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Profitability Analysis by Market Segments LELAND L BEIK an d STEPHEN L BUZBY The contribution approach to cost accounting serves to relate products, channels, and/or other marketing components to the profitability of market segments. Using the profit criterion, the marketing manager can plan and control his decisions for the component being analyzed and make collateral adjustments in other elements of the marketing mix. ABOUT THE AUTHORS. Leiand L. Beik is professor of marketing in the College of Business Administration', The Pennsylvania State University, University Park. Stephen L. Buzby is assistant professor of accounting in the College of Business Administration, University of Indiana, Bloomington. Journal ol Marketing, Vol. 37 (July 1973), pp. 48-53. B Y tracing sales revenues to market segments and relating these revenues to marketing costs, the marketing manager can improve and control his decision making with respect to the firm's profit objective. First expressed by Smith in 1956, the concept of market segmentation has since been elaborated in many different ways.^ It has recently been de- fined by Kotler as ". . . the subdividing of a market into homogeneous subsets of customers, where any subset may conceivably be selected as a market target to be reached with a distinct marketing mix."- The underlying logic is based on the assumption that: . . . the market for a product is made up of customers who differ either in their own char- acteristics or in the nature of their environment in such a way that some aspect of their demand for the product in question also differs. The strategy of market segmentation involves the tailoring of the firm's product and- or m arketing program to these differences. By modifying either of these, the firm is attempting to in- crease profits by converting a market with heterogeneous demand characteristics into a set of markets that although they differ from one another, are internally more homogeneous than before.^ The concept of market segmentation may be used for strategic alignment of the firm's produc- tive capacities with its existing and potential markets. By analyzing market needs and the firm's ability to serve those needs, the basic 1. Wendell R. Smith, "Product Differentiation and Mar- ket Segmentation as Alternative Marketing Strategies," J O URN A L O F MARKETI NG , Vo l. 21 ( JuW 195 6), p p . 3-8; a n d James F. Engel, Henry F. Fiorillo, and Murray A. Cayley, eds., Market Segmentation: Concepts and Applications (New York: Holt, Rinehart and Winston, Inc., 1972). 2. Philip Kotler, Marketing Management, Second Edition (Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1972), p. 166. 3. Ronald E. Frank, "Market Segmentation Research: Findings and Implications," in Applications of the Sci- ences in Marketing Management, Frank M. Bass, Charles W. King, and Edgar A. Pessemier, eds. (New York: John Wiley & Sons, Inc., 1968), p. 39. 48

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