Better segmentation, better customer identification, better margins

 

Tools to make you THINK differently about your business

 Strategy, segmentation, diversification

The most important task for any commercial organisation is to build a sales and marketing engine that can reliably and repeatably deliver customers and clients that it can profitably satisfy. Simple eh?

But what’s the difference between sales and marketing? I think it was the late great Peter Drucker who said something like “the job of marketing is to make sales redundant”. A bit harsh but what I think he was alluding to is the direction of travel; marketing is about “pulling” the customer to you, selling is about “pushing” a product. Marketing is pull. Sales is push.

So, segmentation is about identifying parts of the market that are likely to be the most profitable or that offer the highest growth potential for you. It is these segments that should be selected for special attention, they become the target markets, each of which may require a different marketing approach, that is, different messages, offers, prices, promotion, distribution or some other combination of the marketing variables. Messages about your product and services offered need to be delivered in a way that captures your client’s imagination and the client is drawn to you because you are seen to understand their needs better than the competition.

As a result, market segmentation is not only designed to identify the most profitable segments, but also to develop “profiles” of key customers in order to better understand their needs and purchasing motivations.

However, finding, and then relentlessly focussing on, those customers that you can reliably and repeatably satisfy, profitably, is not easy. In a B2B environment different customers may take different products and services, and their needs may differ… therefore, satisfying them may require different approaches. So, perhaps not so simple after all!

In our focus on segmentation we are going to address the issues in three stages:

  • The first (this blog) will focus on key differences between B2B and B2C segmentation.
  • The second blog will focus on the types of segmentation and their components
  • The final blog will outline the key aspects of using identified segments to grow the business.

But let’s begin at the beginning, with the inventor of segmentation. He was both an academic, researching how companies applied marketing theory, and a hands-on practitioner, helping companies better understand their markets. Way back in 1956, our man, Wendell R. Smith, wrote a paper called Product differentiation and market segmentation as alternative marketing strategies which was published in the Journal of Marketing (Vol. 21, Issue 1, July 1956) which is when segmentation was born.

The B2B Segmentation Challenge

In this blog, before we get into the detail in the next, I think it’s important to recognise a few critical differences between business-to-business segmentation and their consumer cousins as this has some significant implications for our B2B processes:

1) B2B markets have more complex decision-making units:


If you are a consumer, in most instances, you alone make the purchasing decision. Even the biggest purchases people make, cars & houses, may involve the whole household but that’s rarely more than 4-5 people. Not so with B2B purchases. Organisational purchases are often large or have very long-term implications; a new office, a major new item of equipment or plant, a new IT system. Organisational purchases may involve a variety of people; directors, technical experts, purchasing experts, production managers and health and safety experts, and each of these participants will have their own set of (not always evident) priorities.

As a result, segmenting becomes multi-dimensional, complex, and demanding. Questions might include:

  • Do we segment on the types of companies (in which these decision makers work)?
  • Do we segment the decision makers themselves?
  • How many of the potential decision makers should we segment?

In short, who exactly is the target audience and who should we be segmenting?

2) B2B target audiences and segments are smaller than consumer target audiences and segments:


In the UK there are about 65m people (the B2C market). There are about 5m firms (with a VAT registration) (the B2B market) and only about 200,000 firms that employ more than 20 people. In addition to which almost all industrial and commercial sectors are made up of a few large companies, a few more medium sized companies and many small companies. Most sectors conform to the Pareto law or 80:20 rule, where 80% of the market is taken by 20% of the players. Consequently, in consumer markets with thousands even millions of customers, 10-12 market segments are not uncommon, with the smaller number of potential clients in the B2B market and some of those clients being the “big guys” it is often difficult to identify more than 3-4 segments.

3) B2B products are often more complex:


Just as the decision-making unit is often complex in business-to-business markets, so too are B2B products themselves. Even complex consumer purchases such as houses and cars tend to be chosen on the basis of relatively simple criteria. However, even the simplest of B2B products might have to be integrated into a larger system, making the involvement of a range of other qualified parties essential.

4) B2B buyers are more “rational”:


An Aston Martin driver might say s/he bought the car because it was hand made in Britain …but is s/he just a Jane/James Bond wannabe … lying to themselves and others!? Do you by a Rolex for its Swiss engineering excellence or because of what you think it says about you? Consumers tend to buy what they want; B2B buyers generally buy what they need and they often have to justify the purchase to others; in a corporate, sometimes, many others.

5) Personal relationships are more important in B2B markets:


Most of the time consumers don’t get to build a relationship with the sellers. There are exceptions; your favourite Barista in your favourite coffee shop or perhaps if you have a personal tailor. However, in many B2B instances business owners, managers and sales people often build long term relationships. In fact, we have one successful asbestos contracting company that has that put a limit on its growth plans simply because it does not want to employ contracts managers; doing so would allow them to grow beyond their current capacity but, critically, it would dilute the personal relationships the directors have with their clients.

So, people are often on first-name terms, relationships and trust develops and it’s not unusual for business-to-business suppliers to have customers that have been loyal and committed for many years.

As a result of which there is a critical segmentation implication; clients may want a personal relationship but are they willing to pay for them? You must make choices. Do you only offer a relationship to those who will pay for the additional cost of servicing?

Other practical issues might include the potential need to undertake market research to establish exactly what “relationship” means. To a high-margin segment, it may mean monthly face-to-face visits, whilst to a price-sensitive segment a quarterly phone call may do.

6) B2B buyers are often longer-term buyers:


Sticking with the example of consumers and houses and cars, these are obviously long-term purchases, but the frequency with which they are made are relatively rare.
In a B2B environment many purchases may be expected to be repeated over long periods, a few examples include; the purchase of raw materials and components, the purchase of trusted sub-contractor labour, the purchase of capital machinery and equipment that will need ongoing servicing and support. In addition, IT systems, vehicle fleets, even photocopiers usually require extensive aftersales service and support.

In one sense this makes things a little easier as segments tend to be less subject to change meaning the time invested in identifying segments results in a more durable analysis. The downside is that this lack of change can breed complacency and the proper attention may not be paid to the changing needs of customers. In the extreme, this can have a severe impact on segment profitability as customers continue to receive out-of-date messages or “benefits” that they no longer need.

Conclusion

Many companies adopt a busy fool approach to marketing where the thinking is “we can sell our products and services to anyone”. To mix metaphors, it’s an often expensive and time consuming, scattergun approach where many seeds fall on fallow ground.

Taking the time to segment a market allows resources to be deployed more effectively and efficiently and ensures they are more closely aligned to customer needs. Which, when properly executed, means less effort is spent identifying and winning customers… and they beat a path to your door.
The benefits to you are better segmentation, better customer identification, better margins.

In the next article we’ll get into the details of the different criteria used for segmentation.


Related tools and ideas

Recommended references

  • Market Segmentation: How to Do It, how to Profit from it - Malcolm MacDonald 

Downloadable resources


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