B2B Market Segmentation

Market Segmentation is part of the Strategic Planning Process. It’s the first step in Target Marketing.

There are three stages in Target Marketing:

1. market segmentation – that means identifying distinct segments that are quite similar in wants and needs

“A market segment consists of a large identifiable group within a market with similar wants, purchasing power, geographical location, buying attitudes, or buying habits.”

For example, an auto company may identify four broad segments: car buyers who are primarily seeking transport or high performance or luxury or safety.
2. market targeting – select one or more market segments to enter

3. market positioning – establish and communicate the products’ key distinctive benefits to the market
Source: Kotler, Philip (2000). Marketing Management.New Jersey: Prentice Hall. p 256 f

Segmenting B2B markets is different from segmenting consumer markets.

Godefroid identifies two different levels of segmentation in B2B markets:

1. Macro segmentation: Markets and customers are classified according to organizational criteria of the consumer company.
Segmentation base e.g. field of business, religion, company size

2. Micro segmentation: That means segmentation according to individual characteristics of buyers involved in the purchasing decision.
Segmentation base e.g. Buying centre structure, individual features

Business markets can be segmented with some variables we know from consumer markets:

The major segmentation variables for B2B markets are:

Demographic
1. Industry: Which industry should we serve?
2. Company size: What size of companies should we serve?
3. Location: What geographical areas should we serve?

Operating Variables
1. Technology: what customer technology should we focus on?
2. User or Nonuser status: Should we serve heavy users, medium users, light users, or nonusers?
3. Customer Capabilities: Should we serve customers needing many or few services?

Purchasing Approaches
1. Purchasing organization:Should we serve companies with highly centralized or decentralized purchasing organisations?
2. Power structure: Should we serve companies that are engineering dominatied, financially dominated or so on?
3. Nature of existing relationships: Should we serve companies with which we have strong relationships or simply go after the most desirable companies?
4. General purchase policies: Should we serve companies that prefer leasing? Service contracts? System purchases? Sealed bidding?
5. Purchasing criteria: Should we serve companies that are seeking quality? Service? Price?

Situational Factors
1. Urgency: Should we serve companies that need quick and sudden delivery or service?
2. Specific application: Should we focus on certain applications of our product?
3. Size of orders: Should we focus on large or small orders?

Personal Characteristics
1. Buyer-seller similarity: Should we serve companies whose people and values are similar to ours?
2. Attitudes towards risk: Should we serve risk-taking or risk-avoiding customers?
3. Loyalty: Should we serve companies that show high loyalty to their suppliers?

Source: Adapted from Kotler, Philip (2000). Marketing Management.New Jersey: Prentice Hall.p 272

Example using purchasing criteria: e.g. low prices and services contracts

Benefits B2B companies are seeking value due to their stage in the purchase decision process. First-time prospects require understanding of their business, trust.
Customers at the beginning of their relationship seek hotlines, training, knowledgeable sales representatives.
Established customers want high technical support, speed in maintenance.

Business buyers may also have different channel preferences. While first-time buyers prefer a deal with a company sales person, sophisticated buyers, the established group, conduct most of their business over electronic channels.

Other researchers found four business segments based on the profitability of the segment:
programmed buyers, relationship buyers, transaction buyers and bargain hunters.

Questions

1. Define the term “market segment”
2. Godefroid pursues a sequential segmentation process for B2B markets. Describe the stages.
3. What variables can be used to segment business markets?

Consumers in B2B Markets

For being successful in B2B marketing it’s crucial to understand the structure, organisation and processes of B2B procurement. B2B customers can be classified according to the following criteria: users of products and organisational goals.


User, consumer
The classic customer in B2B markets buys a product for production of other goods or services. Products in this context are investment goods and capital equipment like machinery, computer, office furniture, vehicle fleet but also raw materials and supplies.
User, OEM
Firms buying products to assemble them unchanged into their own products are called user or OEM (Original Equipment Manufacturer) e.g. component suppliers in the auto industry (tyres of Conti etc…). The origin of component can be seen differently sometimes highly important to the costumer (Intel inside …) and to the marketer.
Traders and distributors
These organisations buy products of one or more manufacturers and distribute the products together with own products and services to users.
Engineering and consultancy firms
Their formal position is a consulting one. They create and design the requirement profile for the new facility or application. They are paid by the customer, act independently from suppliers and are eminently respectable.
Types of customers according to company goals

Enterprises – their overall aim is achieving profit
Government authorities – their procurement has to follow budget rules; they have to prefer suppliers from a certain region to secure jobs.
Other organisations – private and public organisations like churches, political parties, environment organisations….behave as government authorities when following budget rules, have a different goal system when privately organised.
Revision questions
Which types of consumers appear in B2B markets?

Business Markets versus Consumer Markets

B2B-Marketing
B2B marketing is different from consumer goods marketingB2B marketing is different from consumer marketing.

B2B marketing is different from consumer marketing.

The most important areas of differences are: market structure, products, buyer behaviour, demand, distribution channels, prices and communication. These differences affect marketing processes in a critical way.

Market structure

B2B markets are more segmented than consumer markets. That means fewer prospects for a specific product or supplier. The customer are often segmented geographically  e.g. steel industry in Ruhrgebiet or banks in Frankfurt/Main sometimes there is only one customer for suppliers e.g. Deutsche Bahn for locomotives or Telekom for local telecommunication systems. Furthermore the number of suppliers of specific products is much smaller than in consumer markets. The structure often is an oligopoly  e.g. in the airplane market exist only a few competent suppliers.

Products

Products offered in B2B markets are technically complicated and require more explanation and information than most products in consumer markets. Costumer expectations concerning technical features are extremely high; often products are especially designed for certain customers. Product development can be carried out by a cooperation of supplier and customer. B2B markets can be characterised by product and service packages. Consulting, implementation and maintenance are playing a significant role. Though there are also products offered in B2B markets and consumer markets. A car can be bought for private purposes or as part of a fleet in a company.

Buyer behaviour

Organisations behave differently from private consumers. The main difference lies in the buying decision. In B2B markets a number of persons are involved, the decisions are made in a more rational way, spontaneous buying decisions don’t exist. Many persons on the buyer’s side are extremely competent because they can heavily influence their organisation. In many cases a customer organisation seeks to win their suppliers as consumers of their own products, intends to close countertrade deals.

Demand

The demand of an organisation is a result of the organisation’s targets; therefore it’s a derived demand that cannot be influenced by the supplier. If a business finds itself in a crisis for its products – e.g. the German car industry – their suppliers have no chance to increase their sales.

Distribution channels

Long distribution channels via wholesalers and retailers are characteristics of consumer markets. The distribution channels in business markets are much shorter. Mostly there is a direct selling from supplier to consumer. If there is an indirect distribution there is hardly more than one distribution tier. Many aspects of B2B market affect the relationship between a producer and a trader.A wholesaler selling its product to organisation has to follow the rules of the B2B-marketing.

Prices and terms of delivery and payment

There is a lack of transparency in B2B markets. The power of customers is a big one, pricing policy is complicated and characterised by a wide range of marketing tool features. Price plays an important role in consumer markets too, but usually only expensive consumer goods – like cars or real estate – are subject to negotiation.

Communication

There are significant differences in the communication sector. Impersonal forms of communication don’t play an important role in B2B markets compared to the dominant role of personal selling carried out by the producer himself or by an employee of the wholesaler.

Distribution channels

The following methods of distribution can be found in B2B markets:

  • Producer of goods or services – direct marketing – business customers
  • Producer of goods or services – indirect distribution – OEM, trader, distributors, direct marketing,  business customers
  • Producer of goods or services – key account marketing, wholesale and retail , even the relationship between producer and trade in the consumer goods sector is characterised by aspects of B2B marketing.

Revision questions

Read the text and answer the following questions:What are the main differences between B2B markets and consumer markets in

  • market structure
  • product
  • buyer behaviour
  • demand
  • distribution channel
  • pricing policy
  • communication?