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Since the introduction of the terms "product differentiation" and "market segmentation" by Wendell Smith in 1956[1], marketing researchers recognize differences between groups of consumers to be opportunities in the market. However, as Dickson and Ginter[2] indicate, there is confusion in textbooks and articles about the definition of these terms. In some cases, product differentiation is described as an "alternative" to market segmentation. In other texts, product differentiation is a "complement" to market segmentation. Smith[1] describes product differentiation as "the bending of demand to the will of the supplier". Product differentiation might thus be rather "artificial". Galbraith[3] also takes the latter position and accuses marketing of manipulating consumers.
Market segmentation involves the identification of segmentation variables followed by segmentation of the market. This leads to market targeting, i.e. an evaluation of the attractiveness of the obtained segments and a selection of the target segment(s). For these target segments, positioning concepts are developed, selected and communicated[4]. The segments that are distinguished must form a sound basis for product, distribution, pricing, and communication strategy. This can only be realized by stable segments of which the buying behaviour can be reliably predicted.
Product differentiation and positioning is the counterpart of market segmentation. Product development and marketing communication can be aimed and focused at specific segments in the market[2]. How then are we to identify viable market segments or types of people as target groups for marketing activities? The main questions addressed in this article concern how fruitful several approaches are in identifying market segments. At which level of abstraction should one identify market segments? How are market segments related to differentiated products and services?
In order to do so, we will first review these approaches to market segmentation. Then the domain-specific segmentation approach, the segmentation methodology and techniques, as well as the evaluation of segmentation outcomes, will be discussed.
In market segmentation research, a number of decisions have to be made. We will discuss the major decision points involved in segmentation, such as:
* Which person characteristics or aggregate characteristics are chosen as segmentation variables to categorize people?
* How do we decide on the segmentation method? We will also address application issues, such as how best to:
* evaluate the outcomes of a segmentation study;
* implement the...