Changes in customer preference heterogeneity patterns: a simulation study

Abstract

PurposeAt the core of the success of any firm is its ability to satisfy customer preferences. It has also been part of managerial wisdom that it is good management practice to treat a market as that comprising several market segments and to serve each segment with a different marketing mix. It thus goes without saying that market segments are believed to be very important to profitability. The purpose of this paper is to contend that preference-based segments form and evolve through social interactions between customers. This argument puts forth the questions: How do they form? How do they evolve?Design/methodology/approachThe authors used controlled computer simulations to study the patterns of segments that emerge in markets as consumers in them engage in social interactions.FindingsThe simulation results show that market segments emerge across a wide set of assumptions. Further, the paper offers a number of conjectures and propositions for both research and managerial applications, based on the patterns of the emergent segments that were observed.Research limitations/implicationsA research program could/should be developed based on the empirical measurement of preferences, longitudinally, over the life cycle of a product for a fixed sample group, and on the collection of factors about social interaction (ν), social intervention (β) and the propensity to differentiate (α). The results of this study also indicate that further computational work may be able to find the points of criticality where patterns of behavior will change. With the availability of internet data, close empirical examination and operationalization, and refinement of the authors' initial attempts has become possible. For example, data sets that may be applicable are Zafarani and Liu (2009), Leskovec (2012), Newman (2011), and Arenas (2012).Practical implicationsThe findings of the study have implications for product line management, conditions under which a first-mover advantage may prevail, and the critical measurements needed to understand segment evolution.Originality/valueTo the authors' knowledge, this paper is the first to study the patterns of emergence of segments over several scenarios.