The Substantiality Test

Abstract

While there is a large literature that focuses on the criteria that can be used for segmenting a market, far less attention appears to have been paid to the accompanying requirements for effective segmentation. Thomas (1980) argued that any proposed segmentation should pass four tests: measurability, accessibility, stability and substantiality. The rationale for each test is re-examined and substantiality is shown to require a more precise definition. Substance is shown to be a normative concept, inconsistent with the other tests. While common interpretations focus on segment profitability, market potential and size (numbers), substantiality is shown to depend on a firm's objectives. A model illustrates that profits generated by a particular segment (whether it has sufficient substance) may be subservient to the strategic advantage gained from segmenting. An increase in producer surplus is the necessary condition, not profitability. A test of value to the business is required but substantiality is both imprecise and restricted in its focus. An increase in producer surplus is a more general measure that allows the business to evaluate a specific segmentation decision in relation to its strategic objectives.

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