Customer Segmentation in Business-to-Business Markets

 

UV5749 Mar. 18, 2011

CUSTOMER SEGMENTATION IN BUSINESS-TO-BUSINESS MARKETS 

Introduction

The purpose of this note is to help students better understand the concept of customer segmentation in a business-to-business (B2B) context. Although a number of the issues in  business-to-consumer (B2C) segmentation are similar, there are some distinct differences in approaches. Our attention will be focused on such topics as the role segmentation plays in the larger marketing strategy of which it is a part, pa rt, the process, primary approaches, and variables. Here are two definitions of segmentation: Segmentation is the process of partitioning markets into [groups] of potential customers with similar characteristics who areislikely exhibit markets, similar purchase  behavior…The [process] of segmentation to to analyze find a [defensible] niche, and develop and capitalize on this superior competitive  position. This can be accomplished by selecting one or more groups of consumers/users as targets for marketing activity and developing a unique marketing program to reach these prime prospects [market segments]. 1  Segmentation means the splitting of a market into groups of end-users who are (1) maximally similar within each group and (2) maximally different between groups.2  Marketers use segmentation because groups of customers (or potential customers) search for different cues, utilize different media, and rely on different people to help them make  purchase decisions. Segments allow marketers to better reach high-priority customers or to aavoid void

1

 A. Weinstein, Market Segmentation (Chicago: Probus Publishing Company, 1987).  A. T. Coughlan, E. Anderson, L. W. Stern, and A. L. El-Ansary,  Marketing Channels (Upper Saddle River,  NJ: Prentice Hall, 2001). 2

This technical note was prepared by Joshua Stein (MBA ’10) under the supervision of Robert E. Spekman, Tayloe Murphy Professor of Business Administration. Copyright   2011 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected] [email protected].. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

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less desirable groups of possible customers. The PIMS data3  suggests that firms that segment their markets are likely to achieve higher rates of return than firms that do not. In fact, when a marketer segments a market, she makes a willful decision to serve some people and not serve others. Segmentation should not be viewed as a process of simply dividing the market into groups, rather of understanding important customer characteristics that differentiate the firm’s  products/services from competing offerings. Critical uses for segmentation across a firm include the following:  

Enhancing [the] understanding of customers to build loyalty and retention

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Identifying similar prospects for acquiring new customers

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Determining high-potential customers to optimize o ptimize profitability

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Predicting future purchase patterns of customers

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Improving return on targeted marketing effort

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Identifying new product and service opportunities. 4 

Customer Segmentation in Overall Marketing Strategy  

Segmentation is an essential part of the development of a firm’s marketing strategy. See Figure 1  for a framework for developing a marketing strategy. To begin, one must set the strategic objectives and goals of the firm at the corporate, business unit, or product level; these  business goals flow from the mission, vision, and values of a firm. This is followed by a situational analysis  and the formulation of a strategy to win (if this is the objective) in the market. A portion of this involves analyzing both the external competitive landscape and internal company capabilities. In other words, a company needs to know who they are, where they are currently, and where they want to go before it can determine how to get there. 5  A company also needs to understand how they are different from their competition and what they do that is distinctive. Once this analysis is complete, the company strategy is translated into specific objectives, measures, and initiatives.6 

3

  PIMS   refers to the Profit Impact of Market Strategy, the longitudinal study and database overseen by the Strategic Planning Institute in Boston. 4   M. Badgett and M. Stone, “Multidimensional Segmentation at Work: Driving an Operational Model that Integrates Customer Segmentation with Customer Management,”  Journal of Targeting, Measurement and Analysis  for Marketing 13, no. 2 (2005): 103–121. 5   Wallace Stettinius, “Executing Strategy: Marketing the Management System” (Charlottesville, VA: Darden Business Publishing, 2009). 6   Robert S. Kaplan and David P. Norton, “Mastering the Management System,”  Harvard Business Review  (January 2008): 1–17.

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What is important here is to appreciate the magnitude of the opportunity facing the firm. From an analysis of each opportunity a core strategy evolves tailored to each unique segment. Then, the marketing mix is assembled and coordinated to meet these opportunities, and the marketing plan is implemented. Figure 1. A marketing strategy framework. Strategic objectives

Situational analysis

Core strategy: value proposition and  plan to compete

Description of segments (ours + competitors’)

Implement the marketing mix

Positioning + targeting

4 Ps: price, promotion,  product channels (place) + CRM

Source: Adapted from R. Winer,  Marketing Management  (Upper   (Upper Saddle River, NJ: Pearson Prentice Hall, 2003).

 Next, the firm would attempt to identify and segment the market, target chosen market segments, and position its products/services within those segments (segment, target, position, or STP). Segments  must be identified that allow the firm to create a unique, defensible, and  profitable group of customers that leads to a competitive compe titive advantage. The process of segmentation should result in a deeper understanding of a group(s) of customers based on similarities within a segment and differences across segments. For example, this could be based on what the customers buy and why they buy. Once a set of segments is defined, targeting involves the process of selecting one or more segments to serve. A firm might have a number of reasons to focus on one or more segments. It might be motivated by the market opportunity or might find that a particular segment is under attack from a competitor and can no longer be treated with benign neglect and must be protected. It could also decide to serve one segment of the market—and it with vengeance. example, Paccar (a manufacturer of high-end truck cabs) has serve focused over athe years on For the independent trucker who owns his own cab, as opposed to companies such as Volvo, Ford, and Daimler that offer truck cabs to a variety of o f segments. The third step,  positioning, is the way in which customers perceive the market and the differences among competing firms and offers, the place that a brand or a product occupies in their minds. Often associated with perceptual mapping, positioning is based on the belief that customers are able to compare products/services in a way that identifies the brand/product relative to an ideal or to others with which it competes. While positioning often refers to determining the right products or services to meet the needs of a segment, the STP process serves to define the nature of marketing-mix elements that follow as part of the firm’s marketing strategy. The marketing-mix elements comprise the “four Ps” (product, price, place, and promotion) and should reflect differences among segments. For

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instance, HP typically would enter a market using a price-skimming strategy, whereby it charged a premium price for a new product. In contrast, Texas Instruments would rely on a price penetration approach, whereby it would enter the market with lower prices in hopes of capturing a larger share of the market. In other instances, a firm might rely on the Internet to establish a sales channel to reach the small/medium enterprise customer, while another firm might engage the services of sales agents or other third-party channels to reach the same market. In 2008, Thomson Corporation (now Thomson Reuters; Thomson) followed a marketing strategy that used the STP framework.7  In a transition from previous segmentation methods  based on sales channel and geography, Thompson began segmenting the market to understand the market value of potential customers whose needs it believed it could address. This alone allowed Thompson to examine untapped potential market opportunities. Thomson Corporation used quantitative survey methods to determine the needs of each segment and compare how well it served those needs relative to its competitors and then matched new product offerings to specific market needs at each segment level. By understanding unmet market needs and developing products to serve those needs, Thomson was better able to target specific segments and serve its customers’ needs in ways it previously had not.

Segmentation Differences between B2B and B2C B2 C Markets

While conceptually there are differences in the process of segmentation between B2B and B2C markets, a number of these differences are largely of degree, not of kind; nevertheless, such differences can have practical implications for the industrial marketer. Major differences  between the two markets include geographic diversity, product/market factors, the nature of the  purchase decision, and closeness of the seller to the customer.8  Additional differences include those in the supply chain, the impact of derived demand, and variations in market research. In B2B markets, geographic diversity has led many firms to use sales-force models based on geography. in Therefore, in B2B markets, is more implication often used inofsegmentation as a consideration implementation because geography of the practical reaching target customers within the constraints of a firm’s coverage model. In fact, a machine-tool buyer in Poland might be very similar to a buyer in Chicago, given the functionality of the machine tool. Industrial products and services might not vary much by country, although size of business might account for differences across segments—a smaller firm might want certain value-added services  bundled with the product, whereas larger firms might be more self-sufficient. self-sufficient.

7

 R. J. Harrington and A. J. Tjan, “Transforming Strategy One Customer at a Time,”  Harvard Business Review   (March 2008): 62–72. 8  Weinstein (1987).

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The average B2B transaction has a longer sales cycle and often accounts for a greater  percentage of a firm’s revenue than the average B2C transaction. In addition, the customer base in a B2B market is substantially smaller, increasing the importance of understanding the specific needs of each segment in these markets. Manufacturers of large industrial process equipment (e.g., oil refining, micro-processor fabrication, paper mills) might have only a handful of customers, and each piece of machinery can cost in excess of $500 million. The longer selling cycle in B2B markets has important implications as well. For example, the need to understand the customer and the customer’s customer becomes more urgent since there are a number of decision points at which the buying decision can derail, and another supplier wins the bid. If the incumbent firm loses the bid, it could be the “out” vendor for a substantial period of time. In effect, a lost bid might be a sale lost forever. Instead of one individual being responsible for a purchase decision, as is the case in many B2C buying decisions, in B2B markets there is often a group of people involved in the process. This buying center or decision-making unit  (DMU)   (DMU) is the group of people who come together to make decisions for complex, critical, and often expensive purchases. We often find that the “specific organizational characteristics, such as field of operation, size, organization structure, and objectives, are important determinants of the purchase decision and should therefore be incorporated into any segmentation model.” 9 Furthermore, the decision-making process itself is often more complex, involving multiple stakeholders, enterprise expectations, and business objectives.10  This brings up the issue of communication within a buying organization. The end user is seldom within the DMU: In some instances, the end user is simply not included; in other instances, the selling firm may not have access to the DMU member with veto power. Another difference in B2B markets relates to the supply chain and where the end-use customer is located. In B2B markets, the end-user might be very much downstream, and as a result, the seller might not have access to these customers. This is especially true if the B2B firm sells to an OEM (original equipment manufacturer). In a B2C context, the seller might not reach the end-user and might rely on distribution to reach the end-user. Often there is tension between the firm and its distribution channel as to the amount of information exchanged and concern related to disintermediation of the middleman. The position of B2B firms in the value chain also leads to differences in derived demand that are unique to B2B markets. For example, demand for cold-rolled steel is derived, in part, from the consumer buying a car. As consumer confidence builds and consumers buy more cars, more steel is needed, and the iron mine gears up and orders more Caterpillar (CAT) equipment to run the mines. While CAT might not have its hand on the pulse of the customers’ customer, it can react to the increased demand for steel. To some degree what we witness here is the creation of a bull-whip effect in the supply chain. In the case of segmentation, derived demand increases 9

 R. E. Frank, W. F. Massey, and Y. Wind,  Market Segmentation (Englewood Cliffs, NJ: Prentice Hall, 1972).   J. Berry and A. Weinstein, “Business Psychographics Revisited: From Segmentation Theory to Successful Marketing Practice,” Journal of Marketing Management  25,  25, no. 3–4 (2009): 315–40. 10

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the importance of knowing the customer’s customer and makes gathering this information that much more complex than in B2C markets, given additional links in the supply chain. Market research in a B2B setting is different than in a B2C setting for a number of reasons. For example, in a B2B setting, sometimes information is gathered via one-to-one customer interviews because personal buyer-seller relationships are critical in these markets, whereas in B2C markets, a direct sales force is usually not present to create such a relationship. However, the B2C marketer might instead rely on a pull strategy to attract the customer to the retailer whose sales clerks do maintain contact with the end-use customer. The use of a marketing research firm permits the voice of the customer to be incorporated in the firm’s decision-making process. Unfortunately, B2B marketers spend very little on consumer research when compared to their B2C counterparts. Additionally, B2B markets tend to have a more complex decision-making unit, which could make the data acquisition process much more tedious. That is, if the DMU has members whose status and power positions in the firm differ substantially, questions could arise as to whether a weighting scheme is appropriate to determine whose preferences are most represented in the final decision.

The Importance of Segmentation

As previously mentioned, market segmentation is the process of grouping customers together who have similarities as well as distinct differences from other segments. This is in contrast to market aggregation, which is a marketing strategy that does not differentiate by customer type and which provides companies few opportunities to lower costs and increase returns.11 In one study, ABB Electric saw yearly sales increases of 12% and 18% in two of three districts that implemented segmentation, while sales in its other districts declined  by   by an average 12 of 10%.   So long as the incremental profits gained from segmentation offset the cost of conducting and implementing the research, some form of customer c ustomer segmentation is worth pursuing: Firms can deploy different marketing tactics and strategies for different customers (or customer segments) based on each customer’s lifetime value (or the average CLV of a customer segment). Such marketing interventions will increase the overall lifetime value of the firm’s customers and may also help lower the cash flow risk by stabilizing the future expected cash flows. 13 

11

 Weinstein (1987).  D. H. Gensch, N. Aversa, and S. P. Moore, “A Choice Modeling Market Information System that Enabled ABB Electric to Expand its Market Share,” Interfaces 20 (1990): 6–25. 13  V. Kumar and D. Shah, “Expanding the Role of Marketing: From Customer Equity to Market Capitalization,”  Journal of Marketing 73, no. 6 (2009): 119–36. 12

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However, in a 2004 study of 200 senior executives from large firms, of the 59% that recently had carried out a major segmentation project, only 14% considered the outcomes of value.14 This implies that while segmentation as a strategy can create value, it also needs to be well executed. It is one thing to segment the market and quite another to ensure that the plan can  be implemented. Under Jack Welch, GE’s mantra was that if you were not first or second in a market, you needed to exit the business. Such a mandate leads to very narrowly defined markets—you might be first or second, but the segments you have conquered might be unreachable or hard to measure. Assume that a multinational company sells its products globally; it could find that cultural differences become salient in how a marketing plan is built for the different segments/markets. In fact, a study of 50,000 IBM employees across 40 countries demonstrated that cultural differences can be arrayed across five dimensions: power distance, individualism versus collectivism, femininity versus masculinity, uncertainty avoidance, and long-term orientation.15 It becomes critical that any bases of segmentation used might reflect some of these differences if, in fact, these dimensions account for how people search for, use, or disseminate  product-related information. Cultural differences might affect how the seller negotiates with the  buyer, and this might directly impact the pricing strategy employed by the firm. Because not every product matches the needs of a particular segment, segmentation helps managers better align the needs of the customer with the product portfolio of the firm. By gaining certain efficiencies in production, the firm is better able to match customers to products. More specifically, the benefits of segmentation include the following:  

Determining effective and cost-efficient promotional strategies

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Evaluating market competition, in particular the company’s market position

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Providing insight on present marketing strategies

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Identifying similarities and differences among customers

Better understanding customer needs and characteristics   Improved customer-relationship management

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More precise setting of marketing objectives 16 

14

 D. Yankelovich, “New Criteria for Market Segmentation,”  Harvard Business Review 42, no. 2 (1964): 83–90.  G. H. Hofstede, Culture’s Consequence: International Differences in Work-Related Values (Thousand Oaks, CA: Sage Publications, 1980). 16  Items 1–3 from Weinstein (1987); items 4–6 from E. K. Foedermayr, A. Diamtopoulus, and C. Sichtmann, “Exploring the Construct of Segmentation Effectiveness: Insights from International Companies and Experts,”  Journal of Strategic Marketing Marketing 16, no. 2 (2008a): 129–56. 15

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Key Criteria for a Viable Segment 

The most important criteria for a viable segment are for each customer within a segment to be similar in some capacity with the other customers in that segment yet distinctly different from customers in another segment. In particular, the industrial marketer is driven by several criteria, described in Table 1, when evaluating whether a segment is viable. Table 1. Key segmentation criteria. Criterion Measurable

Definition There are associated metrics that can be collected to monitor segment performance (i.e., growth rates, volume, and market potential). The segment can be easily reached by marketing once identified.

Comments Each segment must be measurable   so that financial metrics and contribution to firm value can be established. Often firms can get to an expense-to-revenue figure, but greater insight into  performance metrics is elusive.

Differences

There is enough of a difference to warrant distinct segments.

Substantial

The monetary benefits outweigh the cost of tailoring a strategy.

In order to make generalizations about segment “characteristics,  buying center dynamics, consumption data, customer needs, the  buying decision-making process, and [decision] influencing factors,” (Dibb and Simkin, 2009) there is an implicit assumption that there are differences across segments. If they are not substantially different , industrial marketers should look to segment on other variables or else aggregation of segments must occur. However, some overlap between segments may indicate additional segments or help to understand changing customer preferences which may result in migration from one segment to another. Since it is imperative that segments can be profitably served, a segmentation strategy needs to uncover segments that are substantial , both profitable and unprofitable, to determine those which marketing will target.

Day and Wensley (1983) 

Accessible Day and Wensley (1983), Frank et al. (1972), Kotler and Keller (2006), Wedel and Kamakura (2000), Baker (2003) (2003)  Day and Wensley (1983) (1983) 

Day and Wensley (1983), Frank et al. (1972), Kotler and Keller (2006), Wedel and Kamakura (2000), Baker (2003) 

Whether a segment is accessible   is a practical concern in implementation, which often leads firms to segmentation variables that are less powerful at differentiating among segments but more actionable at identifying and targeting segments for sales and marketing, such as using SIC as the segmentation variable.

Durable

The segments are stable enough

While customer preferences and behaviors do change over time, a

Day Wensley Frankand et al. (1972),(1983) Kotler and Keller (2006), Wedel Kamakura (2000), Baker (2003))  (2003

such that they are meaningful over time.

durable  enough segment needs to bedecisions it has some continuity for marketing to make based onthat segmentation.

Actionable

Marketing programs can be formulated for each segment.

Whether a segment is actionable   is often a result of it being accessible, durable, identifiable , and responsive  since marketing must be able to direct its own activity to a segment in order for a segment to be viably pursued. Marketing needs to know who its target customers are, and the sales force needs to be able to easily identify  these customers.

Anderson (2004), Frank (1972)

Identifiable Kotler and Keller (2006), Wedel (2000), Baker (2003)

Responsive Kotler and Keller (2006), Baker (2003)

Marketing can recognize distinct segments. Marketing is able to reach and influence each segment with marketing materiel.

Each segment that is pursued needs to be responsive to the messaging from marketing and sales.

Source: Created by case writer.  

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The Process of Segmentation

In general, customer segmentation should follow a multistep process. The segmentation  process described below is part of the larger marketing strategy, which includes some key activities that will impact the effectiveness of the segmentation efforts, such as positioning. While there is not one best approach, we adapted an approach from Clarke and Foedermayr. 17  Although we limit our discussion to a seven-step process, additional consideration needs to be given to the amount of resources devoted to this effort, the quality of the team charged with segmentation, the timing of the segmentation project, and the firms’ willingness to implement changes following the segmentation efforts.18 In fact, R. J. Thomas suggests that the first step in segmentation does involve managing the organization’s expectations, obtaining management support, allocating resources, and creating a project timeline. 19  purp ose: How does segmentation fit into the broader marketing and firm 1.   Identification of purpose strategy?

Identifying a purpose provides guidance and a goal for the segmentation project. The most effective do not start as top-down, high-level initiatives to improve one’s understanding of customers in a general sense. Rather, they begin as attempts to solve a particular business  problem, whether it’s increasing sales-force productivity, redefining a channel strategy, rolling out new types of products or solutions, or overcoming a competitive threat. By centering the effort on a specific business objective, executives can better assess the segmentation effort’s  potential value before actually implementing it, which makes for a less risky investment.20  2.   Identification of market to segment : What market needs to be segmented? It is essential to find a meaningful balance between a broad and a manageable market definition, since too narrow a definition [could] restrict the range of new opportunities. 21  Alternatively, segmentation could expand the range of options available to the firm. Yet too  broad a definition might result in overwhelming the segmentation exercise with too much data 22

and pose problems for the implementation of the segmentation process.  In the present context, a 17

  A. H. Clarke, “Bridging Industrial Segmentation Theory and Practice,”  Journal of Business-to-Business  Marketing  16, no. 4 (2009): 343–73; E. K. Foedermayr and A. Diamtopoulus, “Market Segmentation in Practice: Review of Empirical Studies, Methodological Assessment, and Agenda for Future Research,”  Journal of Strategic  Marketing 16, no. 3 (2008b): 223–65. 18  S. Dibb and L. Simkin, “Market Segmentation: Strategies for Success,”  Marketing Intelligence & P Planning lanning 16 no. 7 (1998): 394–406. 19   R. J. Thomas, “Business-to-Business Market Segmentation: The Interaction of Process and Practice,” working paper, Georgetown McDonough School of Business, 2010. 20   J. Calhoun, K. Davey, and M. Wohlfarth, “The New Science of Predictive Segmentation” (white paper), Oliver Wyman website, available at http://www.oliverwyman.com/ow/pdf_files/WP07-PredictSegmentationSep07.pdf (accessed June 23, 2010). 21  Foedermayr and Diamtopoulus (2008b). 22  M. McDonald and I. Dunbar, Market Segmentation (London: Macmillan Press, 1995).

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market should not simply be viewed in terms of a geographic area, product (often the case with small firms), industry, state-of-action (e.g., frequent flyers) or state-of-mind (e.g., techies). Instead, defining the market should integrate several dimensions—customer needs, customer groups, competition, products and technologies.23  3.  Identification of variables and model:24  What are the variables that should be used for segmentation, taking into consideration the eight criteria for a viable segment previously mentioned? Segmentation variables, the characteristics by which customers are segmented, 25 usually fall under two main categories: criterion variables (based on the behaviors and attitudes of a customer) and descriptor variables (often related to demographic, descriptive information).26  There can be multiple variables selected for segmentation, such as the macro variables (e.g., SIC/NAICS) and more micro variables based on customer needs. In fact, we would encourage that managers rely on multidimensional segmentation (using both macro and micro variables), since the more one knows about a particular segment, the more effectively one can meet the needs of those customers and gain a competitive advantage. 27 The selection of the segmentation variables is critically important since different variables naturally result in different classifications/segments.28  In order to select the most appropriate variables upon which to segment, there are two main dimensions for evaluation; cost and ease of identifying the segments and the effectiveness and appropriateness of the segmentation variable.29  In selecting variables, it should be noted that in practice marketers will discover an inherent “trade-off between the costs and applicability of the segmentation basis.”30  4.  Segmentation and analysis: How will the segments be analyzed? This step involves collecting data and conducting analysis on the information needed to determine the segments. The data collection portion is only complete once a proper database has 23

  A. Weinstein, “A Strategic Framework for Defining and Segmenting Markets,”  Journal of Strategic  Marketing 14, no. 2 (2006): 115–27. 24  Variable is used loosely to refer to a construct or concept. 25   J. B. E. M. Steenkamp, F. T. Hofstede, and M. Wedel, “International Market Segmentation: Issues and Perspectives,” International Journal of Research Research in Marketing 19, no. 3 (2006): 185–213. 26  Frank et al. (1972). 27   S. S. Hassan, S. Craft, and W. Kortam, “Understanding the New Bases for Global Market,”  Journal of Consumer Marketing 20, no. 5 (2003): 446–60. 28  E. Cheron and E. J. Kleinschmidt, “A Review of Industrial Market Segmentation Research and a Proposal for an Integrated Segmentation Framework,”  International Journal of Research Research in Marketing 2, no. 2 (1985): 101–15. 29   Y. Wind and R. Cardoza, “Industrial Market Segmentation,”  Industrial Marketing Management   3, no. 3 (1974): 153–66. 30  A. C. Verhallen and J. Prayton, “Strategy-Based Segmentation of Industrial Markets,”  Industrial Marketing  27, no. 4 (1998): 305–13.  Management  27,

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 been built, and while market research has already determined the information needed, it still needs to collect this data and compile it into a proper, user-friendly database. 31  There are a number of analytical tools that can be used to do the analysis. The approach taken is often a function of whether the data are qualitative or quantitative and what the goals of the segmentation exercise are. When an approach and data support comprehensive quantitative analysis, it typically entails two major phases: a.   Identification of the segments —This phase involves analyzing the available market research and behavioral data of group customers and/or prospects into actionable segments. Analytical techniques employed here include factor analysis, cluster analysis, latent class analysis, and discriminant analysis. The objective is to identify  patterns in the data that may not be readily apparent upon cursory review of the data. Employing these analytical techniques allows marketers to identify discrete segments in their data that ultimately form the foundation of the fully operational segmentation system.  b.   Assignment of the segments —This phase involves developing an approach for taking the segments, which are typically built on a small subset of the overall customer base, and “assigning” every customer/prospect to an appropriate segment. This is done through the development of statistical models using techniques such as multinomial logistic regression and decision trees. These models are applied to customer and  prospect databases to “assign” each customer to a segment based on probabilities. Over time, as more data is available, the quality of these models and the confidence in the assignments increase. These types of analytical techniques typically require relatively rich datasets (behavioral data from transactional systems, “firmographic” 32  data from CRM systems, and attitudinal/  perception data from market research) and advanced analytics capabilities, but the payoff in terms of the quality of the segmentation results is typically very high. 5.  Verification, evaluation, and selection of segments: Are the segments attractive, can the company meet the segment’s needs, and can the company compete?   To properly verify the segments, the eight key criteria for a viable segment mentioned earlier in this note should be reviewed. If each of the segments meets these criteria, then one way to evaluate the financial viability of the segments is based on profitability, including size and growth. Additionally, the number of total segments selected needs to be manageable: “First, each segment needs to be of sufficient size to offer an economical value or volume of sales; second,

31

 Thomas (2010).  In the 1990s, the term “firmographic” was coined to differentiate firm and market demographics.

32

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the number of segments formed needs to be manageable to be handled by the firm.” 33  For example, the B2B marketer may find it impossible to implement a marketing plan for  x distinct segments. In selecting the segments to target, the factors needed to be successful in order to win with each segment (external analysis) should be coupled with how capable the firm is in meeting those needs and market demands (internal analysis).34  In practice, firms tend to overemphasize internal factors without sufficient consideration of the external factors. 35  After the verification, evaluation, and selection of the segments, industrial marketers must then define, describe, and name the segments, with strong consideration given to the ease of understanding and implementing marketing levers throughout the firm based on this information. 6. Communication and implementation: How will the identification of customer segments  be used and does this link back to the original purpose of the segmentation efforts? This is by far the most difficult part of the segmentation process since executing the segmentation strategy is likely where most firms fail to see the full potential of its benefits. Accordingly, a market segmentation strategy must have the potential to be used. 36  Therefore, greater emphasis has to be placed on the ability to tie tangible marketing actions to the segments formed in order to ensure their value to marketing managers. 37  Specific barriers to successful implementation include infrastructure barriers (e.g., communication channels and internal expertise), process issues (e.g., segmentation process steps), and implementation barriers (e.g., resources and distribution).38  This is not just about consistent internal communication within the firm but also about communication to the external segments themselves. Even with a successful segmentation effort, it must be implemented well for its benefits to be realized. Successful implementation starts with revisiting the purpose of the segmentation efforts, determining relevant positioning strategies, and specifying the right marketing-mix programs. 39 Successful implementation may also involve having an internal champion dedicated to pushing the segmentation throughout the firm. 40 

33 

Foedermayr and Diamtopoulus (2008b); M. McDonald and I. Dunbar,  Market Segmentation  (London: Macmillan, 1995). 34   Clarke (2009); N. F. Piercy and N. A. Morgan, “Strategic and Operational Market Segmentation: A Managerial Analysis,” Journal of Strategic Marketing Marketing 1, no. 2 (1993): 123–40. 35  Dibb and Simkin (1998). 36  J. M. Choffray and G. L. Lilien, “A New Approach to Industrial Market Segmentation,” Sloan Management  Review 19, no. 3 (1978): 17–29. 37  W. Rudelius, J. R. Walton, and J. C. Cross, “Improving the Managerial Relevance of Market Segmentation Studies” in M. Houston,  Review of Marketing  (Chicago: American Marketing Association, 1985), 385–404; Foedermayr and Diamtopoulus (2008b). 38  S. Dibb and L. Simkin, , “Market Segmentation: Diagnosing and Treating the Barriers,”  Industrial Marketing  Management  30,  30, no. 8 (2001): 609–25. 39   S. Dibb and L. Simkin, “Implementation Rules to Bridge the Theory/Practice Divide in Market Segmentation,” Journal of Marketing Management  25,  25, no. 3–4 (2009): 375–96. 40  Clarke (2009).

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Another consideration is the impact that segmentation will have on other marketing decisions, such as the structure of the sales force. 7.  Monitoring and updating: Have the segments changed and when should the firm review its segmentation strategy? It is important that the segmentation plan be reviewed on a regular basis, and if it is no longer relevant it should be revised. At a minimum, progress can be tracked using some of the key metrics described later in this note. Additionally, progress against these metrics should be combined with validation that involves talking to customers and conducting further qualitative market research.41  For instance, the following questions are important and should be asked during a segmentation review exercise.  

Who are my customers?

 

What are the key segments? How are they different?

 

Are their priorities changing?

 

What are the shifts?

 

How would you describe the shifts by market segment?

 

Is it more notable in products, services, or both?

 

What changes have you seen over the years?

 

Given these changes, who should your customers be?

 

What is the current business model?

 

Is the competitive model similar or different?

 

How will it change to meet the needs of future customers?

 

What are the barriers affecting change?

Primary Approaches to Segmentation Strategy

There are a number of ways to classify approaches to segmentation. Three distinctions in the approach to segmentation are often articulated. Firms can employ either a break-down  or build-up  approach to segmentation (also known as aggregative  and disaggregative).42  In the  break-down approach, the research starts with the entire market and then moves down toward more company-specific information. The build-up approach starts with the individual customers 41

 Thomas (2010).  Clarke (2009), Thomas (2010).

42

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and then builds up an understanding and segmentation of the market as a whole. In the former, the market must be defined before segmentation occurs, whereas in the latter, the market is defined after segmentation occurs. Both approaches have merit; however the build-up approach is more likely to yield the most meaningful segments since it starts from a clean sheet, whereas the break-down approach is likely to be easier to implement since it operates in predetermined markets. Additionally, smaller firms may find the build-up approach to be more manageable given that they are less likely to have comprehensive databases filled with customer information and therefore may find it easier to begin the process one cu customer stomer at a time. Another way to classify segmentation approaches is a priori versus post hoc methods.43 A  priori methods determine the number and type of segments in advance, whereas post hoc methods wait until after analyzing the results to make these decisions. A post hoc approach is more inductive by nature, allowing the data to speak for itself, whereas an a priori approach is more deductive. With smaller amounts of data and limited information, a post hoc approach works better because the amount of information is manageable. With large data sets, however, informed marketers must have an opinion about their customers and look to test certain hypothesis with the data. Therefore, for many firms an a priori approach to initially shape the segments and a post hoc approach to better refine the segments after a limited amount of data is collected will yield the most insightful and actionable segmentation scheme. A third way to classify segmentation approaches is descriptive  versus  predictive.44  The  best segmentation results will be predictive since a forward-looking scheme incorporates recent and future changes in the market. But this may be difficult to execute. A descriptive approach may be less effective in segmentation since it is backward looking, but it may be easier to understand and implement for marketing managers. Therefore, predictive, post hoc approaches tend to work best since they allow the data to better differentiate among the segments and actually predict future customer behavior. Still, this is also the most difficult to execute given the depth of data needed and expertise required.45 

Primary Approaches to Segmentation Analysis

The type of data used can balance both quantitative and qualitative information. Both types of data can yield meaningful results to the industrial marketer and may require technical experts to apply the most complex of techniques. Additionally, longitudinal data (represented by  past, present, or future behaviors and attitudes) can be collected over time to represent changes in customer preferences.46 Quantitative approaches to segmentation analysis may involve fielding a 43

  M. Wedel and W. R. Kamakura,  Market Segmentation: Conceptual and Methodological Foundations  (Boston: Kluwer Academic Publishers, 2000); Y. Wind, “Issues and Advances in Segmentation Research,”  Journal of Marketing Research 15, no. 3 (1978): 317–37. 44  Wedel and Kamakura (2000); Wind (1978). 45  Dibb and Simkin (1998). 46  Frank et al. (1972).

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survey to collect information from customers, the analysis of which can be as simple as crosstabulations. Oftentimes qualitative interviews are used to inform a quantitative customer survey, so that the right concepts are tested. Qualitative approaches can be equally as complex and may involve a survey. The advantage of such an approach is that it allows the marketer to probe deeper into the specifics of what customers say and do.

Macro and Micro Segmentation Variables

At the highest level, the primary variables used to segment customers are based on characteristics about who they are, what  they   they purchase, how they make purchases, and why they make purchases. Using information about who the customer is and what they purchase for segmentation relies on a priori information, whereas observing and understanding how a customer buys and why they buy requires a more in-depth knowledge of the customer and is mainly drawn from empirically based information. Additionally, it is suggested that segmentation schemes based on how customers buy and why they buy are more likely to encounter problems in implementation because such information, however empirical, is often more difficult to collect and harder for marketers to utilize in the marketing mix. In a B2B context, segments are developed according to both macro and micro variables. Macro segmentation variables tend to be enduring firm-level demographics such as standard industrial classifications (SIC/NIACS), size, and location. These data are typically available through secondary data sources, which are collected for reasons other than the current segmentation exercise. Micro variables are generally specific to the firm and are collected within the context of a specific segmentation approach. These variables are often related to the buying  process, who gets involved in the process, proce ss, when they get involved, and what is important to them during the process. This primary data are often expensive to collect and are likely to be unique to the selling firm’s products and services. Macro data are often available from government sources and private sources such as Hoover’s and Dunn and Bradstreet. While a great deal of secondary data might be available, one should be cautioned that a given data pool might not precisely match the needs of the selling firm. Segmentation can be based on multiple levels using variables, which are summarized in Figure 2. For example, a firm could choose to initially segment its customers by firm demographics such as size and then further segment these groups along some other criteria such as the customer needs. These different variables provide insights that can help the marketer to  better develop a strategy for attracting these priority segments. Our point is that more information is often better, and the resultant segmentation approach can result in a more comprehensive and more relevant combination of factors that will help the firm gain a competitive advantage. Exhibit 1  summarizes the range of data that can be utilized to build a segmentation approach. We often find, however, that as a firm moves beyond demographic and other macro variables, it becomes less comfortable with the data and less confident with the outcomes.

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Figure 2. Segmentation variables framework.



    

Demographic characteristics Life cycle Decision making unit characteristics Profitability/value Social/cultural factors Branding



Behavior-based  Products/services 

Why 

How

What

Who



Decision making  process

 

Occasion-based  Needs-based

 purchased Sales channels

Least progressive

Most progressive  progressive 

Source: Created by case writer.

How Segmentation Affects Other Marketing Decisions

We have shown that segmentation is part of the broader marketing strategy and sets the stage for the resultant marketing program that is developed for the individual segments and ultimately for the firm. Therefore, major managerial decisions, such as which segments to target, how to position a firm’s products/services, and how to formulate and implement the marketing mix (four Ps), are all affected by segmentation. More specifically, segmentation will affect decisions such as “advertising, offerings (products/services), sales promotion programs, prices, sales forces, and distribution systems.” 47  The results of segmentation may impact the sales channels selected to serve specific segments. Segmentation may reveal customer preferences for specific channels, or the economics of a particular segment may be served more profitably through a particular sales channel. Segmentation may impact the entire sales funnel given new information on each segment. The sales force itself may be affected by segmentation, as it is possible that it will need to identify which customers belong to which segment in order to effectively sell to them. Segmentation may also impact the benefits that the sales force emphasizes to segments based on  potential differences in its preferences and key buying criteria. Furthermore, it is possible that the sales force may need to be reorganized to specialize in serving the needs of a particular segment. For instance, the data might reveal that one segment is solutions-focused while another is pricefocused. The approaches taken by the sales force will differ when meeting the needs of these segments. In fact, the price-focused segment might require a different sales channel because a direct sales force might be deemed too expensive.

47

 Foedermayr et al. (2008a).

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Important Segmentation Metrics and How to Know If a Segment Is Profitable

Because the impact of segmentation on bottom-line performance is indirect, it is difficult to link the two; as a result, there is no universally-accepted metric for tracking segmentation efforts.48  Segmentation is only a part of the broader marketing strategy and rarely done in isolation, so the most common metrics are often the same as those that track marketing success overall. Furthermore, standard accounting data is often not segment-friendly; accounting systems are mostly built around products, not customers, making it difficult to extract profits by segment. Typically, the best the firm can do is to gather expense-to-revenue data by segment—useful, but it would be better to know profitability by segment. That said, a number of metrics can be utilized by marketing executives (Table 3). Table 3. Prototypical segmentation metrics. Marketing Concept Immediate financial returns Long-term financial success

Example of Metrics Sales growth and market share Extended product life, return on equity, return on investment, and profit-to-sales ratio

References Craft (2004) Craft (2004)

Relationship building

Share of customers, partnering opportunities with local industries, reduced costs, share of wallet, growth in product  portfolio, and new product innovation Successful brand building, market development, and reputation as successful Product profitability and customer lifetime value Loyalty metrics such as net promoter score, indications of future business such as purchase intention, and current financial metrics such as price premium and cross-sell rate Segment profitability, segment growth, competitive  position of the company within that segment (i.e., market share), and cost to reach (serve) buyers [in each segment]

Craft (2004)

Market position Overall marketing metrics Segmentation progress

Segmentation-specific metrics

Craft (2004) Bailey et al. (2009) Frank et al. (1972)

Piercy and Morgan (1993)

Source: Created by case writer.

While marketers would like to show the return on investment (ROI) for the investment made in the segmentation efforts and compare the current segmentation scheme to alternative choices for segmentation, such metrics are often difficult to track. In fact, some claim that measuring the success of segmentation efforts is one of the biggest challenges that firms face.49  Ultimately, a segment’s profitability is determined by discounting the estimated customer lifetime value and subtracting the initial and ongoing cost of the segmentation efforts. Since the initial costs are likely to include management’s time, that should be taken into account. However this is more useful when determining whether to invest in segmentation and not post hoc in tracking the profitability of segments. Therefore, to determine segment profitability, segment 48

 Foedermayr et al. (2008b).  Badgett and Stone (2005).

49

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revenues can usually be allocated relatively easily assuming there is no overlap among segments and that the unit of analysis for a segment is a customer. However, the cost to serve a customer is often difficult to calculate given that the data needed usually comes from expensive enterprise resource planning (ERP) and CRM systems.50  This information is necessary in order to understand overall segment profitability, especially since the costs per customer should not be assumed to be equal across each segment. Activity based cost accounting may help in this aspect since allocating administrative overhead, marketing dollars, and sales-force expenses are likely to be the largest costs that differentiate segments on their expenses, aside from the gross  production costs for the products/services sold to each. See Exhibit 2 for a real-world example.

Future Trends in Segmentation

Segmentation in the B2B market space has gained much traction over the years but lags when compared to the work done in the B2C arena. In part, the gap is a function of the paucity of rigorous analytical techniques being employed in B2B applications. For instance, it is rare to find a conjoint study or a lifetime value of a customer study in the B2B space. The reasons given are not compelling butthe serve to show how B2B marketing risen torespondents the challenge. However, due to measurement problems inherentexecutives in dealinghave withnot multiple or with key informants, it is not surprising to find this gap. How does one account for responses from different members of the buying-decision unit when each enters the decision process at a different time and may be sensitive to certain pieces of information and not others? With that in mind, it is still possible to examine the B2B segmentation process and identify certain trends that are likely to impact the future:  

Tighter integration between marketing and sales and specifically segmentation developed for marketing purposes with sales coverage and strategies. As highlighted in this note, most B2B segmentation has historically come from a sales coverage legacy focused on geography, company size/potential, etc. As B2B marketers begin to incorporate some of the more advanced techniques used by their B2C peers, a key priority for companies is to develop fully integrated customer contact strategies across both sales and marketing touches.

 

The movement toward one-to-one marketing51 may place doubt on the continued value of macro-level segmentation variables. However, while segments of one are very real, we do not believe it will always pre-empt macro-variables, but there is a trade-off. One-toone segmentation is very appropriate for MARCOM and is still an important decision that will affect the overall marketing strategy.

50

 L. Selden and G. Colvin, “Will This Customer Sink Your Stock?” Fortune, September 30, 2002.  Bailey et al. (2009).

51

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 

Segmentation may just part of a larger trend of diving deeper on customer insight,  begging the question of the contribution of segmentation as a tool to gain this insight.52  However, we believe it is currently underutilized, underappreciated, and an essential tool to help firms compete. The more ways marketers can understand the customer, the better chance firms have to win in the market. Since segmentation allows marketers to create unique offerings and given how it is currently underutilized, we believe in the years to come it will increase in importance as a tool to gain customer insight and will continue to  be a useful.

 

Practitioners continue to face challenges in implementing segmentation models but lack examples of general best practices and an understanding of how to use segmentation in individual customer interactions.53  Unless this is resolved, the ROI from segmentation efforts will continue to underperform since the returns from such efforts often fall short of expectations.

 

Marketers continue to struggle to successfully implement post hoc (e.g., needs-based) segmentation schemes. This questions the real value of such schemes given their practical limitations. Yet as data collection gets better, since needs-based segmentation is more solutions-focused, it is stillwill important to consider. Therefore, think that a solutionsdriven segmentation base only rise in its salience to thewe B2B marketer. It would appear that needs-based segmentation is a bit like the search for the Holy Grail; however, the failure is in the execution of the study.

 

Predictive segmentation (and propensity modeling systems) represents a new wave of trying to get ahead of customer trends54  and has implications on the process of segmentation, the need for high-quality quantitative data, and on the skills of marketers given the requirements of quantitative analysis. It is here that B2B marketers have lots to learn from their B2C brethren; B2B marketers could incorporate the lifetime value of the customer and other approaches that tap into the future worth of a customer. Also, they need to consider the strategic importance of a segment that does not yet turn a profit; do these segments provide a gateway or serve as an exemplar for other segments that we do make money on?

 

Multidimensional/hybrid segmentation models are becoming more common given the detail they provide about the customer. While this trend may indicate that unidimensional a priori segmentation models are a thing of the past, it may be tempered by the implementation difficulties many firms face. It also supports our notion of more is better; the more we know about the customer, the better that enables us to serve them.

 

There is a trend toward multiple segmentation schemes, and it may help to resolve some of the implementation challenges firms face using a single segmentation scheme for multiple marketing activities. Given the range of applications for which segmentation is

52

 Bailey et al. (2009).  Bailey et al. (2009). 54  Calhoun et al. (2007). 53

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used, we wonder whether there is a hierarchy of segmentation variables such that one master variable exists that allows managers to focus on the critical construct.  

As CRM systems continue to integrate more information from on-line sources, segmentation variables are becoming more complex, as are the metrics and ability to

define the key performance measures.   Overall marketing trends such as the rise in on-line search and increased use of social media will likely have an impact on segmentation, yet the exact impact remains largely speculative. Social media still remains a problem for the B2B marketer; how to use it and the expected benefits are often elusive to the firm.  

As individuals continue to increase their use of mobile devices, the impact on segmentation also remains speculative. That said, it could impact the customer buying center and thus affect segmentation schemes that incorporate how the buying center receives information and makes decisions. Thinking of it more as an opportunity, how can marketers better use the technology to enable the development of strategy?

 

As companies continue to expand internationally, the buying center is likely to continue to increase in about complexity, making it even more imperative to take intoand/or account characteristics the buying center in the process of segmentation in implementation.

Conclusion

Although segmentation is a critical element in the development of a firm’s overall marketing-strategy process, it is underutilized, or when it is, often does not yield the results marketing executives anticipate. In part, the problem is the difficulty in identifying the key decision makers in the buying firm; when they enter the buying process; and what attributes, features, or other characteristics are germane to the buying decision process. Compounding the  problem is the accounting data that typically reflects what the firm makes, not what customers  buy, so performance metrics that might provide a basis for evaluation are hard to come by. This is not to be taken as an excuse but as a reality that must be acknowledged. In addition, marketing executives have not taken full responsibility for their actions and, when evaluating key or high priority segments, they have historically taken an approach that has been less than financially rigorous. Finally, we hope this comprehensive approach to B2B segmentation will help B2B marketers confronting segmentation problems to think more deeply about the challenges they face. By reconfiguring past segmentation research into a logical, step-by-step process, we have attempted to address these problems by clarifying issues and posing viable solutions.

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   1    t    i    b    i    h   x    E

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  e   g   a    d   n   a   e    t   a   r    h    t   w   o   m   r   r   g   i    f   m  a   r    i    F   f   o

  s   c   c   i    i    t    h   i   s   p   r   r   e   e   a    l   g   t   c   o   a   a   r    i    b   a   m   r   e   h   a    V   D  c

  e    l   c   y   c   e    f    i    L

 

This document is authorized for use only in Prof. Dhananjay Bapat's B2B Marketing Term Term V at Indian Institute of Management - Raipur from Oct 2020 t o Apr 2021.

 

   2    9    7    0      M      A    V    U

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This document is authorized for use only in Prof. Dhananjay Bapat's B2B Marketing Term Term V at Indian Institute of Management - Raipur from Oct 2020 t o Apr 2021.

 

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This document is authorized for use only in Prof. Dhananjay Bapat's B2B Marketing Term Term V at Indian Institute of Management - Raipur from Oct 2020 t o Apr 2021.

 

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  s   s   a    l   e    h   n   c   u   n   r   e   s   r  ,   e  ,    h   a   c    d    i   o   s   e   s   s    i   a   n   v    l    h   a   o   a   c   c   h   r   s   e   u   n    d    b   o   r   p   n    i   a    t    f   a   e  ,   o   d    t   m   e   n   e   o   z   s   e   t   s   i   a   s   m   u  ,    h   g   c   e   e   r   s   c   s   f   u   a   o   h  .   r   p   s   c   s   h   o   n    f   g   r   e   u   r   u   s   t   c   o   e   e   p   i    l    t   r   v    f   a    b    h   r    t   o   a   p   e    i   s   d   r    t   e   y    /   a   s   e   c    t   s   v   a   n   c   a   g   e   e   u   e    h   u   s   r   c    d   e   g   q   r   o   e    h   r   g   r    T  a   f   p   u   p

 ,    d   s   n    d   s   a   e   s  ,   n  ,    l   a   e   r   s    b   c   a   e    b   n    i   n   r   e   t   y   e   f   a   r   o   r   e   l    V  a   n   f   e   a   y   o   e   w   r    i    l   o   a   t   p   l   p   d   p    d    d   e   m   n   n   c   n   a   r   a   r   a   a   r   x   r   e    E   B  p   b   b

 ,  ,   r   s   n   e   o   s    i    t   o   u    t   o   t    d    h   m   g   o   o    i   r    l   o   p    h    i   s   r    l   o   u   e   k   e    t   s   i   r    l   e    i   e   p    l   s   v   p   /   n   y   h   u   o   y    l   s   t   c   p   v    t    i   s   a   d   a   y   e   e   n   w   o   s   a   l    R   h

  g

   

  n   e   i    l   n    i    b   a   d   r   a   a   r    V   B

   d   e   s   a    b     r   o    i   v   a    h   e    B

 

This document is authorized for use only in Prof. Dhananjay Bapat's B2B Marketing Term Term V at Indian Institute of Management - Raipur from Oct 2020 t o Apr 2021.

 

   2    9    7    0      M      A    V    U

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   ”    d   e   s   a    b     r   o    i   s   v   e   a   g    h   a    t   e   n    b   e   a    “   v   v   e   o    d   e   b    A   S   a

   )    d   e   u   n    i    t   -   n   o    5   c    (    2   -    1    t    i    b    i    h   x    E

   

 

   S   e   b   a   o

  s   r   g    i   n   o   s   t   w   d    i   o    i   n   a   s    h   d    f    b   e    t    h   a    i   c   s   e   y   a   s   n   r   n   n   e   g   s   i   o   a   n   n   a   e   i   s   v    i   r    ’    t   s   e    i   n   n    i   s   o   r   o   c   c   o   v    i   m   i   e   e    t    i   o    l    t   a   n   c   m   u   d   a   t    l   e   n   o   e   n  .   y    t    b   o   u    k    l   e   s   s   r   s   n   a   t   u    i   n   m  o   m  o   c   i   o   a   n   g   n   t   v   c   i   e   y   s   s   d   s   l    l   s   u   a    i   e   r   i   r   o   a    b   e    h    T  e    f   m   r    d   o   a   h   e   o   b   s   u   f

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  e   y    d   s    t    l    i    t    i   e   m   a      i    k   a   e   r   r   w  n    i   r    h   d   s    i   a    i    f   y    l    t   o   u   e   e   a   e  ,    i    t   a   b    t   s   s   l   s   t    h   e   c   v   a   i   w    i   o   l    t   c   m  p   j   e   w    t    h   o    I   u   r   e   s  .    i   o   n   f   o   o   n   ’   r    d   f   o    f   m   r    h   e   r   s    k   o   s   o   c   o   s   r    /   s   e   p    i   m    i   s   g   c   n    d   t   u   t   o   i   o   r   e   s    h   e   n    i    f   m   n   n    i    f   c   y   y   c    l   o   r   a   i   e   n    d    i  .   e   l   u   d    t   v   f   r   r  ,   n   o    d   o   a   s   o   s   a   n    d    i    i   a    f   e   s   p    t   e   a    t   e    t    t   n    t    i    t   e   r   e   a   s   t   s   l   n   g   n   i   o   g   s   a   e   u   r   s   b   a   e   i   n   e   t   n   m   u   a   m   e   e   p    t   r   o   a   i   e   o   o   r   s   e   m   k   m   i    t    d    k    k    d   r   v   s   m   g   g   o   c   a   o   n   a   n   f   a   e   o   e   n   i   n   o   s   a   s   l   v   m  u    U  m  u   i   c   c   m   h

   ”    d   e   s   a    b     r   o    i   v   a    h   e    b    “   e   v

 ,   s   e   e   e   o   l .  ,  .   e   s    b   s   s   s    b    t   e   m   t   s   r   s   y   a   e   s   r   r   c    l   n   e   n    d    l   c    i    i   o   e   o    l   a   a    i    l   u    i   m    f   r   n   m    h   e   u   l    h   e   r   s   h    f    d    t   e   s   h   s   t  ,    d   s   a    i   c   o   h   s   a   m  m   h   c   e    i   c    t   y   s   u    f   r   e   r   o   e   v   a   o   r   p    d    l   a    i   e   c    t   o   o   c    t   c   e    h   c   r   e   s   y    t   n   e   c   y   u   n   a   n   o    t   o   s   s   r   u   c   e   n    l   e   p  ,    d   s   a   f   p   t   o    h   m  g   r   c   b   u   e   v   i   o   e   F   r    d   r   s   u   e   e   o   e   u    i   g   m   n    i   s   c   s   o   s    f   e   c   o   a   r    d   e   o   o   v   e    d   e   i    i   r   o   e   n   s   e   o   f    k   u   s   h   e   e   n   c   t   m  e  .   a   n   o   r    t   s   e    f   c   e  ,   o    t    h   a   s    /   a   o   a   y   u   t   a   s   e   s    h    h   r  .  ,    f    l   e    h   e   c   s   s   e   s    i    t   u   r   a   c   a   p   n   g   e   w    t   s   r   c   p   u   i   e   t   a   e   r   u   a   n  .   m   s    d    d   e  ,    b    t   r   c    i   n    h   e   s   p   r    f   s   r    h   u   e   y   u   (   o   e   s   f   o   u   t   n    i   n   p   i   e   r   m    d   o   t    l    i    h   a   i   c   h   s   d   o   r   a   o   i   a    F    l    i   r    t   n    t   s   s   e   e    l    d   e    b   o    T   s    i    t ,   m  s  ,   g   e   f  .   a   y   f    h   c   r   w   h   a   m   )    d  .    h   e   u   y   s   v   u   l   u    d   o   l   n   r   a   a   e   g   n    b    )   e   e   p   r   g   e    t   r   e   a   s    b   n   o   i   o   n  , .    0   i   s   p   n   i    h   s   o   t    t   e   r    h   e   r   a    d   s   a   g   s   i   o   w  y   u   y   a   h    t    t   e   i    l   e   y   n    1   e   s   l   m  c   o   n   s   u   r   e  .   u   s    i   r    t   o   v   e    b   n    h   o   o    b   a    h   r    i   u   o    0    i    i    t   n    i    t    i   u   a   e    l    f   a   e    b    h   a   r   r    k    (   c   h   s    h   h    h   a   c   s   t    2    t    l    t    d   e   r    d   w  ,   g    t   p   v   s   e  .   r   c   a    l   a    t   s   e  ,    f   n   e  ,   e    f   n   s   e   e   r   e   r   m  a   m  m  n   a   s   s   s   i   e   e    f   s    i   e   a   o   b   s    l    h   p   e   s   e   e   v   o   w   r    t   a    l   s   s   n    k   o   y   e   r   r   r    t   o    l   u   c   s   g   e   e   l   e   e   a   n   m  e   l ,   m  s   e   i    h   e   a   e   e   u   i   o   i   o   b    f    f   m   t   e   p   s   a   s   o   c   n   c   m  a   g   c   v   s   r    l   s   c  ,   u    f   e    b   s    i   n    t   o   m   o   s    t   u   r   e   n    i   n    t   r   r   r   n    h   g   e   e   i   p   o   s   m   n   c   o   n   n   s   a    i    i    h   e   r   s   p   e    i   a   e   s   c   p   e   e    f    t   n   r   r    i   r   s   r    l   e   s    h   e   a   r   e    t   o   u    f    T    l   p    S   n   f   a   c   t   r    t   n   e   h    f   p  .   e   s   u   d   u   g   h   h   e   t   c   h    (    i   o   d    f   a   t   e   i   s   k   a   i   s    d   c   t   o   i   a   n   i   o    t    t    f    h    l    )    f    l   s   r   n   y   u   n   m   s   c   r    i   n   s    l    h   e   s   s   m    l   s   c    f   n   a   s   u   d   c   l   a   t    d   e   e   u   e   o   t   o   r   a   e   b   u   g    i   m   o   r   o   u    f    d    i   s    i   a   c   r    t    i   c    t   c    t   e   d   s   v   a   p   i   o   s   y   g   t    i   m  m   d   u   y   r   o   u   e   t   r   s   n   n    t    l    f    i   a   t   r   e   t    t   p   m   n   c   a   a   a   n    i   n   r   e    i   u   e    t   c    i   r   a   o   a   r   a    l   m    i     c   e    f   s   r   a   e   i   e   c   r   r   a   c    t   m   m   v   a   o   o   c   u  .   w   p    h   e    l   s   r   u   n   s   r   r   r   e   e   c    t   n   g   s   o   f   a   e   o    i   e   s   r   r    i    d   m   s   e    t   a   o   u   a    B   s   s   m   o   e   e   p   e   w   c   p   o    l   c   r   o   a   r   e   m   t   g   e   e   h   e   e   f   e   f   e   u   r   s   p   h   n   h   h    l    2   c   a   t   r   o   i   r    h   n   a   n   h   n   e    h   n   p    D   C  x   e   p   h   s   f    t   p   i   o   i   s   B  a   v   i   p   m   i   a   T  u   T   t    i    d   i   s   c   t    d   y   n   c   a   n  ,  ,   e   n   e   u   o   s   s    i   a   t   e   q   s   e   h    l   a   r    b   c   r   e   c   i    f   a   r   y    f    i   e    i   u   r   u   p   c   a   g    b   a   e    f   s    V  u   o   p   o   s   t   e   t   e   t    l   s    t   z   c   p   c   u   i    f   u   i   s   d   m    d   a   o   d   o   e   x   r   r   n   e    E   P   n   a   p   b

  s   e    l   a   s   t   s    t    l   c   c   e   e   e   r   r    i   n    i    d   n   a    d    h   n    i    d   n   a   c    d   g   n   s   i   n    l   a    t   e    t   e   n   k   c   e   n   r   a   a    i    h   r    D  c   m

  -   g   y  ,   n   u   n   o    b    i   s   i   y   e    i   r   u   c    b    d   e   e   w   i    d   d   e    f   )   y   n   y    i   n   u   a   g  , .    d    b   e   e   o   e    t   e   g   r  .   m   t   a   a   i   r    t    (    t  ,    h   s   s   n   e   g   s   i   g   g   o   a   a   n   i   n    t    h   r    i    i    t   a   c    k   y   s   r   u   u   a   t   r    B  m   i   s   u   p   o

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  s    l   e   n   n   a    h   c   s   e    l   a    S

  g   n    i    k   a   m     n   s   o   s    i   s   e   c   c   e   o   r    D  p

This document is authorized for use only in Prof. Dhananjay Bapat's B2B Marketing Term Term V at Indian Institute of Management - Raipur from Oct 2020 t o Apr 2021.

 

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 ,   s   s   r    t    i    d    f   e   e   e   e   r   m   n   e   n   t   o   e    d   r   m   e   s   i   e   u   r    b   o    t   e   m   s   c   s   c    i   e   o    t   u    t   e   d   v   c   s   r   y   u   e    d   m   s   b   c   n   n    /    t   a    t   u   c   n  ,   u   d   e   e   s   e   r   r   r    d    i   r   t   u   e   d   s   o   u   e   e   r   u   n   p   d    C   f

   d   e   s   a    b     n   e   o    l    i   a    i    b   a   s   r   c   a   c    V   O

   d   e   s   a    b      d   s   e   e    N

 .   r   e    t    i   r   w   e   s   a   c   y    b    d   e    t   a   e   r    C   :   e   c   r   u   o    S

This document is authorized for use only in Prof. Dhananjay Bapat's B2B Marketing Term Term V at Indian Institute of Management - Raipur from Oct 2020 t o Apr 2021.

 

 

-27-

UVA-M-0792

Exhibit 2 CUSTOMER SEGMENTATION IN BUSINESS-TO-BUSINESS MARKETS

An Example of Segmentation and Outcomes of the Effort1 

 Background  

Firm A was struggling to achieve growth in its core legacy product groups and was facing future declines based on substitution and technology innovation. The company had expanded its offerings from its historic core legacy products to a series of services focused on the small and medium businesses (SMB) space but had not achieved the level of growth and crosssell that it had hoped for. A major challenge for it was that it did not have a market-based approach to segmentation, particularly for these new services that were a significant departure from its legacy products.  Approach 

The firm launched a segmentation initiative that was a combination of a priori and post hoc approaches: o

  An a priori phase began by developing a foundational segmentation construct based on management experience and feedback, market data and trends, and assessments of  product/service readiness. read iness. The result was a series of eight potential segments that would  be validated through a series of market research, both qualitative and quantitative, and statistical modeling.

o

  Research and subsequent analysis validated the major aspects of the foundational construct but revealed important nuances and changes to the initial hypotheses based on direct feedback from customers and prospects.

o

 

The final segments were based on key attitudes and behaviors related to:   Technology sophistication (comfort versus discomfort) d iscomfort)  

Role of marketing in a small business (primary focus/capability versus afterthought)

 

Orientation toward growth (actual or planned growth versus steady state “lifestyle” small businesses) 

1

  This example with disguised numbers was provided by Michael Riordan, executive vice president of MarketBridge.

This document is authorized for use only in Prof. Dhananjay Bapat's B2B Marketing Term Term V at Indian Institute of Management - Raipur from Oct 2020 t o Apr 2021.

 

 

-28-

UVA-M-0792

Exhibit 2 (continued)

o

  Analysis determined clusters of customers with very clear attitudes, perceptions, and  behaviors related to these dimensions that allowed the firm to clearly align  product/service offerings, investments, channels, and ultimately its entire go-to-market approach. Segments were then prioritized for resource allocation and execution based on a combination of three factors:

o

 

Market opportunity and growth potential (how attractive is each segment?)

 

Assessment of core attitudes and behaviors (how well does each segment align with current products and service offerings?)

 

Current company penetration and opportunity for growth (how well is the company currently doing with each segment?)

  Finally, firm A went through a comprehensive “segmentation readiness assessment” to determine how well prepared it was to transition its entire go-to-market strategy and execution to align with this new segmentation. Areas assessed included:  

Systems and tools—database, CRM, call center, and an d other systems

 

Product and service marketing—alignment of these areas with the new GTM approach

 

Integrated channel management—lead routing processes and tools to facilitate engagement with these segments and then proper management of leads

 

Measurement—shift from a product- or service-focused measurement approach to one that also focuses on segment performance

 Results

Firm A successfully implemented the new segmentation model in its entirety and saw immediate improvements in cross-sell/up-sell and overall revenue growth: o

  Growth of 1% to 2% in annual revenue directly attributable to new segmentation (in line with best-in-class implementation results) seen.

o

  Base of business in its core legacy products maintained.

o

  Significant growth in the new products and services that were the core focus of the initiative and foundation for future growth.

This document is authorized for use only in Prof. Dhananjay Bapat's B2B Marketing Term Term V at Indian Institute of Management - Raipur from Oct 2020 t o Apr 2021.