Business Market Segmentation

Prof. A. K. Biswas 1


Agenda

Nature, Scope, and Challenges of Business Marketing

Understanding Business Customers

Segmentation of Business Market

New Industrial Product Development

Managing Mature Industrial Products


Agenda

Branding of Industrial Products Pricing of Industrial Products Distribution Channel for

Industrial Products Personal Selling of Industrial

Products



Agenda

What is Market Segmentation? Unique Aspects of Industrial

Market Segmentation Models of Industrial Market

Segmentation Segmentation Dilemma Practical Suggestions for

Organizational Market Segmentation


Defining Market A business firm must define the

market in which it wishes to operate. In defining the market, business

market managers choose descriptors (bases) that characterize and delimit a market, with the intent pinpointing groups of firms that are of greater interest to the supplier firm.

Market segmentation and determining market segment of interest are fundamental to defining the market.


What Is Market Segment?

A market segment is a group of actual or potential customers, sharing a particular need, who want the same type of benefits or solutions to problems from the product or service.


What Is Market Segmentation?

Market segmentation is the process of dividing a varied and differing groups of customers or potential customers into smaller groups, who want the same type of benefits or solutions to problems from the product or service.


First and most necessary is heterogeneity of customer needs and wants.

Second, these customers do cluster into specific groups whose members’ needs are similar.

Thirdly, it is possible to identity of these customers (i.e., ability to reasonably profile these customers).

Finally, the costs of serving customers in a segment must be no more than they are willing to pay.

Fundamental Factors For Effective Market Segmentation


Segmentation BasesWhen segmenting market, business market managers look for a set of variables or characteristics (called segmentation bases) that capture significant differences in requirements and preferences of prospective customers.These variables should, therefore, be related to some aspect of potential customer’s needs or wants and should reflect differences between customers.


Unique Aspects Of Industrial Market

Segmentation The difference between consumer and

industrial market segmentation involve these specific bases of segmentation.

Consumer markets are typically segmented on the basis demographic or psychographic variables.

As the industrial customer is not an individual but a number of interacting individuals in a decision making unit (DMU) of a formal organization, the bases of segmentation are different.


Wind and Cardozo have proposed a two-stage model of industrial segmentation: The first stage involves formation of

macro-segments, based on key organizational characteristics of the buying organization.

The second stage involves dividing those macro-segments into micro-segments, based on characteristics of decision making units (DMUs).

Wind-Cardozo Model Of Industrial Market

Segmentation


Given a genericproduct/service

Identify macro-segments based on key organizational/

product characteristics such as:

•Size•Usage Rate

•Application of product•SIC category: market served

•Organization structure•Location

•New vs. repeat purchase


Segmentation


Select a set of acceptable macro-segments

Evaluate each of the selected macro-segments on whether it exhibits distinct response to the firm’s marketing stimuli

If it does not, identify within eachacceptable macro-segment the relevant

micro-segments based on key DMU characteristics.

Select the desired target micro-segmentsbased on their costs and benefits

associated with reaching the segment


Segmentation


Once the marketer has formed a set of acceptable macro-segments, he may divide of them into micro-segments, or small groups of firms, on the basis of similarities and differences among DMUs within each macro-segment.

Information for this second stage of segmentation will come primarily from the sales force, based on salesmen’s analyses of situations in particular firms, or from specially-designed market segmentation studies.


Segmentation


Key DMU Characteristics

DMU may differ with respect tothe composition and position within a firm.their decision making behaviour.


DMU may differ with respect to:the importance they attach to the purchase of a particular item; the relative weight they attach to such purchase variables as price, quality, and service; their attitudes towards particular vendors; the specific rules they employ to seek out and evaluate alternative offerings.

Key DMU Characteristics


Evaluation Of Different Bases Of Segmentation

The three clusters of segmentation bases as per Wind-Cardozo are: Organizational characteristics Product characteristics DMU characteristics

Marketers use two sets of criteria to evaluate these clusters: Difficulty of implementation Appropriateness


The difficulty of implementation criterion consists of a set of three criteria: Cost of identifying segments Acceptance of the bases of

segmenting by marketing personnel

Ease of identifying segments and differentiating marketing programs



Two-Dimensional Configuration Of Nine Bases

Of Segmentation

4Frequency and

Size of Purchase

5End Use

7Specification

of Project

6Buyer’sIdentity

8SourceLoyalty

9Buyer’s

Personality

OrganizationalCharacteristics

ProductCharacteristics

DMU Characteristics

MostAppropriate

LeastAppropriate

Easier toImplement

Difficult toImplement

1Industry type

2Size of Firm

3Geographic

Location


According to appropriateness dimension, the DMU characteristics is the most appropriate followed by organizational characteristics and product characteristics perceived as the least appropriate.

On the other hand organizational characteristics are the easiest to identify though not the most appropriate.



Based on empirical evidence, Wind and Cardozo argue that marketers often use inexpensive and acceptable means of segmentation, which they consider much less appropriate than what they would like to use.

For examples, DMU characteristics are seen as very appropriate, yet are not currently used as bases of segmentation.

Organizational characteristics appear to be used more widely now than may be appropriate.



Bonoma and Shapiro expanded the use of macro- and micro-segmentation into what is called the nested approach.

This method assumes a hierarchical structure of segmentation bases that move from very broad or general bases to very narrow and specific bases.

Rather than a two-step process, the nested approach allows upto five steps.

Bonoma And Shapiro Model Of Market Segmentation


Organizational demographics:Industry/ Company size/ Location

Operating variables:Technology/User status/Customer

capabilities (financial)

Purchasing approachesOrganization of DMU/Purchasing

policies/Purchasing criteria

Situational factorsUrgency/Applications/Order size

Personal characteristics:Motivation/Buyer-seller dyad/

Risk perceptions

General, observable

(Macro)

Specific, subtle(Micro)

(Intermediate)



The three outer nests cover company variables, the fourth inner-middle nest - situational factors, and the inmost nest - personal characteristics.

The data in the outer nests are generally highly visible, even to outsiders, are more or less permanent, and require little intimate knowledge of customers.



But situational factors and personal characteristics are less visible, are more transient, and requires extensive vendor research.

A marketer can begin at the outside nest and work inward because data are more available and definitions clearer in outer nests.

On the other hand, situational and personal variables of the inner nests are often the most useful.



The outer-nest criteria are generally inadequate when used by themselves in all but simple or homogeneous markets because they ignore buying differences among customers.

Over emphasis on the inner-nest factors, however, can be too expensive and time-consuming for small markets.

A balance is to be achieved between the two nests.



Both the models help us in profiling the business firms – their emporographic details, and their behavioral characteristics.

However, they do not answer the question what these customers want.

The problem is that customers don’t conform their requirements to match with those of the average customer in their emporographic and behavioral segment.

Problem with Traditional Market Segmentation

Process


Better Way Of Market Segmentation

The structure of a market, seen from the customers’ point of view, whether a individual or business firm, is very simple:

They just need to get things done.

When people find themselves needing to get a job done, they essentially buy products to do that job for them.


The marketer’s task is therefore to understand what jobs periodically arise in customers’ lives (individual or business firm) for which they might buy products the company could make.

If a marketer can understand the job, design the product and associated experiences in purchase and use to do that job, and deliver it in a way that the customers want, and the price they are willing to pay, they will buy that product.



When choosing between competing offers, customers select the offer that meets their needs (to get things done) better than any other at the price they are willing to pay.

Value or benefits (the ability of getting the job done) that people seek in products are the basic reasons for the heterogeneity in their choice behaviour, and benefits of the product are thus the most relevant bases for segmentation.



Earlier marketers used to succeed by providing superior products and other distinctive functional benefits.

Today this is no longer enough, for such benefits can readily be imitated.

The solution is to emphasize process benefits (which make transactions between buyers and sellers easier, quicker, cheaper, and more pleasant) and relationship benefits (which reward the willingness of consumers to identify themselves and to reveal their purchasing behavior).

Three Dimensions of Benefits


Segmentation based on customer needs, i.e., benefits-oriented approach, is attractive in the theoretical sense and is clearly more applicable to marketing decisions , but also more difficult for managers to implement.

Many companies that sell to other businesses, therefore, segment customers on the basis of such characteristics as their size, the volumes of their accounts, and the industries in which they compete.

Segmentation Dilemma


Solving The Segmentation Dilemma Unfortunately, businesses of the

same size, account volume, and industry may very well have rather different values and needs.

There are several ways to solve this dilemma.

One way to solve the segmentation dilemma is ‘self-selection’.The basic idea of self-selection is to reverse the roles of a company and its customers.


Sometimes a segmentation strategy works even if you can't identify who is in which segment.Instead the company figures out what segments it wants to reach and gives the customers in them ways of finding them.

Companies most commonly develop a product line and have customers sort themselves among the various offerings based on their preferences.

Solving The Segmentation Dilemma


However, the problem in this business system is that product lines represent the best guesses of the companies about what buyers will want.

Most buyers get too little of what they want and too much of what they don’t.

Manufacturers and dealers also lose as predictions of future demand are inevitably inaccurate.



Another possible solution to this problem is to provide opportunities to individual customers to design their own products and services by choosing from a menu of attributes, components, prices, and delivery options.

This facility can be provided through a choiceboard - an interactive on-line system.



Cisco Marketplace is an on-line configurator that allows corporate customers to create the precise combination of data networking gear they need.

Dell’s choiceboard allows individual as well as corporate customers to exercise their options in the personal computer realm.



GE Plastics: The GE Plastics Design Solutions Center lets customers use design tools to develop unique, customizes products that then can be purchased on-line.

GE Polymerland: The Polymerland Web site provides customers with digital tools that make choosing, ordering, and tracking plastic products easy, fast, and cost effective.



A choice board model of doing business with individual customers becomes possible in any industry when a system of accessible, integrateable components is available from which customers can select and combine options based on their own priorities.

The choiceboard enables customer self-segmentation, which is fast, cost-efficient, and far more precise than traditional manufacturer-imposed segmentation.



Another way to solve the segmentation dilemma is to use dual-objective segmentation models.

Dual-objective segmentation models trade a small amount of precision in delineating segments for a significantly increased ability to identify the customers who belong in each of them.



Dual-Objective Segmentation

Identification of Customers

Iden

tifi

cati

on

of

Valu

e

Low High

Low

HighValue-based Segmentation

Demographics-based Segmentation

Actionable Segmentation

Joint Optimization


In any case, the supplier firm could start with, emporographic segmentation bases, such as Standard Industrial Classification (SIC) codes, location and organizational size, as they are relatively easy to identify and measure.However, suppliers and customers have to work collaboratively towards a better mutual understanding.



Segmentation As Bilateral Negotiation

Segmentation in organizational markets should, in fact, be increasingly thought of as a negotiable and bilateral ‘fit-seeking process’ where suppliers frame tentative segments (based on initial research) subject to exploration with well-placed key managers in those customer firms.


This would encourage the development of evolutionary segmentation that focuses not only on customer needs, but also on supplier needs.The process would also help to develop the sort of long-term relationships between supplier and customer that help to ensure that suppler offerings are developed in line with customer expectations and needs.

Segmentation As Bilateral Negotiation


Reverse Segmentation There is still another process of

segmentation – reverse segmentation.

It is a process whereby customers select suppliers that meet particular criteria (e.g., quality, financial stability, delivery reputation, collaborative product development strategies, etc.).

By implication, a supplier able to exhibit appropriate ‘reverse segmentation’ criteria to a customer can become significantly more attractive.


Segmenting Customers In Mature Industrial Markets

A B

C D

High

Low

Price

Low HighCost to Serve

ValueAxis

MarketPowerAxis

No-frills solution

Augmented Solution

Commodity

Specialties


Customers in mature markets may be aligned along the two dimensions of price and cost-to-serve.

Customers who demand low price will be offered a no-frills product accompanied by minimal service (the south-west quadrant, C).

Segmenting Customers In Mature Industrial

Markets


• Customers who value an augmented product will pay higher price and receive the full compliment of services (north-east quadrant, B).

• In both cases, price-service offering is equitable to the seller and the buyer.

• Firms operating in mature environments expect to align their customers along the value axis.


Markets


Customers may not necessarily align themselves along the value axis as sellers expect, but prefer to operate in quadrant D, depending on their knowledge of competitive offerings and their own market power.

Supplier may also be in a position to extract a relatively high price, without providing the services to go along with it, if the product offering is truly superior that competitors are unable to match (north-west quadrant, A).


Markets


Ongoing Segmentation Process

Segmentation, whether of consumer or business customers, should be considered an ongoing process and, to the extent possible, be built into a company’s marketing intelligence system.

Effective segmentations are dynamic in two senses:


First, they concentrate on customers’ needs, attitudes, behaviour, which can change quickly.

Secondly, they are reshaped by market conditions, such as fluctuating economics, emerging consumer niches, and new technologies, which in today’s world are evolving more rapidly than ever.



To facilitate this ongoing segmentation process, a company must transform its sales and service forces into information sources.

Sales force is a repository of valuable raw information.

A structured interview with the sales persons would be of immense help.



Benefits of Effective Customer

Segmentation Effective customer segmentation

accomplishes four things: It enables you to divide

customers into relatively homogeneous groups.

It also allows you to describe these groups in quantitative terms and easily identify the segment a given customer belongs to, so that you can measure, assign, and monitor them.


It ensures that you have the sales channels and consistent communication messages to reach the groups.

Finally, it creates groups that match up with the products and services your company can actually provide.


Segmentation


If you segment your customers according to preferences and willingness to pay, you are likely to find that you can serve some of the resulting segments more competitively and profitably than you can others.

You should concentrate your resources on such segments and devote fewer resources to others or even ignore them entirely.


Segmentation


Businesses will always need to explore opportunities to enter new markets and develop new products.

They need to determine how they can successfully move beyond their core and into adjacent market areas.

Those explorations, however, take considerable time and investment.


Segmentation


Selection of market segment to serve has to be on the basis of the fit between:

the attractiveness of the segment, the key success factors for operating in the segment, and the company’s relative ability to compete in the segment.

The company also needs to consider the competitive reactions it might face if it decides to compete for a segment.

Selecting Market Segments To Serve


Segment attractiveness depends on:

Size and Growth of the segmentStructural Characteristics of the segment such as competition, segment saturation, profitability, protectability, environmental risk etc.



Key Success Factors (KSF) for a segment could be

Product Quality Brand Reputation Technology Requirement Cost Structure Distribution System Quality of Service Financial Capacity



Company ObjectivesCompatibility with company goalsRelationships with other segmentsProfitability

Resources and Capabilities of the Company and Competitors

Ability to conceive and designR & D CapabilityExisting Patents and CopyrightsAccess to new technologies through third parties



Ability to Produce (Quality & Quantity)

Production TechnologyProduction CapacityFlexibility in ProductionCost Competitiveness

Ability to MarketBrand ReputationDistribution StrengthService Strength



Ability to FinanceAccess to Capital from OperationsAbility to Use Debt & Equity FinanceParent’s Willingness to Finance

Ability to Manage/ExecuteQuality of ManagementQuality of Decision MakingInnovativenessOrganization Culture



In consumer markets, choice of customers whose needs the organization will satisfy with products involves selection of only horizontal market segments as this is the final transaction stage and is fixed.

But in business markets, because intermediate transactions are involved, a firm must first choose the stage in the value-adding chain before selecting the horizontal market segments.



A Value Adding ChainInvolving Isopropanol

Propylene Isopropanal

Acetone

Coatings

Chemical Intermediates

Agricultural & BiologicalChemicals

Other

Plastics


Consider the value-adding chain schematically shown in the previous diagram.

An organization would have to decide whether to sell propylene, isopropanol, isopropyl acetate (chemical intermediates), and/or plastics.

The stage in the value-adding chain where it decides to sell its output represents its choice of output markets.



Suppose the organization chooses to sell isopropanal.

It must now decide whether to sell to producers of acetone, chemical intermediates, coatings, agricultural and biological chemicals.

The latter decision reflects the organization’s choice of macro-segments and represent one aspect of horizontal market choice.



In addition, micro-segments, which consist of organizations similar in their buying behaviour, must be selected to complete the horizontal market choice decision.

Given customer needs in the output markets selected, the organization must decide the form of product required to satisfy these needs and the process used to make it.



These choices determine the organization’s make/buy decisions concerning the value-adding activity to be performed internally within the organization and supplies to be bought in the input markets.

Choice of output markets, the value adding performed by the organization, and input markets constitute the vertical market decision.



Vertical market choice is consequently an important element of firm strategy and may be examined in terms of organizational strengths and weaknesses versus environmental or market opportunities and threats.

The opportunities and threats may take the form of changes in supply markets, changes in competition, and changes in output markets.



Documents

Business Market Segmentation