Technology and Optimal Segment Size

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Abstract

Increasingly, there is greater appreciation of the impact of technology on marketing practice. Many strategies like mass customization, relationship marketing, interactive marketing, etc., have gained increased attention, in part, from advancements in manufacturing and information technology. In this paper, we formally examine how technology has made such strategies economically feasible through its impact on optimal segment size. We build on Lancaster's model of product differentiation to derive an equation that exposes the “invisible hand” of technology. This equation shows how technology influences marketing practice through its effect on optimal segment size. In addition, the equation provides a formal explanation for the apparent paradox of mass customization; that customized products can be mass-produced profitably, without the benefit of large production volumes. We then use this equation to gain a more insightful view of the history of segmentation.

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