The Process of B2B Market Segmentation
The cornerstone of any marketing strategy is a solid understanding of what customers truly value and need.
The cornerstone of any marketing strategy is a solid understanding of what customers truly value and need, then creating and delivering a compelling message showing how your offering delivers measurable value in addressing those needs.
One of the most common challenges B2B marketers face is creating a single compelling message to a complex market, with both common and sometimes conflicting needs. Given the complexity of many markets, it is often impossible to deliver a single solution and appropriate marketing support without diluting the value proposition. This is why market segmentation is a valuable tool used by B2B marketers.
The central purpose of market segmentation is to understand prospective customers in order to win over their purchasing decision. In an effort to better understand your customers, you must determine who they are and what they value. This will allow your company to customize and direct your products and services to meet the needs of your customers.
What is Segmentation?
A segment is a cluster of accounts that think and act in similar way. A segment should consist of accounts that behave similarly and in ways that are distinct from other segments. So, different segments can receive products, services, and marketing support that are designed for their unique needs and usage behavior.
Segments are identified by market variables, not customer classification criteria. For example, a segment is not a sales territory or geographic region. Those are internal classification criteria. Segments may be defined by frequency of use, nature of application, or other criteria relating primarily to how the product or service is used.
Deriving meaningful segments is based on sound and accurate market research. Segments used by one company in an industry may be very different from another company in the same industry, since the criteria will include factors unique to each company’s operational and business strategy. Once a segmentation scheme is developed, it will likely remain unchanged for several years, perhaps even decades.
There are specific requirements needed for your company to create an accurate market segmentation. These requirements include:
- Measurable and identifiable segments
- Consistency within the segments
- Variance or diversity between segments
- Accessible and actionable segments
- Segments large enough to be profitable
As an example, the table below is a possible market segmentation scheme of US grocery retailers for packaging suppliers. The segment values drive the packaging needs, which in turn provide direction and insight to the marketing message and solution options for a packaging supplier. Each segment will require a tailored solution and message to optimize the value proposition.
Benefits of Segmentation
Segmentation provides a plethora of distinct business advantages. First and foremost, it provides a better and deeper understanding of customers, which provides direction and focus for both sales and marketing activities. Targeting your sales and marketing efforts can increase competitiveness and customer retention rates allowing for opportunities to increase pricing based on derived value. Diversifying product portfolio based on customer segmentation and targeted product development efforts also reduces economic risk.
Segmentation in B2B Markets
Segmentation is a challenging exercise, and there are several differentiating attributes of B2B markets that have significant impact on the process of segmentation and the resulting segmentation scheme.
1) B2B target populations are small. Typically, there are hundreds of potential customers in a B2B segment, but sometimes they are as few as tens, which is smaller than a consumer market segment. In addition, the segmentation exercise will rely heavily on the input of a small number of key decision makers.
2) B2B decision-making is more complex. In the B2B market, there are multiple buying influences, each with differing levels of influence and with different levels of expertise and attachment to the purchase process. Therefore, segmentation may be targeted at the company or individual level and may be defined by buying influence.
3) B2B buyers are economically motivated. While consumers often pay close attention to brand messages and positioning, B2B buyers are buying a necessary item with a known or calculable value. Segmentation based on needs is more evident and practical in a B2B environment.
4) B2B products are usually complex. This is a major reason why the B2B buying process is also complex. In many cases, the buyer knows as much as the vendor about a product, particularly the potential value to be derived from the product. Given this complexity, large accounts may be a segment unto themselves. Smaller accounts may be grouped on their product usage or means of deriving value (e.g. as a component of a larger product, by usage frequency or occasion, by value relative to the final product, etc.).
5) B2B customers often have very close relationships with their vendors. For larger ticket items, the sales process is centered around personal interaction and communication. The act and process of switching vendors is complicated by the strengths of these relationships, so the nature and scope of desired relationships must be understood as part of the segmentation process. Understanding the development and maintenance of customer loyalty is key to developing a good segmentation strategy.
6) B2B markets have fewer needs-based segments. A typical consumer market has more needs-based segments. In comparison, a typical B2B study results in 3 or 4 segments. Because B2B buyers are more rational and consistent, discovering segments is often much more challenging than in a consumer market. Segmentation schemes are often centered around functions (e.g. technical, operations, purchasing), buying influence (e.g. price, technical, user), firmographics (e.g. location, size), or nature of relationship (e.g. tenure, strategic versus transactional) as opposed to lifestyle or psychographics.
A good segmentation scheme will be characterized by four basic criteria. First, companies within a segment will be similar in selected characteristics. Second, each segment will be different from others in meaningful, measurable ways. Also, each segment should be of sufficient size. And lastly, a company should be easily placed into a specific segment.