Market Segmentation in B2B Markets: Fundamentals (Part 1)

Business-to-Business segmentation rarely receives the attention that customer segmentation, receives. The segmentation refers to the division of the target market into discrete groups depending on similar requirements for a service or a product. For B2B market, each segment differs from the other one in terms of oraganization needs, Buying Process, Procurement Policy and the buying center behavior. Selling goods and services to these companies requires segment wise strategy in order to make the best out of B2B marketing as a vendor.

The fundamental marketing approach starts with segmentation of the market population – be it is B2B or B2C. To satisfy the needs of all your customers, you need to understand how their specific needs differ from one another. In B2B markets, there are far fewer behavioural and needs-based segments to work with compared to consumer markets. On average, a b2b study will reveal only 3 or 4 distinct segments.

Source: B2B International

The four most common needs-based segments in B2B markets are listed below:

1. Price-focused segment

Favour a more ‘transactional’ way of doing business, placing less importance on ‘extras’ in order to keep costs down.

2. Quality and brand-focused segment

Seek the best possible product or service and is willing to pay a premium for it.

3. Service-focused segment

Place high importance on customer service, such as after sales care and fast, reliable delivery.

4. Partnership-focused segment

Typically represents a company’s key accounts, this segment places huge importance on trust and reliability with the supplier.

Variables Companies use for Market Segmentation

It is very rare for even two customers to have identical needs to each other. In a perfect world, we would identify those customers that we deem to be profitable, and then treat each one of those individually according to their unique needs. In any market with a sizeable target audience, even this is likely to require more resources than is practical or profitable. 

This creates a ground for the consideration of the difference between marketing and selling. Selling focuses on the product in hand and our pressure to get rid of it, almost regardless of the needs of the customer. It is clear that brutal selling may leave a customer with a product they wish they had never bought and, therefore, they may never return as a customer again. Marketing takes a longer-term view. Marketing, and in particular segmentation, concerns itself with the matching of customers’ needs with suppliers’ needs and capabilities. More time and effort may be required but the customer is more likely to be comfortable with their decision and be loyal. Companies can consider several different variables in their segmentation.

• Behavior
• Profitability / Lifetime Customer Value
• Benefit / Attribute [Conjoint Analysis]
• Use or Application
• Product Class
• Price/Quality Demands
• Competitor

Lifetime Customer Value as a metric can provide companies a measurement of the value of a client to the firm; with research into each segment done by Lifetime Customer Value and the pareto principle (80 20 rule), companies can make a concerted effort to improve profitability. The variables for segmentation will vary by company and industry.

Some considerations for Business-to-Business segmentation research:

1. Avoid focusing too much on the product. Rather companies might consider a segmentation based on perceived benefits by each segment. An example of this is with many software companies that focus only functions, rather than the benefits that customers of many different sizes may perceive.

2. Avoid focusing on company size as a means to meet customer needs. By putting companies in categories by how many employees they have, these segmentation can miss important insights and make smaller companies feel that their needs won’t be met.

3. Business-to-business segmentation needs to be useful to the company. While companies can do vasts amount of research, the segmentation information needs to be relevant and actionable.

4. To create a clear market positioning that can be tested. An example of a positioning statement is: To information systems managers, Microsoft is the brand of software package that provides the most value for the price because of added functionality, service and competitive pricing.

5. Continued commitment to research as customer needs rapidly change.

The fundamentals of marketing are the same fundamentals of segmentation. Know your customers, know how they differ, and have a clear proposition that lights their fire. We will return to these issues but first we will examine the differences between consumer and business-to-business markets, as our challenge is to arrive at a business-to-business segmentation.