A Practical Guide To Market Segmentation

Paul Hague, Director, B2B International

There are ten basic steps in finding unique segments in your customer base. Segmentation can be created by looking at factors such as purchase history, industry, need, and behaviour. B2B International shares their segmentation methodology in this white paper.

STEP 1: ALWAYS MAKE KEY ACCOUNTS A SEGMENT ON THEIR OWN
Every company needs to segment its customers. Customers aren’t all the same and they shouldn’t be treated as such. Virtually every business to business company has key accounts and these are recognised as different and given special treatment.

The 80/20 rule which determines that 20% of customers account for 80% of turnover focuses special activity on those large accounts which determine the future of a business. For many business to business companies these key accounts amount to just a couple of handful of customers. It is quite reasonable therefore that such large and crucial customers should be treated as individuals, scoping products and services to exactly meet their needs. This is segmentation at its best – segments of one.

STEP 2: APPLY MARKET SEGMENTATION ANALYSIS TO THE SMALLER CUSTOMERS
However, the corollary of the 80/20 rule is that 80% of customers account for only 20% of revenue. Eighty per cent of customers are, by definition, relatively small accounts and they dominate the customer population. Clearly they should not be treated in the same way as the key accounts. Since this tail end of customers can run in to many hundreds of accounts, some sort of segmentation is needed. Without a segmentation these companies will either be treated as all the same (in which case many will be disappointed by an offer that does not suit them) or, equally unsatisfactory, an attempt will be made to treat each and every one as a special accounts, swallowing up a huge resource and yielding very little in the way of profit.

Segmentation enables us to group together customers with similar needs so that we can bring together limited resources to best serve them.

STEP 3: CONSIDER A FIRMOGRAPHIC SEGMENTATION
The question is, “how to segment?”. One of the simplest ways is to group together companies with a common physical attribute such as they are in a certain region, or classified in a particular industry. This is the equivalent of demographic segmentation in a consumer company. The classifications are important as they are often critical to understanding their needs. Demographics in consumer markets and firmographics in business to business markets is after all an important driver of its needs. A company selling welding equipment knows that welders in shipyards have quite different needs to welders in car assembly plants and so the industry grouping immediately flags up their need for a different offering. The needs for oil lubrication in the engine room of a supertanker are quite different to the needs for lubrication in the engines of the cars you and I drive. A segmentation according to industry grouping is therefore one of the most obvious and often most useful we can employ in business to business markets.

STEP 4: LOOK WHERE POSSIBLE FOR A NEEDS-BASED SEGMENTATION
However, there are potential problems with segmentations based on industry. A company selling accountancy software may find that there is little difference in the needs for its products in a food company compared to one that makes steel. A company selling office copiers is unlikely to find much help from an industry segmentation that separates out manufacturers of safety pins from manufacturers of safety products. In many markets the needs of customers have a good deal of crossover. Customers in a segment made up of heavy manufacturing companies could have the same need for customer service as companies making light electronic goods.

Furthermore, the segmentation based on industry groupings is so obvious that the chances are that this is how everybody does it. In other words there is no competitive advantage to be achieved in doing what everyone else is doing.

A segmentation based on needs is, in theory, the ideal as it gets to the heart of marketing; that is the identification and satisfaction of customers needs’ – at a profit of course. There are however, a number of practical problems in achieving a needs based segmentation in business-to-business markets.

STEP 5: USE MARKET RESEARCH TO FIND OUT NEEDS
The first and very obvious problem is that needs are difficult to recognise. Market researchers are able to help in this regard. Certainly it is possible for market researchers to devise questions which ask people what they require from suppliers, though this is not without some difficulties. How do we decide whose needs are to be satisfied? Is it the needs of the company, or the needs of the department that is involved in choosing the supplier, or is it the needs of the individual within the department who is a key decision maker?

All three of these needs must be addressed but there could be conflicts. At a company level, there could be an overriding need to choose suppliers that offer quality products, suppliers that are committed to the market, and suppliers that can be trusted. And yet, at a personal level, the purchasing manager may think he has to drive down prices to demonstrate that he is doing an excellent job. A market research question addressed to the buyer may elicit an answer that leads us to believe that the company is price driven when in fact the company demands quality products with full service.

The decision-making unit in many businesses comprises no less than two or three people. The professional buyers look after the day today procurement of supplies. The same company may also have chemists, engineers or technicians who play an active role in screening products and suppliers before they are approved list. A production manager could have a say in which suppliers are used as the choice could materially affect output levels on his production line.

Another problem in classifying companies according to their needs is that they can change quite quickly. When products are in short supply, deliveries are critical and many business to business markets have a large segment expressing a need for suppliers to deliver full orders, on time, every time. If the same market takes a downturn and frees up the supply of products, delivery may not be the issue that it once was. In a recessionary environment the company purchasing the products may be fighting for its life and be driven by the need to get costs as low as possible. A needs based segmentation would have to be capable of recognising the shift that can take place in a company’s needs if they change or if the personalities involved in the decision-making unit change. If these changes cannot be recognised an offer could be pushed to a group of customers who simply are not interested in it.

These cautionary notes do not mean that needs based segmentations are inappropriate in business to business markets. Quite the opposite. They are the ultimate segmentation if they can be achieved. Indeed, it is healthy for every company to constantly be reviewing its customers’ needs and responding to them. If a company has a mechanism for recognising the needs and making adjustments when they change, this focus on customers and what they want will pay huge dividends. Sales forces will become skilled and practiced at asking customers what they want and ensuring that the right offer is directed at them, so satisfying them and achieving the maximum profit. A needs-based segmentation is the best means by which business-to-business companies can change from being product orientated to marketing orientated.

To read the rest of this article on the B2B International website, click here.

Paul Hague is Director at B2B International.

[Oct 13, 2009]