Market segmentation is a fundamental concept in identifying profitable business opportunities.  Market segmentation divides markets into subsets of consumers or businesses who share a similar set of needs and wants, evaluating the subset segments, and then implementing strategies to target high value segments. 

Segmentation is widely used in consumer marketing. This becomes very obvious walking down the aisles of your local supermarket seeing product form segmentation such as liquid laundry detergent or powder, special shaving products for African American men, or easy to prepare food products targeted to the working parent.

In sharp contrast is business to business (B2B) where recent research shows limited use of market segmentation and where it is used, little value is received. It may be that segmenting business markets is more complex than consumer markets because business to business marketing is much more than a simplistic approach of finding customers who may be interested in your product.

Historically, B2B was viewed as the segmentation between the seller and buyer using a variety of segmentation bases including demographics, sometimes called firmographics, operating variables, purchasing approaches, situational factors, and buyers’ personal characteristics.  Simply, whoever bought from you was the focus of the segmentation analysis.

Today, B2B marketers recognize there are situations where the company buying your product is not the ultimate user or consumer. So, segmentation is more than just B2B. At times it is B2B2B or even B2B2C (consumer), thus segmentation requires a different approach.

B2B

B2B in its simplest form is when a business sells its products to another business who uses the product themselves.  For example, B2B is selling commercial dishwashers directly to restaurants.  The restaurant market may be segmented by large restaurants or hotels depending on segmentation criteria.  Based on analysis, the commercial dishwasher company decides to focus sales on restaurants with seating capacity of at least 150 people. 

This is not to be confused where a business sells products to business intermediaries who resell the product. When Coca Cola sells soft drinks to Wal-Mart, Coca Cola segments the market on the basis of consumer use of soft drinks and uses the B2B intermediary as a channel of distribution. However, Coca Cola may also segment the carbonated drink market by outlet type, food stores, drug stores, mass merchandisers, small grocery stores, convenience stores, and other outlet types.

B2B2B and B2B2C

But what happens when a business sells its product to a business customer and that customer incorporates the product into its own product for resale to either another business or to consumers? Does the segmentation method change? Do they look at segmentation differently?  Do they attempt to segment the market on the basis of their customer or do they also look at the business segments of their customers?

B2B2B

Several examples can help clarify this. XYZ Company manufactures electric motors. Electric motors have widespread application for use in other companies’ products. They are used as components in elevators, escalators, water pumps, oil industry pumps, even electric motors for aircraft.  XYZ segments the market not on the customer purchasing their product as a component first, but rather on the application of XYZ’s capabilities. They develop segmentation criteria for different industries using pumps taking into consideration their own capabilities and strategy.  Once they determine that the market for elevator motors and aircraft electric motors are growing but oil industry pumps and water pumps are not, they then focus on segmenting the suppliers to these industries.  In essence, the demand for their products is derived from the demand of their customers’ products.

B2B2C

This is also evident in the high technology industry. Chip makers sell to Apple, Lenovo, Compaq, HP, Samsung, and Dell, for use in consumer products such as cell phones, computers, and tablets and now smart televisions. Consumer behavior drives demand for these products.  So, a chip maker must understand their customer’s customer. A chip maker will also sell chips to companies for application for cloud computing such as Dropbox, Amazon, and HP Enterprises.  The sales for the cloud businesses of Dropbox, Amazon, and HP Enterprises are driven in part by consumer demand for cloud storage or cloud applications. Companies in the B2B2C business must develop segmentation skills in the consumer market such as psychographic and behavioral bases for segmentation. Thus, additional segmentation skills are required beyond the B2B segmentation skills for B2B2C companies.

In a recent report to analysts, Intel revealed they are reducing investment spending in software, personal computers, and phones and tablets while investing more in data centers with cloud computing, retail solutions, transportation and automotive, smart homes and buildings, and industrial and energy. These are consumer driven segments. They will then focus on companies who are strong in the growth segments they identified. 

Qualcomm similarly looks at the end user of their customers in deciding product developments, sales, and marketing priorities. They have identified segments where consumers drive demand including technology for the automotive market, smart homes, mobile computing, and wearables.  

Segmenting business markets is no longer is just looking at your company’s customers or potential customers. With the recognition of B2B2B and B2B2C, segmentation is now focusing on the market segments served by the customers to drive investments in product development, sales, and marketing effort.  

Herbert Brotspies, D.B.A., is a Part-Time Participating Faculty in Marketing in the H. Wayne Huizenga College of Business and Entrepreneurship, Nova Southeastern University. He can be reached at brotspie@nova.edu

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Does your company suffer from any of the following marketing deficiencies – fuzzy business mission, unclear objectives, information that is not decision oriented, lack of agreement as to segmentation’s real role in the organization, products/services that reflect corporate desires rather than customer needs, unfocused IMC strategy, and/or failure to attack niche markets and customize offerings?

Over the years, many top B2B marketing executives have asked me how to build and implement a true segmentation-driven culture in their organizations.  Based on my more than 20 years of experience as a professor, researcher, and consultant, here are a few of my thoughts on how to get the segmentation process in high gear.

1. Create a 1-day segmentation training workshop for the marketing group to generate excitement and stimulate project development. This will lead to a set of specific, market-based strategic initiatives and research opportunities. Bayer Diagnostics, Citrix Systems, Motorola and other companies have implemented such a plan. 
2. Begin with 3-5 small, focused and low-cost initiatives to demonstrate success and build enthusiasm. Realize that all segmentation projects may not be a resounding success (good news -- most will be if properly designed and executed). Cordis, a Johnson & Johnson company, benefited from the strategy of hitting many singles rather than going for grand-slam homeruns.
3. Review previous segmentation studies and make sense of the summary reports. Via a meta-analysis methodology, a fresh set of objective eyes can add significant value to good work and extend segmentation reports buried in computer files or file drawers. At one time, Blue Cross Blue Shield of Florida had undertaken 18 segmentation studies with no synthesis, integration or strategic analysis.
4. As Intel learned, segmentation audits with marketing managers, channel members and customers can pinpoint current and potential problems as well as overlooked market opportunities and niches.
5. Successful segmentation means being able to answer these 6 “what” questions -- what do you want to accomplish? (e.g., find new markets, get better customers, upgrade business relationships, align products to customer desires, create a segmentation model/typology, etc.); what methodologies will help you get the necessary information?; what is unique about your segmentation view of the world?; what is your budget?; what is your timeline?; and, what are reasonable expectations for the work?

B.C. Forbes said, “You can drive your business or be driven out of business.” I leave you with 5 thoughts to share with your management team to get them inspired and on-board to invest in segmentation thinking.

• I am convinced that market leadership is dependent upon how successful firms are at defining and selecting markets appropriate to their capabilities, resources and competitive situation.

• Segmentation findings provide a systematic basis for controlled market coverage as opposed to the hit-or-miss, random efforts of mass or unfocused marketing.

• Segmentation-based marketing is the essence of sound business strategy and value creation.

• Segmentation will continue to grow in stature as a fundamental marketing tool and foundation for marketing strategy in business organizations, large and small.

• A more thoughtful approach for market selection can assist marketers design winning target marketing strategies.

Realize that firms in all industry sectors are discovering the power of strategic segmentation as a marketing tool for attracting and retaining customers in fast changing, globally competitive markets. How about you?

*Post reprinted from LinkedIn, May 16, 2015

Image source: www.b2binternational.com, 2016.

 Art Weinstein, Ph.D., Professor of Marketing, Nova Southeastern University and author of Handbook of Market Segmentation, 3rd Edition. Professor Weinstein can be reached at art@nova.edu

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I recently completed a major research project with 70 top-level marketing executives on best practices in market segmentation in 13 high-tech business sectors. The study was  conducted in California, Florida and nationwide. My findings were published in the Academy of Marketing Science and Society for Marketing Advances proceedings, as well as the Journal of Strategic Marketing (JSM) and Journal of Marketing Analytics (JMA).

I began exploring this fascinating B2B marketing arena in 1990 when I did my doctoral dissertation "Market Definition in Industrial High-Tech Markets". A quarter of a century later, I am still learning from the experts in the field and sharing the insights gained with academic, practitioner and student audiences. For example, this work was recently featured in presentations/webinars with organizations such as the Business Marketing Association of Northern California, Direct Marketing Association, Market Research and Intelligence Association of Canada, amongst others.

Here are 10 recent knowledge chunks I gained in this latest round of inquiry:

A.    Segmenting B2B Technology Markets via Psychographics (JSM, 2014)

1.    While psychographics has captured the imagination of consumer marketers, only 22% of B2B companies used psychographics as a segmentation dimension.

2.    The top 5 B2B segmentation dimensions were application, firmographics, geographics, benefits, and value (psychographics was rated 9th).

3.    Those firms that did use psychographics were richly rewarded. It was the most effective segmentation dimension resulting in a 24% increase in business performance.

4.    While only 1 in 5 companies used "formal" psychographics, 3 of 5 (59%) used "informal" analysis - i.e., many years of marketing experience is a good proxy information source for sound decision making. Using formal or informal analysis led to better insights than not using psychographic thinking.

5.    Barry and Weinstein's 3 component, 8 item B2B psychographics model was strongly supported by the respondents (Journal of Marketing Management, 2009).

B.  Target Market Selection in B2B Technology Markets (JMA, 2014)

1.    The 3 most important criteria for target market selection were opportunities in the industry, sustainable differential advantage and profitability.

2.    Market oriented firms were more successful in using technology than production oriented firms.

3.    75% of companies used a differentiation strategy (target 2 or more market segments with 2 or more strategies). 54% of these companies were successful or very successful in their marketing strategy.

4.    Competitive analysis was a strong predictor of target market success accounting for 22% of explained variance.

5.    Firms using creative market selection criteria were more successful than those companies using traditional approaches.

What has been your experience in segmenting and targeting business and technology markets? What are your major challenges in truly understanding your customers and designing winning marketing strategies? What questions do I need to ask marketing executives in follow-up studies?

Art Weinstein, Ph.D., is Chair and Professor of Marketing at NSU. He is an internationally known expert in B2B segmentation who has written four books and dozens of scholarly articles on this subject. He has provided segmentation research, consulting, and training to some of the largest technology companies in the world. Contact him at art@nova.edu to request a copy of articles A or B.

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