Chapter 6: Business Market Segmentation

Tips for introducing the concepts

Overview

While there is a clear introduction to the purpose and value of segmentation, much of the content of this chapter revolves around the bases of segmentation, the specific variables that may be used to split up largely heterogeneous customers into more homogeneous groups that are more likely to respond similarly to a company’s offerings. Drawing from a well-established B2B segmentation framework – the Shapiro and Bonoma (1984) nested bases are presented in an iterative step-by-step fashion. The earlier coverage starts with those variables that are most easily measured or observed, typically using readily availablestatisticaldata.Thecoveragethenprogressestovariablesthatrequiregreateramounts of subjectivity in their measurement. Advice is provided on how far to take the segmentation process and recent studies aimed at improving the practical usefulness of the segmentation activity.

Recognizing that segmentation for its own sake is of very limited value, the latter part of the chapter focuses upon the real value that segmentation information can provide: a better informed position from which to establish clear market priorities with identifiable target segments (also see the class exercise below). As well as coverage of target market selection and strategy attention is paid to the competitive need to establish a differential position in the minds of customers.

Ideas for the class

The following exercise, Fine Filtration Limited, enables students to see some segmentation variables being used and equally importantly gets them to engage with the task of making use of segment profiles in order to take targeting decisions.

Student materials

Fine Filtration Limited (FFL) supplies industrial sieving and filtration solutions to industrial companies. Based in London, they have customers in 10 countries, mainly in the UK and the rest of Western Europe. The principal method of segmentation used by FFL is industry sector.

This makes sense, because the filtration product needs of manufacturers tend to be specific to the industry in which they operate. For example, pharmaceutical manufacturers often require filtration and sieving systems that operate to very high levels of quality and reliability; the requirements of paint manufacturers are usually less stringent. Currently, FFL has four target market segments – the pharmaceutical, plastics, food and paint industry sectors. Certainly, the requirements of each of these segments are different. But one also finds considerable variation within each industry sector. For example, in the food sector, there are manufacturers of very fine foods that command high prices (such as premium chocolate manufacturers based in Belgium and Switzerland) and suppliers of more humble products which, while they must be safe and palatable, need not meet the very highest quality standards.

FFL relies on very high levels of quality and innovativeness for its competitive advantage. The philosophy of the top management team is to supply the best filtration solutions to the most demanding customers. Furthermore, since it is based in the UK, FFL could never hope to compete on price with filtration systems suppliers from lower cost countries. But the advantage of the UK is that FFL has ready access to high-quality engineering graduates from British universities, and is geographically close to many important customers.

The top management team has decided that they can no longer afford to put maximum effort into four target industry segments, and that they need to decide on a priority list for their four main target markets. They will allocate strategic resources (such as product development engineering, and key account management) primarily to customer in their two top segments. Customers in the other two segments will generally be managed through routine processes (e.g., with few or no field sales visits) and will not be allocated dedicated product development resources.

Student exercise

The Table below has been prepared to summarize the key characteristics of each market segment. Use this Table, and the information above, to evaluate each market segment, and produce your own overall ranking of the four segments.

Plastics Estimated at €95 million in 2011.

excellent longterm potential. firms in the USA, Germany and Denmark.

Currently 12% pa, expected to decline slowly.

solutions, adapted to customer needs.

Food Estimated at €120 million in 2011.

Paint Estimated at €80 million in 2011.

Currently 2% pa, expected to continue similarly.

Currently 3% pa, with good future prospects.

High competition mainly from firms in the USA, Germany and Denmark.

Moderate competition primarily from Eastern Europe.

Very high competition from Eastern Europe and the Far East.

Generally moderate quality. Often buy products rather than solutions.

Generally high quality, often buying complete solutions.

Generally lowquality requirements compared to other segments.

Lecturer material

Students should be encouraged to produce an analysis something along the following lines.

Columns 2 and 3 are self-explanatory (the segments ranked in terms of size and growth potential). Column 4 is a little more complex, since the scale is the reverse of the scales in the first two columns (the fastest growing segment ranks first, while the segment with the highest competition ranks last). Column 5 takes the product requirements of the segment and compares them with the strengths and the desired positioning of FFL, which wants to compete on high quality, and has the capability to provide solutions that are engineered to meet individual customerneeds. Column 6is thesimplesum ofranks. One‘solution’to thisexample,therefore, issimplytoputthesegmentsinorderoftheirsumofranks,sothatwehave(1)Food(2)Plastics (3) Pharmaceuticals (4) Paint.

Depending on what you want to achieve with the class, you can either leave the discussion at thatpoint,oryoucanaskforcriticismsofthismethodology,andsuggestionsforimprovements. Normally, this kind of analysis wouldonly be used as aguide to decision-making, andcertainly not as the ‘answer’ to the marketing issue. For example, the analysis uses un-weighted criteria, and perhaps more weight should be given to some criteria rather than others (the class can argue about which). Additionally, by reducing the information to ranks, the analysis tends to smooth over the differences between the segments. For example, not only is Food the largest segment, it is the largest by a considerable margin. At a slightly more sophisticated level, one might ask why, if the food segment seems so attractive to FFL, it has not attracted more filtration competitorsinto this sector,andin particularwhythe Americans, Germans and Danes are absent; perhaps they are also be considering expanding in this market segment. (Note: For an example of a company similar to FFL, please see www.russellfinex.co.uk)

B2B Scenario 6.1 DigiCherche Positioning

The fundamental issue for DigiCherche was not changed by the discussions at the Awayday.

The ties that bind to the existing agencies and the relative dependence upon them for sustained orders means that there was an unwillingness to rock the boat too much, too soon. This entailed also maintaining a low profile such that there would be no danger that the agencies would feel DigiCherche was in direct competition with them. However, there was nonetheless a general appetite amongst the senior team to extend the business into new segments and there was a clear recognition that their existing capability matched the needs of some segments particularly well (success in large-scale staff recruitment for the financial services sector is one, and student recruitment for universities is another). In order to prepare the business to better meet the differential needs of other segments, the senior team discussed how to restructure the different technical capabilities of the company so that they could communicate them more readily as elements of a customer service range portfolio. As a consequence, the business now has a series of digital media services (including insight, planning, and delivery). Expert knowledge of Chinese digital media means that they have also now added access to China as part of the portfolio. Branding activity since the AwayDay has concentrated upon the differential areas of capability and has enabled conversations with direct customers to focus on this product range. It has now enabled the company to target those segments where they feel they have particular strengths and establish a relative positioning that enables them to compete more effectively with other digital media companies.

Chapter case study Overview

The Wavin case study also enables students to start identifying some relevant segmentation variables and then reflect on how these variables can be used to arrive at qualitatively different customer groups.

The indicative questions

Question 1 simply invites students to peruse the case text identifying criteria that could be used and the text should enable them to identify a variety of the more macro-level variables including different geographical markets, different sectoral uses, different types and sizes of potential customers and referrers. Though it is perhaps more latent in the text, students should also be able to point to elements that are more micro level but which might be important in identifying relevant segments, including purchasing approaches of customers, situational determinants and personal characteristics of buyers. Drawing from the segmentation funnel, students should be encouraged to distinguish the more easily observable variables from those that are more difficult to observe.

On the basis of the identification, it should be possible to talk meaningfully about different types of customer segments (a useful, but perhaps incomplete, bulleted list of which are captured in the text) and the relative numbers of individual customers for which they might account, from the large numbers of jobbing builders (and below that the mass market of individual diy’ers), through to the small number of large national home builders or large civil and engineeringcompanies,wherethe concept of thesegmentofone has real significance. And key to the sector at large is the role played by builders’ merchants, the companies who actually account for the sales directly from Wavin.

This leads naturally to a discussion about Wavin’s targeting strategy (Question 2), where through its strongly branded product and reputation for technical expertise and innovation, it seeks to remain the major reference for all uses of plastic piping and ducting. In essence, it wants to provide for all possible uses (with specialisms such as water containment and movement being particularly strong) and has to therefore deal with that through how it brings its services and products to market. The mass markets will purchase largely on functional grounds and a reputable brand. End users will expect to be able to find OSMA-branded products at their local diy store or builders’ merchants. On the basis of that branded demand, intermediaries will be more or less inclined to stock OSMA ranges. Away from the ‘mass’ markets, the emphasis may be more on technical requirements but the very broad branded presence makes it possible to associate the technical excellence and innovation in ways that appeals to mass markets and more specialist markets equally. Referrers are looking for real solutions to specific engineering needs and thus require technical expertise to be part of the offering. Big house builders are looking for similar things but are clearly interested in cost. Value to them can come both from scale discounts or solutions created with ease of use/installation and maintenance built in that reduces build times. In both cases, they are looking for system solutions and in order to meet the needs of these segments Wavin has to use teams of system designers and sales specialists to help produce what are effectively bespoke solutions (albeit using what may well be combinations of off-the-shelf products from the OSMA ranges to make those system solutions possible).

Getting to this level of discussion of different types of customers already moves to the comparison between the Building/Installation versus Civils/Infrastructure sector distinctions that Wavin makes (Question 3). The latter is essentially so bespoke that it is a series of oneoffs (often very high profile) that require different parts of the OSMA ranges (see website for indication of the ranges and their uses). Here, Wavin has to position itself on the basis of its service offering rather than the physicality of the products themselves (see Chapter 10). It is almost taken for granted that the physical products will be technically/functionally adequate. They also have to perform at a consistently high level as a matter of course. However, the combination of individual products to achieve a complete customized solution means that the positioninghastoemphasizecomplexunderstanding,bespokedesign expertiseandinnovation, high levels of customer responsiveness and attention to detail. While there may be some elements of service that are important to the Building/Installation sectors, positioning strength derives primarily from the physical product superiority itself. This comes from having available, through a wide distribution, a comprehensive range of technically adequate products that provide solutions to a whole range of building problems. Question 4 invites students to move beyond the material in the case study to help flesh out other relevant target segments.

Using the supplementary readings

The suggested texts are:

Shapiro, B., & Bonoma, T. (1984) How to segment industrial markets Harvard Business Review, 62(3), 104

110.

Ries, A., & Trout, J. (2001) Positioning: The battle for your mind. New York, NY: McGrawHill.

The first is a very easily digested article and, despite its age, constitutes the foremost description of the segmentation concept in an industrial context and the most widely accepted approach to undertaking segmentation. While B2B marketing has perhaps embraced a definition of itself that is less industrial and more service-oriented, more relational and less transactionally focused, students’ attention can be drawn to this article’s continuing relevance.

The second text is also very readable and is a very comprehensive coverage of the positioning conceptwhichismerelyintroducedinourtextbook.Thepositioningconcept iswell established but has often been related in consumer terms, with less focus on the B2B context. The Ries and Trout text tends not to distinguish the contexts but certainly makes reference throughout to B2B brands. The recent relative increase in interest in branding in the B2B context can perhaps be used alongside this text to set students thinking about what is different about B2B positioning compared to consumer goods and brands.

Suggested websites

Industrial classifications can be particularly useful for the purposes of segmentation. The following provide links to relevant agencies and information about their classification systems: http://unstats.un.org/unsd/cr/registry/regct.asp?Lg=1 http://www.statistics.gov.uk/statbase/product.asp?vlnk=14012 http://www.census.gov/eos/www/naics/

Here is an example of how online resources can allow searching for potential clients lists on the basis of industrial classification information (both SIC and NAICS in this case): http://www.webstersonline.com/searchresults.asp?category1=naics&searchvalue=327122&ci ty=Any+City%28Optional%29&state_prov=&country=&imageField.x=11&imageField.y=12