A New Approach to
Market Segmentation
Although market segmentation is still considered a major topic
of interest by the marketing research community, it might be
useful to question some premises of traditional segmentation.
PAUL E. G R E E N
Paul E. Green is S. S. Kresge Professor of Marketing at The
Wharton School, University of Pennsylvania.
Few, if any, topics in marketing have com-
manded more attention than market segmen-
tation. Hardly a journal issue appears that
does not include some article on the subject.
Almost all marketing texts devote at least a
chapter to the topic, and whole books have
been written on segmentation.
Techniques for carrying out segmentation
have also increased in variety and sophistica-
tion. Multiple regression and discriminant
analysis were the standard approaches a dec-
ade ago. N o w they frequently take a back seat
to such procedures as Automatic Interaction
Detection, factor analysis, cluster analysis,
perceptual and preference mapping and
conjoint scaling. With the profusion of tech-
niques has come a profusion of segmentation
bases--perceptual-preference segments, needs-
oriented segments, common-problems seg-
ments, benefits-seeking segments, psycho-
graphic segments, and so on. One could easily
get the impression that the topic has b e c o m e
too complex for mere mortals to compre-
hend.
One of the purposes of this article is to
argue that such is not the case. I first discuss
the role that segmentation can play in the
formulation of marketing strategy for either
products or services, consumer or industrial.
The second part of the article suggests that
FEBRUARY 1977
the complexity of segmentation methods is
more apparent than real. Two basic ap-
proaches to segmentation--a priori and post
h o c - a r e described, and it is shown that all
current approaches boil down to one of these
types, or possibly a hybrid of the two. A new
method is then proposed for examining rela-
tionships among alternative bases for segmen-
61
tation that may be under consideration b y the
researcher. The third part of the article
describes a new approach to s e g m e n t a t i o n -
componential segmentation. The characteris-
tics of this method are described nontechni-
cally, and the results of an empirical applica-
tion are reported. 1
SEGMENTATION AND MARKETING
Contemporary segmentation studies often col-
lect such a welter of different kinds of data
that it is difficult to k n o w h o w the separate
facets of the survey are to be integrated. For
example, in segmenting the market for auto
1. Componential segmentation has been developed joint-
ly with J. Douglas Carroll, Bell Laboratories, and Frank J.
Carmone, Drexel University. More details on the model
appear in Paul E. Green, J. Douglas Carroll and Frank J.
Carmone, "Superordinate Factorial Designs in the Analysis of
Consumer Judgments." (Working paper, University of Penn-
sylvania, September 1975) and Paul E. Green, J. Douglas
Carroll and Frank J. Carmone, "Design Considerations in
Attitude Measurement." (Paper presented at the Seventh
Annual Conference on Attitude Research, February 1976).

insurance policies, data could be collected on
the respondent's
current insurance--amount, type o f coverage, cur-
rent supplier, previous supplier, recent claims
perceptions and evaluations of alternative sup-
pliers of insurance
utilities for various combinations of insurance
policy characteristics
evaluations of new policy concepts
insurance needs, benefits sought, problems en-
countered with current supplier
life style-insurance related and more general
aspects
communications channel selection
demographic and socioeconomic variables.
It is banal to say that segmentation studies are
but a means to an end. However, one some-
times loses sight of the strategic aspects of
segmentation research when the incremental
costs of tacking on more sections to the
questionnaire are so low.
At any point in time, the firm markets a
particular set of offerings (products or ser-
vices) to a particular set of buyers (consumer,
62 commercial or industrial). This all takes place
within a set of interconnected environments
made up of competitors, distributors and
various governmental agencies. Just as obvi-
ously, the firm could, in principle, be market-
ing other kinds of offerings, to the same or to
different kinds of people.
Figure 1 is an adaptation of the original
Ansoff schema involving four basic competi-
tive strategies in marketing: market penetra-
tion, market development, product develop-
ment and diversification. 2 In this adaptation,
however, we distinguish b e t w e e n the struc-
tural and functional characteristics of offer-
ings and markets.
Structural characteristics of products in-
clude physical and chemical attribute levels,
packaging, distribution and price. Structural
characteristics of persons refer to their demo-
graphic and socioeconomic characteristics.
While these latter characteristics are expected
to change over time, they may be treated as
fixed for relatively short time intervals. More-
2. H. Igor Ansoff, Corporate Strategy (New York:
McGraw-Hill Book Co., 1965).
PAUL E. GREEN
over, it is reasonable to assume that demo-
graphic and socioeconomic variables moderate
persons' choices among offerings but, in turn,
are pretty much independent of the firm's
marketing strategies.
Functional characteristics of offerings per-
tain to the uses or purposes to which the
products or services are put. (Included here
are the symbolic values that offerings may
display in a social-psychological context.)
Stretching the analogy a bit, functional char-
acteristics of people pertain to the ways in
which demographic and socioeconomic char-
acteristics shape one's style of living and one's
perceptions and values in the market place.
Two different structural o f f e r i n g s - f o r ex-
ample, a candle and table l i g h t e r - m a y serve
the single function of lighting one's cigarette.
Conversely, a single o f f e r i n g - a lemon-lime
soft d r i n k - m a y serve two or more functions,
such as a mid-afternoon refreshment or a
mixer with one's favorite b o u r b o n at bedtime.
The functions that an offering purports to fill
are part of its array of promotional appeals,
claims and symbolic characteristics. Develop-
ment of its image and market positioning is
the job of advertising message design and
communications channel selection.
By the same token, two different demo-
graphic structures could display (within
limits) a similar life style, benefit-seeking
pattern, or brand preference profile. Con-
versely, a single type of demographic struc-
ture could manifest different goal-seeking and
expressive behaviors.
Functional-expressive behaviors may, in
turn, be arrayed hierarchically in terms of
general life style, product-related needs, prob-
lem solving and specific brand-related percep-
tions and preferences. (In the simplified classi-
fication of Figure 1 these are all called
functional-expressive.)
The original Ansoff schema was repre-
sented by a table which did not distinguish
between structural and functional characteris-
tics of offerings and markets. From the
standpoint of strategy formulation, a more
BUSINESS HORIZONS
A New Approach to Market Segmentation

FIGURE 1

Alternative Marketing Strategies and Segmentation Research*

Present Segments New Segments

Structural Functional- Structural Functional-

Character- Expressive Character- Expressive
istics Behavior istics Behavior

Structural
Characteristics
Present MARKET MARKET
Offerings PENETRATION DEVELOPMENT
Functional-
Symbolic
Appeals

Structural
Characteristics 63
New PRODUCT
Offerings DEVELOPMENT DIVERSIFICATION
Functional-
Symbolic
Appeals

*Adapted from H. Igor Ansoff, Corporate Strategy (NewYork: McGraw-HillBook Co., 1965).

detailed classification might be preferred. For
example, in the auto insurance example one
might want to distinguish between structural
product development in which the actual
policy's characteristics are altered (increased
benefits, extended coverage, increased pre-
mium), and functional product development
in which different appeals for selling the
original policy are implemented. In turn,
these appeals could be targeted to specific
demographic groups, different life style seg-
ments, or both.
Depending u p o n the empirical context,
the interconnections between structure and
function may be loosely or tightly coupled.
For example, lowering the insurance policy's
premium and offering the policy b y mail may
markedly change the offering's functional-
symbolic character. Conversely, including a
new restriction on claims (as part of the
policy's fine print) may have no effect what-
soever on the policy's image. Whatever may
be the case, a general problem in strategy
formulation is to achieve c o n g r u e n c e between
structure and functional-symbolic appeals. In
particular, one may wish to find a specific
structure that allows for a variety of believ-
able functional-symbolic appeals--each one
being attractive to a different market seg-
ment.

FEBRUARY1977

The value of the schema of Figure 1 is the
guidance it provides for designing the segmen-
tation study in the first place. As a further
example, consider the problem of a telephone
company wishing to increase revenues for
long distance usage. Clearly, little can be
gained by attempting to increase installed
sets; the market is already saturated. Simi-
larly, little opportunity (except for the ex-
ploitation ot pmture phones) exists tor drama-
tically changing the physical structure of
telephones. What can be done involves such
strategic aspects as
increasing the variety of appeals related to why
people call long distance
changing the pricing or discount structure for load
leveling and increased overall demand
appealing to special demographic groups--senior
citizens, college students, military service personnel--
via special rates or gift certificates
appealing to special life styles--the highly mobile,
gregarious and involved person--via special appeals or
channels, such as direct mail.
64 The reader can easily think of m a n y examples
where the permissible courses of action shape
the kind of segmentation study that should be
implemented. However, as basic as this point
is, many omnibus-type segmentation studies
are launched and the data analyzed before the
central idea of formulating strategy alterna-
tives even comes up.
TRADITIONAL APPROACHES
In the past, marketing researchers have em-
ployed two basic analytical approaches to
segmentation:
A priori segmentation, in which the re-
searcher chooses some cluster-defining de-
scriptor in advance, such as respondent's
favorite brand. Respondents are then classi-
fied into favorite-brand segments and are
further examined regarding their differences
in other characteristics, such as demographics
or product benefits being sought.
Post hoc segmentation, in which respon-
dents are clustered according to the similarity
PAUL E. G R E E N
of their multivariate profiles regarding such
characteristics as purchasing behavior or atti-
tudes. Following this, the segments may then
be examined for differences in other charac-
teristics, not used in the original profile
definition. In post hoc segmentation one does
not know the number of clusters or their
relative size until the cluster analysis has been
completed.
As an example of a priori segmentation,
one might classify all respondents according
to their stated favorite brand of beer. Having
done this, some technique such as multiple
discriminant analysis might be used to deter-
mine if the groups differ in terms of average
demographic profiles or life style variables.
In post hoc segmentation, we prespecify
only the set of variables on which consumers
are to be clustered-benefits sought, problems
encountered with the product, or whatever.
One then takes the consumers' response pro-
files on the whole battery of selected variables
and clusters the respondents. Having done
this, some technique such as multiple discrim-
inant analysis (or simple cross-classification,
for that matter) can be employed to see if the
various clusters differ with regard to demo-
graphics, product usage, and so on. In the
preceding beer example, respondents could
first be clustered on the basis of the common-
ality of their benefit-seeking profiles. Having
done this, one could then see if the various
clusters differed significantly with regard to
weekly consumption of beer, brand favorite,
respondent age, and so on.
In some studies a hybrid of the two
approaches is used. For example, respondents
could first be grouped according to favorite
brand and then a clustering procedure could
be employed to see if segments evincing
c o m m o n benefit-seeking profiles appear with-
in each of the brand-favorite segments that
were found via the a priori approach.
Figure 2 shows, in stylized form, hypothe-
tical examples of each approach. To illustrate,
assume that we have m consumers' consump-
BUSINESS HORIZONS
A New Approach to Market Segmentation

FIGURE 2

Traditional Approaches to Segmentation

A Priori Segmentation

Brand
Brand
C o n s u m p tio n
Segment
Rates
A B C
A B C

1 4 6 8-
2 X
2 2 4 9
3 X --
3 0 15 12
4
Consumers 4 12 1 3

m 14 13 0 m X

Post Hoc Segmentation

R a t i n g s on
Product Needs Need 65
Statements Consumers Segment
1 2 3 ...... n 1 2 3 4 ...... m 1 2 3 4

1 -2 4 7 ...... 1" 1 1
2 1 3 6 . . . . . . 2 2 2 -- X
3 2 4 6 . . . . . . 1 3 Cell entries are 3 X
Consumers 4 2 3 6 ...... 2 ~ 4 dissimilarity .__..._~ 4 X
measures
• . • . • between
consumers
• , . ° .

• , • . •

m 2 2 4 ...... 3 m
m x

Hybrid Segmentation

Needs
Brands Statements Brand-Need Segment
A B C 1 2 3 ...... n A B C
1 2 1 2 3 1 2 3 4
1 4 6 8" 1 -247 ...... f" -- X --

2 2 4 9 2 1 3 6 ...... 2 2 -- -- X
3 0 15 12 3 2 4 6 ...... 1 3 -- -- X
Consumers 4 12 11 3 4 2 3 6 ...... 2 .____1~. 4 - x

m 14 13 0 m 2 2 4 ...... 3 m X --

FEBRUARY 1977

tion data (in cases, over some base period) of
three brands of beer: A, B and C. Under a
priori segmentation we may elect to group
people on the basis of the brand that enjoys
the highest consumption rate. The second
matrix is a simple transformation of the first
in which an X appears under the brand for
which consumption is highest for each respon-
dent. (We note, for example, that the first
two respondents are assigned to segment C.)
In post hoc segmentation, an extra s t e p -
computation of a matrix of interperson dis-
similarity measures-is involved. Then, the
actual grouping process is carried out b y some
type of clustering algorithm. To illustrate,
assume that each of the m consumers re-
sponds to a set of needs-type attitude seg-
ments regarding beer consumption, on a
seven-point agree-disagree scale. Under post
hoc segmentation, the first matrix shows the
original response profiles. This matrix is trans-
formed into an m x m symmetric matrix of
66 dissimilarity measures in which each cell entry
measures h o w disparate each pair of con-
sumers is across the whole set of needs-type
statements. This second matrix is then sub-
mitted to a cluster analysis, yielding, in this
illustrative case, four segments.
Hybrid segmentation starts out with b o t h
data sets. Respondents are first clustered b y
favorite brand. Following this, separate and
independent dissimilarity-measure computa-
tions and cluster analyses are carried out
within each favorite-brand segment. As shown
in Figure 2, different numbers of clusters may
emerge and, in general, the needs-type sub-
groups found b y the hybrid approach differ
from those found b y the post hoc approach.
As can be noted from the preceding
example, segmentation is an aggregative pro-
cess insofar as matrices of individual data are
concerned. Whether a single variable is se-
lected for respondent assignment or whether a
clustering is performed over a general measure
of interperson dissimilarity, the net effect is
to reduce the m original respondents to a
more manageable number of groups. In the
PAUL E. GREEN
process of doing this, information about
detailed consumption of brands or detailed
responses to needs-type statements is (willing-
ly) discarded.
Two other points are worth making. First,
in Figure 2 only persons were grouped into
segments. This is generally the way market
segmentation proceeds, b u t it is quite possible
to take the obverse point of view and to
cluster offerings. For example, in the case of a
large number of brands, one could just as
easily develop a dissimilarity measure for pairs
of brands across persons' consumption pro-
files and cluster those brands that exhibit a
relatively high commonality of usage. This
may not always be useful, b u t the point is
that a kind of symmetry exists b e t w e e n each
facet of the response m a t r i x - o n e can cluster
market offerings just as readily as people.
Second, the choice entities need not be
products or services in the more narrow sense.
They could be political candidates, legislative
actions, charitable appeals, home site loca-
tions, or whatever.
CHOOSING A SEGMENTATION BASE
In most segmentation studies, the researcher
is faced with a surfeit of variables that could
serve as the basis of segmentation. Returning
to the insurance policy example, eight differ-
ent sets of data were collected, ranging from
the characteristics of current policies to the
respondent's demographic-socioeconomic pro-
file. Which set is to serve as the "distin-
guished" set or segmentation base?
Unfortunately, there is no simple answer
to this question. Historically, researchers have
selected some variable or battery of variables
and proceeded from there. For example, if a
needs-type attitude segmentation is being
done, then responses to the battery of needs-
type statements provide the segmentation
base. However, suppose one finds that other
variables--demographics, product usage, new
concept evaluations-do not show systematic
BUSINESS HORIZONS
A New Approach to Market Segmentation
profile differences among the needs-type seg-
ments? If so, should some other battery of
variables be chosen as a base?
Relating the choice of segmentation base
to strategy considerations, as described ear-
lier, appears to be the most appropriate
approach. Even so, cases can arise in which
several candidate bases are tenable "choices.
What is needed is a method that will: (1)
show h o w closely related various clusterings
obtained from alternative bases are; (2) test
whether some clusterings are independent of
the remaining ones; and (3) find the clustering
that exhibits the highest contribution to the
mutual association among the subset of clus-
terings that evince significant associations in
the first place. Furthermore, even if the
researcher has settled in advance on a distin-
guished set of variables to serve as the
segmentation base, he may be interested in
finding out h o w well the clustering obtained
from this distinguished set can be predicted
b y some function of the other clusterings.
As it turns out, all of these objectives are
interrelated and can be attained through
application of a new approach that utilizes
multidimensional contingency table analysis.
The basic ideas of the method can be briefly
described as follows:
E a c h c a n d i d a t e s e g m e n t a t i o n base ( b a t t e r y o f
variables) is i n d e p e n d e n t l y u s e d to cluster t h e respon-
d e n t s i n t o some specified n u m b e r of groups. T h e
n u m b e r o f clusters so f o r m e d m a y or m a y n o t b e t h e
same across bases, d e p e n d i n g u p o n t h e r e s e a r c h e r ' s
objectives.
E a c h c l u s t e r i n g serves as a categorical variable
(where t h e clusters r e p r e s e n t t h e categories), a n d a
m u l t i d i m e n s i o n a l c o n t i n g e n c y table is f o r m e d .
A v a r i e t y of tests c a n t h e n b e carried o u t o n t h e
m u l t i w a y table to see w h i c h clusterings are r e l a t e d to
w h i c h o t h e r ones.
One clustering c a n be c h o s e n as t h e d i s t i n g u i s h e d
c l u s t e r i n g a n d a m o d e l can b e d e v e l o p e d f o r p r e d i c t -
ing this c l u s t e r i n g f r o m clusterings o b t a i n e d f r o m
o t h e r bases. I n this way o n e can a s c e r t a i n h o w closely
a s s o c i a t e d s o m e s u b s e t o f clusterings m a y b e w i t h t h e
d i s t i n g u i s h e d clustering. If desired, clusterings o n
n o n d i s t i n g u i s h e d sets c a n b e r e p e a t e d w i t h subsets of
t h e variables t h a t i n d i v i d u a l l y evince h i g h a s s o c i a t i o n
w i t h t h e distinguished-set clustering.
FEB RUARY 197 7
While practitioners may continue to
choose some segmentation base b y fiat, the
new method can still show them h o w strongly
the clusterings obtained from alternative bases
are related to the distinguished base. More-
over, if one should select a benefits-seeking
base and find that its clustering is indepen-
dent of the clusterings of all other candidate
bases-while the other bases are mutually
associated-then serious questions about the
choice could be raised.
In brief, the clustering comparison ap-
proach can provide new insights into market
segment relationships and statistical support
for the choice of some specific segmentation
base. Moreover, it can do this in terms of the
natural output of a segmentation analysis-
groupings of consumers-rather than being
limited b y the linearity assumptions of such
techniques as generalized canonical correla-
tion. 3
67
COMPONENTIAL SEGMENTATION
Up to this point, our discussion of segmenta-
tion has proceeded along more or less tradi-
tional lines. It is now appropriate to describe,
briefly and nontechnically, a new .way to
segment markets, called componential seg-
mentation. In one sense, componential seg-
mentation is disaggregative in nature. Unlike
the a priori and post h o c approaches, in
componential segmentation persons who
evince similar response profiles are not
grouped together. On the contrary, their
individual responses are further decomposed
into c o m p o n e n t contributions that are per-
son-related (demographics, life styles, and so
on) and contributions that are offering-related
(such as attribute levels of the product or
service).
3. For a more technical discussion of this approach, see
Paul E. Green and Frank J. Carmone, "Segment Congruence
Analysis: A Method for Analyzing Association Among
Alternative Bases for Market Segmentation," Journal of
Consumer Research (forthcoming, March 1977).
 PAUL E. GREEN

An Example undesirable to highly desirable. Conjoint scal-

ing could then be used to estimate each
A firm engaged in the marketing of credit respondent's utility for each level of each of
cards was interested in developing a new card the five factors. 4 However, b y the application
that would maintain current patron privileges of certain experimental designs-called ortho-
but would also exhibit attractive benefits to gonal arrays-one can reduce the labor of
potential retailing establishments that might respondent evaluation from thirty-two card
wish to honor the card. Interest centered on descriptions to only sixteen, while still retain-
the establishments' utilities for various cost- ing the ability to estimate all utilities, s
benefit profiles. Five credit card attributes Orthogonal arrays represent a type of frac-
were selected for study: tional factorial design that is a generalization
d i s c o u n t r a t e - 2 V 2 % versus 6% of the more familiar latin square design.
s p e e d o f p a y m e n t - o n e d a y a f t e r r e c e i p t of w e e k ' s ("Orthogonal" means that all effects are
v o u c h e r s versus t e n days a f t e r r e c e i p t o f w e e k ' s
mutually uncorrelated.)
vouchers
c r e d i t a u t h o r i z a t i o n - - c o m p u t e r t e r m i n a l versus
toll-free t e l e p h o n e n u m b e r
m a r k e t i n g s u p p o r t to e s t a b l i s h m e n t - - 0 . 1 % o f an-
The Componential Design
n u a l billings versus 0.75% of a n n u a l billings
r e b a t e o n a n n u a l g r o w t h in b i l l i n g s - - n o n e versus a In the usual approach to conjoint scaling, a
15% r e b a t e o n billings e x c e e d i n g q u o t a . sample of retail establishments would be
chosen and respondents asked, among other
Insofar as the preceding factors are con-
things, to evaluate the hypothetical credit
cerned, the discount factor refers to the
cards. Segments may then be formed on the
68 percentage of the establishment's billings on
basis of commonality of utility functions.
the credit card that is deducted b y the credit
In componential segmentation, however,
card company for its service. Speed of pay-
one applies the same design principles to the
ment refers to h o w quickly the company pays
(less its service discount) the establishment selection of respondents--namely, fractional
factorial designs, such as orthogonal arrays--as
after receiving the establishment's vouchers.
The credit authorization procedure consists of are applied to the construction of the stimu-
two alternatives: a company-supplied com- lus cards. In the present study, four establish-
puter terminal versus a manual system involv- ment-type factors were believed to be impor-
tant background variables for segmentation:
ing credit-check calls on a toll-free telephone
t y p e of e s t a b l i s h m e n t - l o d g i n g ; retailing; restau-
number. Marketing support refers to the
rant
company's payment of local advertising on size of e s t a b l i s h m e n t w i t h i n t y p e - - s m a l l ( b e l o w
behalf of the establishment. The rebate proce- m e d i a n in sales v o l u m e ) versus large
establishment's current favorite card--card type
dure pertains to a plan in which the company
A; c a r d t y p e B; c a r d t y p e C
rebates, to the establishment, 15% of the n u m b e r of credit cards h o n o r e d b y establish-
company's charges on all billings exceeding m e n t - t h r e e or f e w e r versus f o u r or m o r e cards.
the establishment's quota, usually set at 1.25
In this case we would have 3 x 2 x 3 x 2 = 36
of the previous year's billings level. As noted,
combinations if a full factorial were used.
each of the above factors appears at two
levels, so that a full factorial design would 4. As examples of various ways to apply conjoint scaling,
entail 25 -- 32 combinations. see Paul F. Green and Vithala R. Rao, "Conjoint Measure-
ment for Quantifying Judgmental Data," Journal of Market-
Ordinarily, one would make up thirty-two ing Research (August 1971), pp. 355-363 and Richard M.
credit card combinations and have retailers Johnson, "Trade-Off Analysis of Consumer Values,"~ournal
of Marketing Research (May 1974), pp. 121-127.
evaluate them on some type of scale, such as a 5. See references in footnote 1 for technical details
one to eleven rating scale, ranging from highly regarding orthogonal arrays.

BUSINESS HORIZONS
A New Approach to Market Segmentation
However, by employing orthogonal array
principles, a design involving only nine com-
binations can be prepared. One of the basic
features of componential segmentation is that
respondents exhibiting specific profiles are
sought from some much larger frame of
potential respondents in order to find the
particular set of background profiles dictated
by the design.
If full factorials were employed in design-
ing both stimuli and respondents, the re-
sponse matrix would consist of thirty-six
respondent types times thirty-two stimulus
types, a total of 1,152 data points. By the use
of orthogonal array principles, this size is
reduced to only 9 x 16 = 144 data points. In
practice, of course, one would obtain several
replicates of each candidate respondent pro-
file so as to examine within-profile homo-
geneity and provide higher stability in the
parameter estimates of the model.
Applying the Model
Componential segmentation is a model in
which a series of decomposition techniques
are applied to t h e basic 9 x 16 matrix of
averaged profile evaluations of the sixteen
stimulus cards. The basic objective is to
decompose the response matrix into separate
parameter values for each of the levels of the
five attributes comprising the stimulus cards
and each of the levels of the four profile
characteristics describing the respondents.
Componential segmentation (COSEG) em-
ploys more or less standard statistical tech-
niques, such as analysis of variance, to carry
out the first of the sequence of decomposi-
tions. In the process of doing this, a useful
measure is computed that shows how "seg-
mentable" the market is, with respect to the
stimuli and background variables used in the
study. The segmentability index is simply a
measure of how large the interaction sum of
squares (persons x stimuli) is, relative to the
total variation in the data. In the present
FEBRUARY 1977
problem, the effect of the interaction term
was quite small (about 8% of the total),
suggesting that this market was not highly
segmentable.
The COSEG model develops parameter
values for both stimulus components (the
credit cards) and respondent profile charac-
teristics. In the former case the parameter
values represent utilities for the levels of the
five components making up the stimulus
cards. In the latter c a s e the parameters are
saliences that indicate how much each profile
characteristic contributes to variation in the
evaluative responses.
No attempt is made here to describe the
model in detail. Rather, a brief description of
the results of the COSEG analysis is offered.
Figure 3 shows the output for the stimulus
part of the response matrix. In the case of
credit card utilities, the solid lines show that
discount rate is, by far, the major evaluative
component. (It is not surprising that respon-
dents prefer smaller discount payments to 69
larger ones.) Speed of payment and credit
authorization procedure are also important
components, while marketing support and
rebate show virtually no variation at all.
Figure 4 presents respondent results, a
unique output of COSEG. The solid lines
indicate the contribution that each back-
ground variable makes to differences in over-
all stimulus evaluations. As noted, type of
favorite card displays the highest salience or
contribution to the overall evaluation.
However, COSEG also develops, if neces-
sary, a set of interaction parameters, denoted
by the selective dotted lines in Figures 3 and
4. In this case, only discount rate in Figure 3
and type of establishment and type of favor-
ite card in Figure 4 displayed interactive
effects. A specific interpretation of the inter-
action effect is that restaurants whose favorite
card is type A, when evaluating credit cards
with the small discount rate, evince a higher
utility than would be implied by the sum of
the main effects (solid lines) for this combina-
tion.
 PAULE. GREEN

FIGURE 3
Stimulus Utilities Obtained from the COSEG Model

Utilities
1.0 1.0 1.0

0 ""\\.
-1.0 f I -1.0 I I -1.0 I I
21/2% 6% 1 Day 10 Days Computer Telephone
Discount Rate Speed of Payment Credit Authorization

1.0

70
1°I
0

-1.0 I I -1.0 I I
0.1% 0.75% None 15%
Marketing Support Rebate

Main effect parameters

__-- Interaction parameters
(Stimulus mode)
Use of COSEG
The main value of COSEG lies in its ability to
make predictions about the relative ratings of
any of the thirty-two stimulus cards by any of
the thirty-six possible respondent types, as
based on parameters developed for the small
subsets of each. For example, suppose a
researcher wished to learn how a large restau-
rant, honoring three or fewer cards, whose
favorite card was type A, would evaluate six
different credit cards, each of which is com-
posable from the five basic stimulus factors,
shown earlier.
COSEG provides that prediction, using
parameters estimated from the calibration
sample. In practice, errors are associated with
the estimation of COSEG's parameters. A
measure of this overall error can be obtained
(by standard statistical procedures) for the
9 x 16 matrix that was used for parameter
estimation in the first place. Then, having
estimated the standard deviation of prediction
errors, one could estimate various segments'

BUSINESS HORIZONS
A New Approach to Market Segmentation

FIGURE 4
Respondent Saliences Obtained from the COSEG Model
Saliences

1.0 -- 1.0

-1.0 I I I -1.0 I I
Lodging Retailing Restaurants Small Large
Type of Establishment Size of Establishment

1.01 1.0

71

-1.0 i I I -1.0 I I
A B C ~<3 />4
Type of Favorite Card Number of Different Cards

Main effect parameters

-- -- Interaction parameters
(Respondent mode)
evaluations of alternative combinations of
credit card service levels by Monte Carlo
simulation.
Moreover, it is a relatively simple matter
to weight the choices of specific segments in
accordance with their relative importance in
the population of interest. The typical kind of
o u t p u t from these Monte Carlo runs entails a
cross-classification of each segment's fre-
quency of choices for each stimulus alterna-
tive under evaluation. Hence, for a specific
respondent segment one could find the fre-
quency of first choices received by each credit
card composite. Similarly, for each credit card
one could find the frequency across segments
in which it receives first choice. In short, once
the parameters and overall prediction error of
COSEG are estimated, it is relatively straight-
forward to run various sets of Monte Carlo
trials involving alternative strategies of in-
terest to the marketing manager.

FEBRUARY1977

Contribution of COSEG
The value of COSEG would appear to lie as
much in the point of view that underlies its
construction as in the specific model itself.
Componential segmentation focuses on the
building blocks of segments rather than on
specific groups that may emerge from a
particular type of clustering procedure (or
other means for developing segments from a
specific d a t a base). If the interaction effects
are small, segmentation may not be warranted
with respect to the stimulus domain under
study. If the interaction effects are large,
segmentation could be of major interest.
In the illustrative example we considered a
case in which both respondents and stimuli
were capable of being decomposed into sub-
ordinate factor levels. Two other cases are of
interest where: (1) respondents, but not
stimuli, are decomposable; and (2) stimuli,
but not respondents, are decomposable.
72 A number of segmentation studies-
benefits seeking, problem-oriented segmenta-
tion, life styles, brand preferences-are carried
out in which respondents can be selected
according to specific background profiles but
the stimuli are ordinarily not easily decom-
posable into subordinate components. For
example, in needs segmentation studies con-
sumers are asked to indicate how strongly
they agree or disagree with each of a set of
items that characterize various needs that a
product might satisfy. Ordinarily, these items
cannot be described as factorial combinations
o f more basic attributes. COSEG can still be
applied to this type of problem, although the
leverage for using it decreases.
Illustrations of the obverse case frequently
appear in the context of concept testing or
general studies involving conjoint scaling
where respondents (not chosen according to a
factorial design) evaluate designed stimuli that
are constructed factorially. Again, COSEG
could be applied to the response data and
post hoc examination made of the relation-
ship between concept ratings and various
PAUL E. GREEN
background variables. Moreover, Monte Carlo
simulations could be set up in either case.
However, COSEG seems most useful in
cases where both respondents and stimuli can
be further decomposed into subordinate com-
ponents and where the advantages of ortho-
gonal arrays (and similar kinds of fractional
factorials) can be fully realized in parameter
estimation. I suspect that a number of mar-
keting problems could be profitably formu-
lated in this way.
The high efficiency of COSEG is based on
the use of fractional factorial designs that, in
turn, permit uncorrelated estimation of re-
spondent and stimulus effects. As such,
COSEG is particularly Useful in the design of
stimuli and the selection of respondents.
However, cases will often arise where ortho-
gonal estimation of respondent background
characteristics is not feasible. If so, the
procedures described here can still be used to
make nonorthogonal estimates of the para-
meter values of interest, albeit with lower
statistical precision. Thus, even if one cannot
Select respondents according to orthogonal-
array desiderata, the principles of COSEG can
still be applied to obtain nonorthogonal esti-
mates of respondent-type subordinate factors.
Some Caveats
As the reader has probably surmised by now,
componential segmentation is not a variant of
market segmentation in its usual sense. Some
major differences should be noted:
COSEG considers the question of whether
or not a market is segmentable to be an
empirical matter, capable of being answered
statistically for the background variables and
stimuli under study.
No groups or clusterings in the usual sense
are formed. Rather, COSEG develops para-
meters for predicting how any segment com-
posed from the basic background levels will
evaluate similarly composed stimuli.
BUSINESS HORIZONS
A New Approach to Market Segmentation
The size o f the segment must be estimated
from the larger data bank from which the
specific respondent profiles (needed for the
orthogonal arrays) are drawn.
A number of caveats should be listed in
considering the COSEG approach:
To be most effective, COSEG requires the
ability to screen a large number of possible
profiles for the particular subset that meets
the design conditions. Ongoing panels where
respondent background variables exist in com-
puterized form are most useful for this
approach.
COSEG does not employ a random sam-
ple. Profiles selected to meet the design
characteristics are not necessarily "typical" of
the population as a whole. Moreover, it is one
thing to design stimuli and quite another to
select respondents from a larger universe. In
the former case one can design out (or
randomize over) unwanted variables. In the
latter case one gets all of the respondent, not
just the profile of interest.
When the desideratum of profile ortho-
gonality must be relaxed, the high statistical
efficiency of COSEG diminishes. Moreover,
interpretation of correlated parameter values
becomes more difficult substantively.
The preceding caveats clearly call for t h e
collection of additional data for internal cross
validation of the COSEG model's predictions.
This should be a sine qua non for using the
model.
~ 1 1 Illl The main objective of this article
I]l II has been to elaborate on some
rather basic beliefs:
• Segmentation works best when the
study design is tied in with market strategy
questions.
FEBRUARY 1977
• The traditional Ansoff table can be
expanded to produce a table that distin-
guishes between strategies at the structural
level versus those at the functional level. This
expanded table can serve as a kind of check
list for strategy development within various
segments.
• While a myriad of segmentation bases
exist, only two fundamental a p p r o a c h e s - a
priori and post hoc (and a hybrid of the
t w o ) - h a v e been traditionally applied.
• It is not always clear what subset of
segmentation variables should be chosen as
the distinguished set. However, procedures
have recently been developed to examine the
degree of association among alternative seg-
mentation bases. Moreover, if some base is
chosen b y fiat, the same approach can be used
to find a functional relationship between its
clusters and those produced b y employing
other bases.
• Componential segmentation represents a
73
new approach to segmenting markets, one
that emphasizes the prediction of new respon-
dents' evaluations of new stimuli (for exam-
ple, new product offerings) from a relatively
small sample of factorially selected respon-
dents and factorially designed stimuli.
* In the COSEG approach, the segmen-
tability of a market can be measured for the
specific background variables and stimuli un-
der study.
• Given the fact that COSEG estimates a
relatively large number of parameters on the
basis of a relatively small number of calibra-
tion responses, it is essential that all COSEG
studies include an internal validation step
where a control sample of responses are held
out of the analytical stage and later predicted
b y the model.