Business Market Segmentation [p]

Prof. A. K. Biswas 1


Agenda

What are the Unique Aspects of Business Market Segmentation?

What are the Models of Industrial Market Segmentation?

How Business Market Segmentation Should be Done?

How to Select Market Segments to Serve?


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.

What are the Unique Aspects of Business Market

Segmentation?


What are the Unique Aspects of Business Market

Segmentation? The difference between consumer and

industrial market segmentation is generally seen in the 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 and Cardozo Model Bonoma-Shapiro Model

What are the Models of Business Market Segmentation?


Given a genericproduct/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

Wind-Cardozo Model Of Business 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 eachacceptable macro-segment the relevant

micro-segments based on key DMU characteristics.

Select the desired target micro-segmentsbased on their costs and benefits

associated with reaching the segment

Wind-Cardozo Model of Business Market Segmentation


DMU may differ with respect tothe composition and position within a firm.their decision making behaviour.



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.



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

4Frequency and

Size of Purchase

5End Use

7Specification

of Project

6Buyer’sIdentity

8SourceLoyalty

9Buyer’s

Personality

OrganizationalCharacteristics

ProductCharacteristics

DMU Characteristics

MostAppropriate

LeastAppropriate

Easier toImplement

Difficult toImplement

1Industry type

2Size of Firm

3Geographic

Location


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.

Wind-Cardozo Model of Business Market

Segmentation


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.

Wind-Cardozo Model of Business Market

Segmentation


Organizational demographics:Industry/ Company size/ Location

Operating variables:Technology/User status/Customer

capabilities (financial)

Purchasing approachesOrganization of DMU/Purchasing

policies/Purchasing criteria

Situational factorsUrgency/Applications/Order size

Personal characteristics:Motivation/Buyer-seller dyad/

Risk perceptions

General, observable

(Macro)

Specific, subtle(Micro)

(Intermediate)

Bonoma And Shapiro Model Of Business Market Segmentation


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.



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.



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.

What is the Problem with these Market Segmentation

Models?


How Market Segmentation Should

be Done? 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.


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.


be Done?


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).


be Done?


However, it is no doubt more difficult for managers to implement the benefits-oriented approach of market segmentation.

One 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.


be Done?


This facility can be provided through a choiceboard - an interactive on-line system.

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.


be Done?


GE Plastics: The GE Plastics Design Solutions Center lets customers use design tools to develop unique, customized 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.


be Done?


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.


be Done?


Segmentation in business 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.


be Done?


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.


be Done?


There are also instances where 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.


be Done?


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.

How to Select Market Segments To Serve?


Segment attractiveness depends on:

Size and Growth of the segmentStructural Characteristics of the segment such as competition, segment saturation, profitability, protectability, environmental risk etc.



Key Success Factors (KSF) for a segment could be

Product Quality Brand Reputation Technology Requirement Cost Structure Distribution System Quality of Service Financial Capacity



Company ObjectivesCompatibility with company goalsRelationships with other segmentsProfitability

Resources and Capabilities of the Company and Competitors

Ability to conceive and designR & D CapabilityExisting Patents and CopyrightsAccess to new technologies through third parties



Ability to Produce (Quality & Quantity)

Production TechnologyProduction CapacityFlexibility in ProductionCost Competitiveness

Ability to MarketBrand ReputationDistribution StrengthService Strength



Ability to FinanceAccess to Capital from OperationsAbility to Use Debt & Equity FinanceParent’s Willingness to Finance

Ability to Manage/ExecuteQuality of ManagementQuality of Decision MakingInnovativenessOrganization Culture



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 ChainInvolving Isopropanol

Propylene Isopropanal

Acetone

Coatings

Chemical Intermediates

Agricultural & BiologicalChemicals

Other

Plastics


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.



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.



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.



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.



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.



Documents

Business Market Segmentation [p]