I ticked the box in that options dialog, and the scaled down 1080p video does look better in that 320x240 window. It's still not quite what I was after though - KMPlayer might not be able to do what I am trying to do. After a bit of thinking, I've managed to come up with an example that explains things pretty well I think, perhaps someone may be able to use it to confirm or deny the possibility of what I am attempting.
We have two video players: Zoom Player, KMPlayer. We have two test videos: a 1080p 1920x1080 something video, and a smaller 640x480 video. First, using Zoom Player, we open the 1080p video. At 100% zoom, the video window basically fills all (and more) of my 1680x1050 resolution. I then close Zoom Player, and open the 640x480 video. Now, Zoom Player stays at 100% zoom (which was the last zoom setting I had used - which is what I want KMPlayer to do), but it scales the video window down to fit the 640x480 window (which is currently what I can't get KMPlayer to do). If I then close this video and open Zoom Player and not play a video, the window size is the size it was when I closed the last video - this is also what I want to achieve with KMPlayer. Three things: keep the same zoom level as before, keep the same window size as before, but still scale the window to fit the video - i.e. make the size and zoom relative to the video being played, not a static 'never changes' thing.
Now, using KMPlayer. I open the 1080p video, set the window to 100% zoom and the window fills most of my screen (no idea why the window is smaller than the Zoom Player window - the Zoom Player window has some bits off screen the video is so big, KMPlayer has all its bits on screen so it looks to have scaled down the window slightly - anyway, I'm not interested in that issue at the moment). No problems here then I can say. I then close that video and open the 640x480 video. The KMPlayer window stays at the same size it was when I closed the 1080p video, and it has simply scaled the 640x480 video up a little - the video fits the KMPlayer window vertically, but only half fills it width wise. It should scale down to fit the 640x480 video. On the plus side I think, if I then close KMPlayer and open it again but don't play a video, the window stays the same size as it was when I played the last video (which is sort of like what Zoom Player does I think).
Anyway, that's about as clear as I can explain things. I hope someone can tell me definitively if what I want to do is possible in KMPlayer.