Do or Die:  Market Segmentation and Product Positioning on the 
Internet 
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By Ravi Kalakota and Andrew B. Whinston

Author Information: Ravi Kalakota is a research associate and 
Dr. Andrew Whinston is a Chair Professor at the University of Texas at 
Austin. They are the co-authors of a forthcoming book titled 
"The Frontiers of Electronic Commerce" to be 
published by Addison-Wesley in Spring 1995.
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Contrary to folklore, marketing on the Internet is neither easy, nor as 
straightforward as it appears at first glance.  The bandwagon that most 
companies hopped on takes the stand that Internet marketing is equivalent 
to creating a home-page on the World Wide Web (WWW) with an 
underlying assumption that "create it and the hordes will come."  

However, this approach does not address the more fundamental marketing 
issues that need to resolved for success in the electronic marketplace. 
These issues range from: how to position and differentiate the product in 
the eyes of the growing Internet population estimated at 20-30 million 
with 10% monthly growth rate [1]?  How to generate pull forces 
emanating from the company that attract and lure the potential customer 
into visiting your company's server? How to effectively communicate on-
line with the interested customer? And finally, retention. How to 
continuously innovate in order to keep the customer happy so that he or 
she returns?

One reason for the dichotomy in Internet marketing practice is that early 
Internet pioneers (or first-movers) were more oriented towards technology 
and consequently placed more emphasis on the product and its 
corresponding information.  However, when one moves away from 
complex information heavy products like software and hardware with 
their multitude of features to more commodity items like stock quotes, 
newsletters, flowers, or lingerie, the emphasis shifts from the product focus 
to the marketing process of reaching and getting close to the customer. 

It is this illusive transition from product to process that firms must 
understand and adapt to in the emerging marketplace. For instance, a 
product way of thinking is succinctly captured in Internet artifacts such as 
the Frequently Asked Questions (FAQs). More recently, we witnessed 
hypertext publishing that enabled the creation of information webs of 
associated products. Now we are entering a new phase where the focus is 
on mercantile transactions and buy/sell processes built on the network 
publishing infrastructure where service quality becomes paramount.

Central to all service businesses is product differentiation -- success in 
appealing to desirable market segments so as to maintain visibility and 
create defensible market positions.  Differentiation has become almost 
gospel among the early Internet pioneers who set up very successful 
WWW servers such as HotWired and O'Reilly's Global Network Navigator 
(GNN). These firms realized that the key to their survival as part of the 
new electronic marketplace is ''finding and addressing a niche.''   
Unfortunately, for every one company that has realized this there are at 
least ten others who took the wrong path in thinking that creating a home 
page on the WWW is effective marketing. 

Differentiation is based on the view that charging a better price or profit 
on products or services is dependent on the ability to  differentiate oneself 
from the pack and forge institutional identity.  To better capture this 
notion of effective marketing, we state our "Law of Differentiation'': As 
the blurring of distinctions among firms increases in electronic markets, 
survival requires identifying your unique role in the marketplace in terms 
of value to the customer.  

This law is based on that fact that although there is relatively little 
differentiation among on-line firms today, most firms will have to choose 
their niche in the market rather than ''trying to be all things to all people.'' 
This creates a perception that there is something of extra value in doing 
business with the on-line firm.  Thus differentiation is the process of 
focusing on the identification of tangible and intangible customer needs 
(for both consumer and corporate markets), and creating an appropriate 
superior cluster of information products, value-added services, and image 
to meet those needs.

While, the notion of differentiation is easy to articulate, it is often difficult 
to execute or operationalize. Added to that,  there is much confusion 
about what differentiation really means in the context of electronic 
markets and how to go about finding your best market niche. 
Segmentation is only one technique for creating value-added 
differentiation. Differentiation goes beyond segmentation to other 
techniques --  product bundling and packaging;  price;  service quality;  
delivery systems and organization; and  strategic themes like rewarding 
customer loyalty -- which create perceived extra value  in the eyes of the 
customers, and thereby establishes the institutional distinctiveness required 
for survival. 

Let us tackle the first problem facing every company attempting to do 
business on-line: how to carry out market segmentation as a first step in 
the differentiation process? Segmentation is an essential prerequisite for 
product positioning.  Market segmentation is the process of dividing the 
market into separate and distinct customer groups. Its purpose is to 
determine differences among customers which may be of consequence in 
choosing among them or marketing to them. Some typical segmentation 
approaches that need to "re-engineered" and carried out on the Internet 
are:

-- Demographic: categorizing the market in terms of population 
characteristics such as age, sex, income, occupation, race, family size, or 
religion.  For example, banks associate deposit sources with demographics 
and create programs to focus on the elderly or workers over 50 years of 
age, because these groups are perceived to be savers.  Focusing on ''upper 
income'' groups, 25-44 age group of heavy borrowers or the 18-25 credit 
risk groups is also segmentation marketing.  The goal is to find the 
relationship between profits or volume and the identifiable demographic 
characteristic, and use that characteristic for formulating the 
product/service and direct marketing programs. How do we do this when 
there is no centralized directory or organization keeping tabs on Internet 
users?

-- Benefit or Behavioral: dividing the market according to how people 
behave, their attitudes, or the benefits they seek. For instance,  in the case 
financial products, one can use behavioral segmentation to distinguish 
needs according to a customer's position in her financial life cycle -- 
whether she needs to borrow, save, invest, protect, manage her cash flow, 
or control her tax position. Another type of behavioral segmentation is 
based on differentiating between people who use on-line firms primarily 
for transactions, versus those who use them primarily for prospecting and 
discovering information.  

-- Volume: distinguishing heavy, medium, light or non-users of a product 
category and, after determining the value or profitability of the product 
and whether its users differ in some special way, to focus product sales on 
the right volume target. For example, marketing programs focused on 
business users for cross sell are a response to volume segmentation.

-- Business Specialization: categorizing the market by type/ size of 
industry or institution. This form of segmentation applies primarily to 
business or institutional markets. Special programs for small business are 
an example of business specialization segmentation. 

-- Geographic: deciding to market in some territories but not in others or, 
more likely, identifying a location that appeals to a market target.  On the 
Internet, this issue is not so clear as there are no geographic boundaries 
that limit your reach.  A firm as easily reach South Africa as the next city.  
Hence, we need to rethink the notion of geographic segmentation may be 
as culture or even language-based when applying to electronic markets.  

All of these segmentations give rise to opportunities to service electronic 
markets in special, hopefully, profitable ways.  Segmentation has to be 
repeated often as the characteristics of the population are constantly 
changing with the influx of new customers and networks on a global 
scale.  

In sum, segmentation means ''picking your spots,'' focusing more on 
business in one part of the market than another, in the hope of gaining a 
more profitable mix. Success in doing this depends not only on selecting 
the right segment and creating an appropriate package with the image, 
products, and services required to meet those needs. It is this last step 
which creates perceived extra value and institutional distinctiveness in 
electronic markets.

[1]  source: The Internet Society (http://www.isoc.org/)