model functional relationship, F, will depend on the con-
of demand with the exception that economists usually sumers' tastes, competitive product offerings, and other
separate price from the vector of product character- marketplace factors such as disposable personal in-
istics. It postulates that the demand, Q, for a partic- come.
ular product offered by an individual supplier is a We should note that the traditional economic co
function of the price, p, and the product characteris- cept of the market demand curve,

4 / Journal of Marketing, April 1987

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 Q = FxI ..... xn(P), (2)
selves should be the theoretical basis for s
inition. Other bases for identifying or d
ments
does not coincide perfectly with the form of will be useful only to the exten
the de-
mand model in equation 1. In this traditional
correspond eco-empirically to these demand f
nomic model, demand is a function of price,
lead given a
to identification of the true market
Underand
specified set of fixed product characteristics, ideal
theconditions, the total mark
demand function will shift such that quantity
consist de-
of subsets or segments whose wi
manded is greater for each price if thedifferences
product char-in individual demand functi
acteristics are changed to match more points) would
closely the con-be relatively small in comp
sumer ideal points. the between-group differences. Unfortu
There appears to be some uncertainty ever,in individual
the eco- demand functions are not
servable
nomics literature about whether the product and segment distinctions are usu
character-
Different
istics in equations 1 and 2 are objective orfirms' conclusions about the number and
subjec-
tive. Under the common economics assumption of full
properties of market segments therefore will vary with
consumer information, there is no difference. The
their conceptual and analytic approaches to segment
identification.
marketing literature, in contrast, recognizes that As a result, competing firms may have
most
consumers base decisions on their perceptions of real-of the market segment structure
different perceptions
ity founded on only partial information.of a We
market that exhibits demand heterogeneity. Be-
therefore
cause these
view xl, ..., Xn as perceptions of product perceptions of segments may provide a
character-
basis for marketing
istics. It should be noted that these perceptions result strategy, they may be one deter-
from the wide-ranging set of stimuli minant of competitive
received by the performance. We therefore de-
fine "marketby
consumer. Some of these stimuli are controlled segmentation"
the as a state of demand het-
erogeneity such
marketing managers of the brand in question that the total market demand can be
as they
disaggregatedsales-
make decisions about advertising, packaging, into segments with distinct demand
functions.4
force efforts, and the like. Other stimuli Each firm's definition, framing, and char-
are provided
by marketing efforts of competing firms,acterization
product ofusage
this demand heterogeneity will likely
experience, and the broader environment.be unique and form the basis of the firm's marketing
Even if consumers shared common strategy.
perceptions of
Consequently the accuracy of the firm's per-
a product's characteristics, it would beception
unusualof market
to ex- segmentation often is a critical de-
pect all consumers to respond equally terminant
to a market of competitive
of- advantage.
Product
fering. One reason for this heterogeneity in demand differentiation also is defined as a mar-
ketplace condition.
across consumers is diversity in the demand function, If the product class were a com-
modity, all
F. This distribution of demand functions may take manyalternatives would be equal and perceived
forms such as uniform, unimodal, ortomultimodal.
be equal on all elements of the vector of price and
Heterogeneity in demand may be viewed both physical
also as and
thenonphysical product characteristics.
distribution of customers' ideal points The
in prevalent
an attribute-condition is one in which all products
are not perceived
based product space, where each customer's demand as equal on each of the product char-
function, F, is reflected in the location of the
acteristics, ideal price. We term this condition a
including
point. Under the condition of demandstate of "product differentiation."
heterogeneity,
it may be possible to view the total marketThe preceding
as a setdefinitions
of lead directly to man-
submarkets or segments, with eachagement having its de-
strategies that may be pursued. One is de-
mand, Qi, determined by a unique segmentmand function
demand modification, the alteration of the
functionaland
function, Fi. We view these various segments relationship,
their F or Fi, between perceived
product characteristics
corresponding demand functions as actually existing and market or segment de-
in the marketplace. This is not to say, mand. For example,
however, thata firm may attempt to increase
any single firm's identification of the themarket
importance customers associate with a product
seg-
attribute onportrays
ments and their demand functions accurately which it has a competitive advantage (e.g.,
AT&T emphasizing
this reality. The numerous sets of variables, such asthe value of personal telephone
demographic characteristics and past services,
behavior, BMW that promoting advanced engineering and
have been used to identify segments may or may not
lead to accurate conclusions about market segments,
depending on their relationship to the4Thedemand func-definition could be expanded to include
market segmentation
tions in any particular market setting. Becausein the
heterogeneity de-
any market-related response functions-such as het-
erogeneity in response to different media and distribution channels,
mand functions and the vector of product perceptions
as well as in the traditional product demand function. Discussion of
actually determine the response to a firm's marketing
the implications of expanding the definition in this way is beyond the
efforts, we maintain that the demand scope
functions them-
of this article.

Market Segmentation, Product Differentiation, and Marketing Strategy / 5

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road handling). In addition, the firm may attempt to metric on the two axes is homogeneous for all con-
change the consumer's ideal point on an attribute to sumers. Finally, we assume that the maps accurately
a location nearer to that of its offering (e.g., Burger represent the true marketplace conditions. Competi-
King promoting the advantages of flame-broiling over tors who fail to understand thoroughly the true market
conventional cooking). The marketing literature gen- configuration may fail to identify the alternative strat-
erally has viewed the alteration of consumer values egies we discuss or may pursue other strategies that
and tastes entailed in these strategies as more difficult are inappropriate for the market.
to achieve than a change in perceptions of product
Product Differentiation
characteristics (Boyd, Ray, and Strong 1972; Lutz
1975). Figure 1 illustrates a competitive situation in which
The term "market segmentation" is used fre- there is neither product differentiation nor market seg-
quently in the marketing literature to refer to a man- mentation. The three competitive offerings, a, b, and
agement strategy rather than a market condition or c, share the same approximate position, and ideal points
perception of a market condition. In this context, are distributed uniformly throughout the space. With
"market segmentation strategy" usually refers to use this configuration, each of the brands will achieve ap-
of information about market segments to design a pro- proximately one third of the total market. A compet-
gram(s) to appeal to a specific existing segment(s); itor in this situation may achieve a competitive ad-
this convention is observed in the following sections. vantage through a strategy of product differentiation.
The firm also may wish to consider developing the If, for example, brand a were to move to position a'
condition of market segmentation through demand in Figure 1 by differentiation on axis Y, it would in-
function modification. Under this strategy, which we crease its market share because it would be closer to
term "segment development strategy," the firm would the ideal points of nearly half the market. In this sit-
attempt to cause the development of a homogeneous uation, any one brand can increase its sales by dif-
group of individual consumer demand functions that ferentiation (to a small extent) in any direction from
differ from the demand functions of the remainder of its competitors. Though we do not address the poten-
consumers in the marketplace. Within this definitionaltial dynamics that would result from competitive re-
framework, we can observe that marketing research action, one could speculate that brands b and c might
has been oriented toward identification and analysis also attempt to differentiate their offerings from po-
of demand heterogeneity for market segmentation sition a' and from each other. The various competitive
strategy rather than for identification of opportunities solutions to this problem depend on the nature of the
for segment development. market boundaries (see Lancaster 1979). Definitions
The term "product differentiation" also may be used of product differentiation that assume a single ho-
to describe a management strategy. It is best viewed mogeneous demand function or limit the firm's ac-
as creation of a state of product differentiation by tions to nonphysical product characteristics would not
offering a product that is perceived to differ from the lead to identification of this strategic option for brand
competing products on at least one element of the vec-
tor of physical and nonphysical product characteris-
tics. As discussed next, this strategy may be pursued FIGURE 1
through product design in specification of actual prod- Product Differentiation in a Uniformly
uct characteristics and/or through advertising directed Distributed Preference Space
at establishing perceptions of both physical and non-
physical product characteristics.

Strategic Options
The strategic options available to a competitor can be
illustrated best through reference to a product pref-
erence map. For ease of illustration, we assume that
two product characteristics, which may be either
physical or nonphysical, are of primary importance.
Brand locations in this two-dimensional space are rep-
resentations of consumers' perceptions of the offer-
ings and these perceptions are assumed to be homo-
geneous for this discussion. Consumers' tastes and
values are represented through location of their ideal Shaded area represents uniform distribution of consumer ideal points.

points. Another simplifying assumption is that the

6 / Journal of Marketing, April 1987

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a. Note that Figure 1 contains no natural groupings of FIGURE 3
ideal points, and the product differentiation strategy Product Differentiation in a Multimodal
Preference Space
therefore is not accompanied by either of the strate-
gies of market segmentation or segment development.
Figure 2 represents another set of competitive con- Qa Y
ditions in which a strategy of targeted product differ-
entiation would be very advantageous. In this diagram
the distribution of consumer ideal points is not uni-
abc~ x?CI
form, but unimodal (e.g., bivariate normal). For ex-
ample, in the express mail-delivery market most busi-
ness customers want guaranteed overnight delivery. a bc
Each of the brands could increase sales by moving
closer to I, the centroid of the ideal point distribution. Fj .
This situation would be likely to lead to active com-
petition among the three brands, with each attempting
to be perceived as being closer to I than its compet-
itors. Ironically, if all three brands were successful in
moving to point I, the resulting configuration would
reflect no product differentiation and the three brands
would share the market as before. Such interbrand entiated, any of them could increase sales by moving
competition would result in a closer matching of con- closer to Il, the centroid of the largest segment (e.g.,
sumer wants and product offerings and the possibility,a move to a'). This is an example of a segment-based
at least initially, of an increase in either the generalproduct differentiation strategy (Porter 1980 refers to
price level or total market demand or both. Product it as a focus strategy). Note that if one brand were to
differentiation definitions that are confined to non- make such a move, the choice of the remaining brands
physical product characteristics may cause the mar- between moving toward 12 or 13 and moving toward
keter to fail to respond on all relevant dimensions inIl (and sharing sales of segment 1) would depend on
attempting to pursue the strategy depicted in Figure 2. the relative sizes of the market segments and the costs
of the alternative moves. If brand a were to achieve
Segment-Based Product Differentiation product differentiation in the direction of Il, it could
increase its price to adjust for its more accurately
Figure 3 shows the existence of three market segmentsmeeting the needs of segment 1. Whether this increase
whose sizes are represented by the area of the corre- would result in higher, monopoly profit in the long
sponding circles. This is a third condition under whichrun would depend on the costs of moving to and re-
product differentiation may be beneficial, but in this maining at a' and the attractiveness of the higher profit
case it is coupled with a market segmentation strat- level to other firms. If brand a were to increase its
egy. Because the three brands are initially undiffer- prices slightly above its increases in costs, the addi-
tional profit it would receive may not be enough to
cause another brand to attempt to duplicate its move.
FIGURE 2
Product Differentiation in a Unimodal Preference The reason is that after such a duplication, the two
Space brands would have to share the demand of segment 1
at a lower level of sales and profit for both. Defini-
y tions that describe product differentiation as an at-
tempt to alter demand functions and/or recognition of
only one demand function in the market would lead
to failure to recognize this strategic option. In addi-
0.a' tion, definitions that constrain it to nonphysical attri-
butes would lead to failure to use all relevant product
characteristics in implementing this strategy.
V?-? be~x
a b c The condition in Figure 3 corresponds to Cham-
berlin's (1965) observation that where the possibility
of differentiation exists, sales depend on the skill with
which the good is distinguished from others and made
to appeal to a specific group of buyers. Coca-Cola
finally recognized heterogeneity in demand with its
KI-_ new segment-based product differentiation strategy.

Market Segmentation, Product Differentiation, and Marketing Strategy / 7

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Classic Coke, New Coke, Cherry Coke, Diet Coke, FIGURE 4
No Caffeine Coke, and No Caffeine Diet Coke each Demand Function Modification of a Uniformly
cater to different segments and the strategy appears to
Distributed Preference Space
have worked to the extent that Coca-Cola's overall
market share has grown. The long-term profitability
of the strategy has yet to be established.
Sometimes a marketer will attempt to convince a
dubious segment of the public that its brand is dis-
tinctive because it has a combination of desired attri-
butes normally not present in other alternatives and
commonly not believed possible (i.e., an area of the
perceived product space is empty because it is per-
ceived to be an infeasible combination of attributes).
The Miller Brewing Company's "less filling, great
taste" positioning of its Lite Beer is an example of
such a campaign. In this case, advertising had to change
perceived relationships between attributes to be able
to position the product successfully.

Demand Modification Strategy

A situation in which a demand modification strategy

may be beneficial is shown in Figure 4. In this dia- "judged" to be manipulative and/or wasteful com-
gram, product differentiation already exists, perhaps petitive strategy. Demand modification also may re-
through the unique product characteristics or brand sult in segment development when an attempt at con-
images of the three firms. Because brand a is per- centrating demand in one area of the space results in
ceived as having a higher level of characteristic Y, it multimodal concentrations of demand throughout the
could increase sales by creating a segment centered at space.
position a. Note that this demand modification would A final strategic option is the combination of mar-
not be effective without product differentiation as an ket segmentation strategy and demand function mod-
existing state or as a concurrent strategy. In the latter ification, as shown in Figure 5. In this situation, both
case, the brand would attempt simultaneously to move product differentiation and market segmentation exist.
to position a and to cause ideal points of a group of Initially one would expect brand a to have the lowest
consumers to converge at that position. As an ex- market share because it is sharing segment 1 sales with
ample, the brand of pantyhose called "Underalls" has brands b and c, which also have separate, proximate
drawn attention to its unique product-differentiated segments. Instead of moving the perceived location of
solution by promoting the unattractiveness of panty brand a to Il, the firm could choose to emphasize at-
lines. To the extent that the campaign has increased tribute Y to members of segment 1 in an attempt to
the importance of this product characteristic, it has move Ii to a. This approach is clearly an example of
altered the demand functions of many consumers. what we have termed "demand function modifica-
Product differentiation definitions that recognize only tion" and, as it is directed at only one segment, we
one demand function would not lead to the strategy would also label it "market segmentation strategy."
depicted in Figure 4, and those that constrain it to Market segmentation strategy discussions that ignore
nonphysical attributes would lead to failure to con- the possibility of demand function modification, as well
sider all relevant dimensions. as product differentiation definitions that recognize only
This sort of combination of product differentiation one demand function, would clearly fail to identify
and demand modification centered on a so-called "un- this strategic option.
necessary feature" often has been the target of social In reality, demand modification often is accom-
welfare economists. The real problem appears to be panied by product differentiation and vice versa. In
that, whether rightly or wrongly, the marketplace fre- the winter of 1983, Campbell's Soup launched a de-
quently does not have the same value system as the mand function modification campaign promoting good
economist. Though the marketplace clearly likes the nutrition and the importance of the nutritional value
choice that product differentiation provides, among of food. At the same time, it attempted to differentiate
many economists "product differentiation" has be- the product by positioning hot soup as not only an
come a disparaging term used to describe what is excellent winter food (the theme of previous cam-

8 / Journal of Marketing, April 1987

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 FIGURE 5 ferentiation already exists or when accompanied by a
Demand Function Modification of a Market complementary product differentiation strategy.
Segment
The distinction of market segmentation, product
differentiation, and demand function modification
y
provided by this conceptual framework is of benefit
to both academics and practitioners. It shows that
Smith's (1956) discussion of market segmentation as
alteration of the product to match more clearly the needs
of a segment actually corresponds to a combination of
product differentiation and market segmentation, as
0eb shown in Figure 3. His discussion of product differ-
entiation as attempting "to bring about the conver-
gence of individual market demands for a variety of
*c products upon a single or limited offering in the mar-
ket" corresponds to demand function modification
(Figure 4) or demand function modification combined
with a market segmentation strategy (Figure 5). Farris
and Albion's (1980) investigation of the impact of
advertising on price also has conceptual ambiguity
that our proposed framework eliminates. First, they
identify market segmentation as a "central underlying
paigns), but also a superior nutritional supplement.
concept" of product differentiation. In fact, neither the
Demand function modification also may be a concept
byprod-nor practice of product differentiation re-
uct of a product differentiation strategy. Whenquires
TV ad-recognition of heterogeneous market subsets.
vertising very effectively argues that Total Second,
has four
the authors identify three advertising strate-
times the vitamins of an alternative breakfast cereal,
gies that achieve product differentiation. Only one of
for example, one effect may be heightened these,
impor- "influencing consumers' assessment of the
tance of vitamin supplements in breakfast foods. In performance on a given attribute," is prod-
product's
1985, the maker of a high fibre cereal attempted to
uct differentiation. The other two advertising effects,
raise the level of concern among the wives of"introducing
middle- new attributes into the choice decision"
aged men about the risks of colon cancer and andto"influencing
in- the combination of attributes re-
crease the perceived benefits of a high fibregarded
cereal.as 'ideal,'" are demand function modification
This approach is a combination of segmentation, de- Because these effects and the means of
strategies.
mand function modification, and product differentia-
achieving them can be very different, the distinction
tion strategies. between product differentiation and demand function
modification must be clearly recognized and under-
stood.
Conclusion Though market segmentation and product differ-
The preceding discussion leads to a set of summaryentiation are key marketing concepts, there has been
little discussion about their underlying theory. A ma-
statements about the availability of strategic options.
First, we can see that the preferred strategic optionjor
is exception is the work of Frank, Massy, and Wind
determined primarily by the existing market condi- (1972), who offered a comprehensive framework for
tions. Second, we can see that a strategy of product analysis and distinguished between price discrimina-
tion and market segmentation. However, most of the
differentiation does not require the existence of mar-
ket segments (Figures 1 and 2), but may be used literature
in on segmentation and differentiation has dis-
conjunction with market segmentation strategy when cussed analytical techniques. We attempt to define,
segments are perceived to exist (Figure 3). Third,develop
a the theory, and illustrate the application of
strategy of segment development is feasible only whenmarket segmentation, product differentiation, demand
product differentiation either already exists or is modification,
an and segment development. There is evi-
accompanying strategy. Within this framework, prod- dence that these concepts have been confused with each
other in the literature. Because they have very differ-
uct differentiation and market segmentation are clearly
ent implications for strategy, it seems important for
not alternative management strategies. A product dif-
both
ferentiation strategy can be pursued with or without a managers and academics to have a common, ac-
market segmentation strategy, but a market segmen- cepted understanding of the theoretical and applied
meaning of these concepts.
tation strategy can be pursued only when product dif-

Market Segmentation, Product Differeitiation, and Marketing Strategy /

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