Market Segmentation – Are You Optimizing It?
Contributed by Bryce Ward
In 1956 Wendell R. Smith published a groundbreaking article on marketing strategies called “Product Differentiation and Market Segmentation as Alternative Marketing Strategies.” The title is intimidating, but the content is much easier to grasp, and Smith’s ideas are becoming increasingly relevant in our current marketing landscape.
Smith wrote his article in a time when mass production was dominating the economy – Henry Ford had introduced the first moving assembly line just 43 years before – and business owners struggled to differentiate themselves from competition (a struggle that still exists today). Their solution, which was far from perfect, but a good first step, nonetheless, was what Smith called product differentiation. Smith defined product differentiation as “securing a measure of control over the demand for a product by advertising or promoting differences between a product and the products of competing sellers” (6). Think two lemonade stands trying to one-up each other by constantly adjusting their prices to attract more visitors, or advertising that “Our lemonade is sweeter than theirs!” In terms of the early 20th century automobile industry, this appeared when competing manufacturers tried to differentiate themselves from the Model T (or copy it in some cases, which is not a good long-term approach) by creating more visually appealing or better running vehicles.
Smith believed that such an approach, however, overgeneralized the consumer market, ignored certain consumer needs, and resulted in an unstable and short-term solution. He likened product differentiation to taking a thin layer from a cake (symbolically the market). Though some cake is better than no cake, he recognized that it’d be much better if business owners also had a wedge (or multiple wedges) of the cake. This wedge, he believed, was market segmentation, an approach to marketing that views “a heterogenous market (one characterized by divergent demand) as a number of smaller homogenous markets in response to differing product preferences among important market segments” (6). In other words, instead of solely basing your decisions on what competing lemonade stands are doing, marketing segmentation means you base your decisions on the unique needs and circumstances of consumers, taking into consideration, especially, demographic, socio-economic, lifestyle, and other relevant factors. By utilizing this approach, Smith believed that businesses could obtain “a more secure market position” with “greater over-all stability” (7). And his claim makes sense, too: as Smith, himself, noted, market segmentation leads to an increased willingness by consumers to pay a little more to get just what they want (7) – this is a much more easily maintainable marketing approach than trying to constantly set yourself apart from your competitors.
Smith didn’t claim, however, that market segmentation was a cure-all and flawless marketing tactic – he acknowledged that product differentiation also had its benefits. Afterall, consumers have to be able to differentiate between your product and the product of your competitor. Determining the optimum balance between product differentiation and market segmentation, however, is where you truly (and ironically) set yourself apart from your competition. Every business utilizes product differentiation to some degree, but the successful ones recognize the unique needs of consumers and adjust their products accordingly. Businesses, Smith observed, may stumble across segmentation eventually and out of necessity, but it is much better to anticipate segmented markets and determine beforehand how much segmentation can be utilized while still being profitable (6).
In the early 20th century, a business’ ability to craft their products to the unique needs of consumers was largely hindered by production costs and means, but thanks to technological advancements businesses today have much more flexibility, and they should take advantage of this flexibility. Instead of putting up identical lemonade stands in every neighborhood and trying to differentiate yourself from competing lemonade stands, craft your lemonade to best fit different markets. If you’re in a health-conscious and active community, try selling low-calorie lemonade made from freshly squeezed lemons. If you’re setting up shop in a colder region, try selling hot chocolate instead. Your ability to tap into segmented markets and secure a more stable and long-term foothold in your industry is restricted only by your imagination and means of production. And in our digital age, where it’s easier than ever to identify and appeal to unique consumer needs, optimizing your market segmentation is crucial to your business’ long-term success.
Smith, Wendell R. “Product Differentiation and Market Segmentation as Alternative Marketing Strategies.” Journal of Marketing, vol. 21, no. 1, 1956, pp. 3–8. JSTOR, www.jstor.org/stable/1247695.