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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 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 frameworkinclude
for the following:
economic analysis, the theories of perfect
1. Variations in the production equipment
competition and pure monopoly had be-
and methods or processes used by differ-
come 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 homoge-2. Specialized or superior resources en-
neity among the components of both thejoyed by favorably situated manufac-
demand and supply sides of the market, facturers.
but diversity or heterogeneity had come
3. Unequal progress among competitors in
to be the rule rather than the exception.design, development, and improvement
This analysis reviews major marketing of products.
4. The
strategy alternatives that are available to inability of manufacturers in some
planners and merchandisers of products industries to eliminate product varia-
in an environment characterized by im- tions even through the application of
quality control techniques.
perfect competition.
5. Variations in producers' estimates of the
nature of market demand with reference
Diversity in Supply to such matters as price sensitivity, color,
That there is a lack of homogeneitymaterial, or package size.
or close similarity among the items of-
Because of these and other factors,
fered to the market by individual manu-
both planned and uncontrollable differ-
facturers 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 ap-
shopping center. In many cases the im-
peals in support of their marketing ef-
pact of this diversity is amplified byforts.
ad-
vertising and promotional activities. To-
day's advertising and promotion tends to
emphasize appeals to selective rather Diversity or Variations in Consumer De-
mand
than primary buying motives and to
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

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4 THE
4 THE JOURNAL
JOURNAL OF MARKETING
OF MARKETING July 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 effectivepossible. However, even in industrial
use of appealing product claims designed
marketing, the strategy of product differ-
entiation should be considered in cases
to make a satisfactory volume of demand
converge upon the product or productwhere 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 hypothesis that, while product differen-
with which a firm's products can satisfy 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 theferentiation
demand and segmentation call for
side may be based upon differentdifferingcus-
systems of action at any point in
toms, desire for variety, or desire
time,for
butex-
the dynamics of markets and
clusiveness or may arise frommarketing
basic dif- 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 achievement of maximum functional
the desire or the ability to shop in a suf-
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

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PRODUCT DIFFERENTIATION AND MARKET SEGMENTATION 5

the minimizing of total costsbecome

must takesoluble by doing something
precedence over separate approaches to
about marketing programs and product
minimization of production costs on
policies the
that overgeneralize both markets
one hand and marketing costs on the effort. These are situa-
and marketing
other. Strategy determination tions
mustwhere
be intensive promotion de-
regarded as an over-all management
signed to de-
differentiate the company's
cision which will influence and require
products was not accomplishing its objec-
facilitating policies affectingtive-cases
both pro- where failure to recognize
duction and marketing activities.
the reality of market segments was re-
sulting in loss of market position.
Differences Between Strategies While successful product differentia-
of Dif-
ferentiation and Segmentation tion will result in giving the marketer a
Product differentiation and market horizontal share of a broad and general-
ized market, equally successful applica-
segmentation are both consistent with
tion of the strategy of market segmenta-
the framework of imperfect competi-
tion tends to produce depth of market
tion.' In its simplest terms, product dif-
position in the segments that are effec-
ferentiation is concerned with the bend-
tively defined and penetrated. The dif-
ing 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 segmenta-
of suppliers such as a farm cooperative,
tion can be cited; the cigarette and auto-
the members of which have agreed to act industries are well-known illus-
mobile
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 develop-
ments on the demand side of the market distinguishable preferences of the seg-
ment of the refrigerator market made up
and represents a rational and more pre-of home freezer owners whose frozen
cise adjustment of product and market-
food storage needs had already been met.
ing effort to consumer or user require-
Strategies of segmentation and differ-
ments. In the language of the economist,
entiation may be employed simultane-
segmentation is disaggregative in its ef-
ously, but more commonly they are ap-
fects and tends to bring about recogni-
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.
mentation is a momentary or short-term
Attention has been drawn to this area
phenomenon in that effective use of this
of analysis by the increasing number of
strategy may lead to more formal recog-
cases in which business problems have
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
uals that comprise the demand or supply sides of markets. Redefinition may re-
a market. sult in a swing back to differentiation.

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6
6I I
THE JOURANAL OF
JOUNA OF
MARKETING
MAKTN jul
July
1
1956

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 differentiationdifferentiation
is 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 advertisingand orineffective 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 price programs designed for particular market
competition. Differentiation tends tosegmentsbe may achieve a broader accept-
characterized 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
approach. The challenge to planning
levels associated with perfectly competi-
tive market conditions. It may be classi-
arises from the importance of determin-
fied as a promotional strategy or ing,
ap- 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, 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 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 push at point of sale.
The Emergence of the Segmentation This increases the 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

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PRODUCT DIFFERENTIATION AND MARKET SEGMENTATION 7
I I _ _

differentiation under such circumstances

requirements as measured by satisfactory
rates of stock turnover. is undesirable, since market share avail-
It has been suggested that the able present
as a result of such a promotion-
level of discretionary buying oriented
power approach
is tends to be variable
productive of sharper shopping over compari-
time. Much may hinge, for example,
sons, particularly for items that uponareweek-to-week
above audience ratings of
the need level. General prosperity alsoshows of competitors who
the television
creates increased willingness seek"to
to outdifferentiate
pay a each other. Ex-
little more" to get "just whatploitation I wanted." of market segments, which
Attention to market segmentation provides forhas greater maximization of con-
also been enhanced by the recent sumerascend-
or user satisfactions, tends to build
ancy of product competitiona to more secure market position and to
a posi-
tion of great economic importance. lead to greater
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 view-
More specifically, advancing point) have created pressures for ex-
technology
is creating competition between pandednewsale 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 activi-
markets of maximum potential as tiesa requires
re- precise utilization of both
sult of recognition of differencesproduct
in the differentiation and market seg-
requirements 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 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 is poten-
present 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 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

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8 THE JOURNAL OF MARKETING July 1956

encesof-
a limit to which diversity in market between product differentiation
and market segmentation as marketing
ferings can be carried without driving
production costs beyond practicalstrategies,
limits. they are closely related con-
Similarly, the employment of product
cepts in the settingof an imperfectly com-
differentiation as a strategy tendspetitive
to be market. The differences have
been highlighted
restricted by the achievement of levels of in the interest of en-
marketing cost that are untenable. hancing
Theseclarity 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
provides evidence of the consumer's pre-
of marketing strategies or a strategy mix
dictated 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 differ- science to marketing problems.

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