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
Prof. A. K. Biswas 2
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.
Fundamental Factors For
Effective Market Segmentation
 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.
Segmentation Bases
When 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-Cardozo Model Of Industrial
Market Segmentation
 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).
Market Segmentation
Given a generic
product/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
Market 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 each

acceptable macro-segment the relevant
micro-segments based on key
DMU characteristics.
Select the desired target micro-segments

based on their costs and benefits
associated with reaching the segment
Market 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.
Key DMU Characteristics
DMU may differ with respect to

the composition and position
within a firm.
their decision making behaviour.
Key DMU Characteristics
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.
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
Easier to Organizational
Characteristics
Implement 1
Industry type
DMU
Characteristics 2 4
6 Size of Firm Frequency and
Buyer’s Size of Purchase
Identity 3
Geographic Least
Most
Location Appropriate
Appropriate 8 5
Source End Use
Loyalty
9 7
Buyer’s Specification
Personality of Project
Difficult to Product
ImplementProf.Characteristics
A. K. Biswas 20
 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 Model Of
Market Segmentation
 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:
General, observable Technology/User status/Customer
(Macro) capabilities (financial)
Purchasing approaches
Organization of DMU/Purchasing
policies/Purchasing criteria
(Intermediate) Situational factors
Urgency/Applications/Order size
Personal characteristics:
Specific, subtle Motivation/Buyer-seller dyad/
(Micro) Risk perceptions
Market Segmentation
 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.
Market Segmentation
 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.
Market Segmentation
 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.
Problem with Traditional
Market Segmentation Process
 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.
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.
Segmentation
 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.
Segmentation
 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.
Three Dimensions of
Benefits
 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).
Segmentation Dilemma
 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.
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.
Dilemma
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.
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.
Dilemma
 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.
Dilemma
 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.
Dilemma
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.
Dilemma
 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.
Dilemma
 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
High Value-based Segmentation
Identification of
Actionable Segmentation
Value
Joint Optimization
Demographics-based
Segmentation
Low
Low High
Identification of Customers
Dilemma
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.
Segmentation As Bilateral
Negotiation
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.
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
Value
High Axis
A B
Specialties Augmented Solution
Price
C D
Low No-frills solution Commodity Market
Power
Axis
Low High
Cost to Serve
 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).
• 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.
 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).
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:
Process
 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.
Process
 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.
 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.
 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.
Selecting Market
Segments To Serve
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 segment
Structural Characteristics of the
segment such as competition,
segment saturation, profitability,
protectability, environmental risk
etc.
Selecting Market
Segments To Serve
 Key Success Factors (KSF) for a
segment could be
 Product Quality
 Brand Reputation
 Technology Requirement
 Cost Structure
 Distribution System
 Quality of Service
 Financial Capacity
Selecting Market
Segments To Serve
Company Objectives
Compatibility with company goals
Relationships with other segments
Profitability
Resources and Capabilities of the
Company and Competitors
Ability to conceive and design
R & D Capability
Existing Patents and Copyrights
Access to new technologies through
third parties
Selecting Market
Segments To Serve
Ability to Produce (Quality &
Quantity)
Production Technology
Production Capacity
Flexibility in Production
Cost Competitiveness
Ability to Market
Brand Reputation
Distribution Strength
Service Strength
Selecting Market
Segments To Serve
Ability to Finance
Access to Capital from Operations
Ability to Use Debt & Equity Finance
Parent’s Willingness to Finance
Ability to Manage/Execute
Quality of Management
Quality of Decision Making
Innovativeness
Organization Culture
Selecting Market
Segments To Serve
 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 Chain
Involving Isopropanol
Acetone
Coatings
Chemical
Propylene Isopropanal Plastics
Intermediates
Agricultural
& Biological
Chemicals
Other
Selecting Market
Segments To Serve
 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.
Selecting Market
Segments To Serve
 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.
Selecting Market
Segments To Serve
 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.
Selecting Market
Segments To Serve
 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.
Selecting Market
Segments To Serve
 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.

Business Market Segmentation

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Business Market Segmentation

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Prof. A. K.

 Branding of Industrial Products

macro-segments, based on key

those macro-segments into micro-

Evaluate each of the selected macro-

If it does not, identify within each

Select the desired target micro-segments

DMU may differ with respect to

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