Market Segmentation, Product Differentiation, and Marketing Strategy Author(S): Peter R

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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 Accessed: 05-10-2016 19:00 UTC

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This content downloaded from 143.107.252.158 on Wed, 05 Oct 2016 19:00:47 UTC All use subject to http://about.jstor.org/terms 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," there has been and continues to be considerable misunderstanding about their meaning and use. The authors attempt to lessen the confusion by the use of traditional and contemporary economic theory and product preference maps.

M ARKETS have been segmented and products and Rosenberg 1981; Neidell 1983; Pride and Ferrell and services differentiated for as long as sup- 1985; Stanton 1981) describe product differentiation pliers have differed in their methods of competing for as an alternative to market segmentation and 11 of the trade. The major advance in recent times has been that texts (Abell and Hammond 1979; Buell 1984; Busch market researchers are using economic and behavioral and Houston 1985; Cravens 1982; Dalrymple and Par- theories and sophisticated analytical techniques in their sons 1983; DeLozier and Woodside 1978; Enis 1980; search for better ways of identifying market segments Guiltinan 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 threebe of the texts (Evans and Berman 1982; Mandel judged to have shifted in status from an art to a sci- and Rosenberg 1981; Pride and Ferrell 1985) limit ence. product differentiation to only nonphysical product We therefore might expect that by now characteristics. the basic purpose, definition of terms, and theory Theunderlying potential for misunderstanding is exacerbated market segmentation and product differentiation by the discussion would of "undifferentiated" and "differ- have been consistently described and well entiated" understood. marketing strategies. These terms are used This is not the case. A review of 16 contemporary to indicate whether or not marketing strategy is based marketing textbooks reveals considerable on recognitionconfusion. of market segments. Where product Five of the texts (Evans and Berman differentiation1982; Mandel is discussed as an alternative to market segmentation, it is described as being an undifferentiated 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, onthose ear- of Assael (1985), Cunningham and Cunningham lier versions of the article provided by Brian Ratchford, (1981), Cynthia McCarthy Fraser, and Perreault (1984), and Scott, Warshaw, and Alan Sawyer, Fred Sturdivant, W. Wayne Talarzyk, TaylorBarton (1985) Weitz, are not and 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

This content downloaded from 143.107.252.158 on Wed, 05 Oct 2016 19:00:47 UTC All use subject to http://about.jstor.org/terms 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 differentiation 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.

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This content downloaded from 143.107.252.158 on Wed, 05 Oct 2016 19:00:47 UTC All use subject to http://about.jstor.org/terms tion that the latter authors also included alteration of rather 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 consumers, 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 differ 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- segmentation as a form of research analysis directed ferentiation, and demand function modification can be 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 assumed 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).

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This content downloaded from 143.107.252.158 on Wed, 05 Oct 2016 19:00:47 UTC All use subject to http://about.jstor.org/terms 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 exists such that i 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 May be directed at entire market P&G advertises Charmin as 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 May entail change in ideal point Promotion of cancer prevention constitute a unique location qualities of breakfast cereal to market segment May entail change in adults importance attached to a physical or nonphysical product

tics of that offering, xl, ..., xn. These product characteristics 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 con- function of the price, p, and the product characteris- cept of the market demand curve,

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This content downloaded from 143.107.252.158 on Wed, 05 Oct 2016 19:00:47 UTC All use subject to http://about.jstor.org/terms Q = FxI ..... xn(P), (2) selves should be the theoretical basis for segment definition. Other bases for identifying or defining seg- does not coincide perfectly with the form ments of willthe de-be useful only to the extent that they mand model in equation 1. In this traditionalcorrespond eco-empirically to these demand functions and nomic model, demand is a function of lead price, to identification given a of the true market segments. specified set of fixed product characteristics, Under and ideal the conditions, the total market would demand function will shift such that consist quantity of subsets de- or segments whose within-group manded is greater for each price if the differences product char- in individual demand functions (or ideal acteristics are changed to match more points)closely thewould con- be relatively small in comparison with sumer ideal points. the between-group differences. Unfortunately, how- There appears to be some uncertainty ever, in individualthe eco- demand functions are not directly ob- nomics literature about whether the product servable character- and segment distinctions are usually blurred. istics in equations 1 and 2 are objective Different or firms' subjec- conclusions about the number and tive. Under the common economics assumption properties of marketof full segments therefore will vary with consumer information, there is no difference. their conceptual The and analytic approaches to segment marketing literature, in contrast, recognizes identification. that Asmost a result, competing firms may have consumers base decisions on their perceptions different perceptions of real- of the market segment structure ity founded on only partial information. of a Wemarket therefore that exhibits demand heterogeneity. Be- view xl, ..., Xn as perceptions of product cause thesecharacter- perceptions of segments may provide a istics. It should be noted that these perceptions basis for marketing result strategy, they may be one deter- from the wide-ranging set of stimuli minantreceived of competitive by the performance. We therefore de- consumer. Some of these stimuli are controlled fine "market by segmentation" the as a state of demand het- marketing managers of the brand in questionerogeneity suchas they that the total market demand can be make decisions about advertising, packaging, disaggregated sales- into segments with distinct demand force efforts, and the like. Other stimuli functions.4 are provided Each firm's definition, framing, and char- by marketing efforts of competing firms, acterization product of usage 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 Consequently of the accuracy of the firm's per- a product's characteristics, it would be ception unusual of market to ex- segmentation often is a critical de- pect all consumers to respond equally terminantto a market of competitive of- advantage. fering. One reason for this heterogeneity Product in differentiationdemand also is defined as a mar- across consumers is diversity in the demand ketplace condition.function, If the product class were a com- F. This distribution of demand functions modity, may takeall alternatives many would be equal and perceived forms such as uniform, unimodal, or to multimodal. be equal on all elements of the vector of price and Heterogeneity in demand may be viewed both physicalalso as and the nonphysical product characteristics. distribution of customers' ideal points Thein prevalentan attribute- condition is one in which all products based product space, where each customer's are not perceived demand as equal on each of the product char- function, F, is reflected in the location acteristics, of the including ideal price. We term this condition a point. Under the condition of demand state heterogeneity, of "product differentiation." it may be possible to view the total market The preceding as a set definitions of lead directly to man- submarkets or segments, with each agement having strategies its de- that may be pursued. One is demand, Qi, determined by a unique segment mand function demand modification, the alteration of the function, Fi. We view these various segments functional and relationship, their F or Fi, between perceived corresponding demand functions as actually product characteristics existing and market or segment de- in the marketplace. This is not to say, mand. however, For example, that a firm may attempt to increase any single firm's identification of the the market importance seg- customers associate with a product ments and their demand functions accurately attribute on portrays which it has a competitive advantage (e.g., this reality. The numerous sets of variables, AT&T emphasizing such as the value of personal telephone demographic characteristics and past services,behavior, BMW thatpromoting 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 the 4The demand market segmentation func- definition could be expanded to include tions in any particular market setting. heterogeneity Because in theany market-related de- response functions-such as het- mand functions and the vector of product erogeneity perceptions in response to different media and distribution channels, as well as in the traditional product demand function. Discussion of actually determine the response to a firm's the implications marketing of expanding the definition in this way is beyond the efforts, we maintain that the demand scopefunctions of this article. them-

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This content downloaded from 143.107.252.158 on Wed, 05 Oct 2016 19:00:47 UTC All use subject to http://about.jstor.org/terms 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 definitional tial 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 vector of physical and nonphysical product characteristics. 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 nonphysical product characteristics.

Strategic Options The strategic options available to a competitor can be illustrated best through reference to a product preference 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 offerings and these perceptions are assumed to be homogeneous 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

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This content downloaded from 143.107.252.158 on Wed, 05 Oct 2016 19:00:47 UTC All use subject to http://about.jstor.org/terms 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 strategies of market segmentation or segment development. Figure 2 represents another set of competitive con- Qa Y ditions in which a strategy of targeted product differentiation 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 example, 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 competition among the three brands, with each attempting to be perceived as being closer to I than its competitors. 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 general product 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 in Il (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 segments meeting 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 which run 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 additional 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 attempt 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 attributes 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.

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This content downloaded from 143.107.252.158 on Wed, 05 Oct 2016 19:00:47 UTC All use subject to http://about.jstor.org/terms 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 Distributed Preference Space cater to different segments and the strategy appears to 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 attributes 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 perceived 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-

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This content downloaded from 143.107.252.158 on Wed, 05 Oct 2016 19:00:47 UTC All use subject to http://about.jstor.org/terms 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 differentiation 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 market" 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 conceptbyprod- nor practice of product differentiation re- uct of a product differentiation strategy. When quires 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 gies cereal, 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.product's In performance on a given attribute," is prod- 1985, the maker of a high fibre cereal attempted uct differentiation. to 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 and to "influencing in- the combination of attributes re- crease the perceived benefits of a high fibre garded cereal. as 'ideal,'" are demand function modification This approach is a combination of segmentation, strategies. de- Because these effects and the means of 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 understood. Conclusion Though market segmentation and product differ- The preceding discussion leads to a set of summary entiation are key marketing concepts, there has been statements about the availability of strategic options. little discussion about their underlying theory. A ma- First, we can see that the preferred strategic option jor 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- differentiation does not require the existence of mar- tion and market segmentation. However, most of the ket segments (Figures 1 and 2), but may be used literaturein 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 when market 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 uct differentiation and market segmentation are clearly other in the literature. Because they have very differ- not alternative management strategies. A product dif- ent implications for strategy, it seems important for ferentiation strategy can be pursued with or without both a managers and academics to have a common, ac- market segmentation strategy, but a market segmen- cepted understanding of the theoretical and applied tation strategy can be pursued only when product dif- meaning of these concepts.

Market Segmentation, Product Differeitiation, and Marketing Strategy / 9

This content downloaded from 143.107.252.158 on Wed, 05 Oct 2016 19:00:47 UTC All use subject to http://about.jstor.org/terms REFERENCES

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