Market Segmentation in B2B Markets: Challenges (Part 2)

Business-to-business markets are characterized in a number of ways that makes them very different to consumer markets. Fundamental parameters that used in B2B market segmentation presents a greater challenges for B2B marketers to segment the market. Before, focusing on the challenges a summary of the main differences between consumer and business-to-business markets given below:

These differences put B2B marketers in a challenging situation. The challenges of B2B Market segmentation is discussed below with implication for marketers:

1) Complex decision-making unit: For individual household, buying decision process involve usually involves just one person. Even the most complex and expensive of purchases are confined to the small family unit with shared will and mostly from similar socio-cultural background. But in case of B2B purchase, the decision-making unit in businesses is far more complicated. The purchase of a piece of equipment/software/hardware may involve technical experts, purchasing experts, board members, production managers and working level recommendation. Each of these buying unit members have their own set of values, understanding and priorities, which challenges the marketer to put this organization in a particular segment. 

Implication for Marketer: In order to segment an organization that is multifaceted, complex, oblique and ephemeral requires a strategic approach. The marketer need to address what specific parameter is more strong for this particular organization. For example: an organization may strictly follow a set of procurement policy or it may make purchase decision based on key person approval. The both case requires different set of approach and methodology.  In short, who exactly is the target audience and who should we be segmenting?

2) More ‘rational’ Buyer: The B2B buyers are more rational than consumer buyers is perhaps controversial, but we believe true. The Need-Want-Desire-Demand framework of economics play a significant role here. Generally, consumers tend to buy what they want while B2B buyers generally buy what they need.

Implication for Marketer: It perhaps therefore follows that segmenting a business audience based on needs should be easier than segmenting a consumer audience. In business-to-business markets it is critical to identify the drivers of customer needs. These often boil down to relatively simple identifiers such as company size, volume purchased or job function. These identifiers often enable needs and therefore segments to be quite accurately predicted.

3) More complex products: Just as the decision-making unit is often complex in business-to-business markets, so too are b2b products themselves. Even complex consumer purchases such as cars and stereos tend to be chosen on the basis of fairly simple criteria. Conversely, even the simplest of b2b products might have to be integrated into a larger system, making the involvement of a qualified expert necessary. Whereas consumer products are usually standardized, b2b purchases are frequently tailored.

Implication for Marketer: This raises the question as to whether segmentation is possible in such markets – if every customer has complex and completely different needs, it could be argued that we have a separate segment for every single customer. In most business-to-business markets, a small number of key customers are so important that they ‘rise above ‘ the segmentation and are regarded as segments in their own right, with a dedicated account manager. Beneath these key customers, however, lies an array of companies that have similar and modest enough requirements to be grouped into segments.

4) Smaller target audiences: Almost all business-to-business markets exhibit a customer distribution that confirms the Pareto Principle or 80:20 rule. A small number of customers dominate the sales ledger. Nor are we talking thousands and millions of customers. It is not unusual, even in the largest business-to-business companies, to have 100 or fewer customers that really make a difference to sales.

Implication for Marketer: One implication is that b2b markets generally have fewer needs-based segments than consumer segments – the volume of data is such that achieving enough granularity for more than 3 or 4 segments is often impossible.

5) Importance of Personal relationships: A small customer base that buys regularly from the business-to-business supplier is relatively easy to talk to. Sales and technical representatives visit the customers. People are on first-name terms. Personal relationships and trust develop. It is not unusual for a business-to-business supplier to have customers that have been loyal and committed for many years.

Implication for Marketer: There are a number of market segmentation implications here. First, while the degree of relationship focus may vary from one segmentation to another, most segments in most b2b markets demand a level of personal service. This raises an issue at the core of b2b segmentation – everyone may want a personal relationship, but who is willing to pay for it? This is where the supplier must make firm choices, deciding to offer a relationship only to those who will pay the appropriate premium for it. On a practical level, it also means that market research must be conducted to provide a full understanding of exactly what ‘relationship’ comprises. To a premium segment, it may consist of regular face-to-face visits, whilst to a price-conscious segment a quarterly phone call may be adequate.

6) Longer-term buyers: Whilst consumers do buy items such as houses and cars which are long-term purchases, these incidences are relatively rare. Long-term purchases – or at least purchases which are expected to be repeated over a long period of time – are more common in business-to-business markets, where capital machinery, components and continually used consumables are prevalent. In addition, the long-term products and services required by businesses are more likely to require service back-up from the supplier than is the case in consumer markets. A computer network, a new item of machinery, a photocopier or a fleet of vehicles usually require far more extensive after sales service than a house or the single vehicle purchased by a consumer. Businesses’ repeat purchases (machine parts, office consumables, for example) will also require ongoing expertise and services in terms of delivery, implementation/installation advice, etc that are less likely to be demanded by consumers.

Implication for Marketer: In one sense this makes life easier in terms of b2b segmentation. Segments tend to be less subject to whim or rapid change, meaning that once an accurate segmentation has been established, it evolves relatively slowly and is therefore a durable strategic tool. The risk of this, and something which is evident in many industrial companies, is that business-to-business marketers can be complacent and pay inadequate attention to the changing needs and characteristics of customers over time. This can have grave consequences in terms of the profitability of a segment, as customers are faced with out-of-date messages or benefits that they are not paying for.

7) Less drive on innovation: B2B companies that innovate usually do so as a response to an innovation that has happened further upstream. In contrast with FMCG companies, they have the comparative luxury of responding to trends rather than having to predict or even drive them. In other words, B2B companies have the time to continually re-evaluate their segments and CVPs and respond promptly to the evolving needs of their clients.

Implication for Marketer: A more focus and drive on innovation is required to pull the B2B market segment. The marketer may sentimentalize target audience based on adaptability of technology.  

8) Fewer behavioural and needs-based segments: The small number of segments typical to b2b markets is in itself a key distinguishing factor of business-to-business markets. B2B markets typically have far fewer behavioural or needs-based segments than is the case with consumer markets. 

Implication for Marketer: The main reason for the smaller number of segments, however, is simply that a business audience’s behaviour or needs vary less than that of a (less rational) consumer audience. Whims, insecurities, indulgences and so on are far less likely to come to the buyer’s mind when the purchase is for a place of work rather than for oneself or a close family member. And the numerous colleagues that get involved in a B2B buying decision, and the workplace norms established over time, filter out many of the extremes of behaviour that may otherwise manifest themselves if the decision were left to one person with no accountability to others.

Read the First Part of the Article: Market Segmentation in B2B Markets: Fundamentals (Part 1)