Industrial market segmentation is a scheme for categorizing industrial and business customers to guide strategic and tactical decision-making, especially in sales and marketing. While government agencies and industry associations use standardized segmentation schemes for statistical surveys, most businesses create their own segmentation scheme to meet their particular needs.
While similar to consumer market segmentation, segmenting industrial markets is different and more challenging because of greater complexity in buying processes, buying criteria, and the complexity of industrial products and services themselves. Further complications include role of financing, contracting, and complementary products/services.
The goal for every industrial market segmentation scheme is to identify the most significant differences among current and potential customers that will influence their purchase decisions or buying behavior, while keeping the scheme as simple as possible. This will allow the industrial marketer to differentiate their prices, programs or solutions for maximum competitive advantage.
Segmentation Variables:
Webster describes segmentation variables as “customer characteristics that relate to some important difference in customer response to marketing effort”.
He recommends the following three criteria:
1. Measurability, “otherwise the scheme will not be operational” according to Webster. While this would be an absolute ideal, its implementation can be next to impossible in some markets. The first barrier is it often necessitates field research, which is expensive and time-consuming.
Second, it is impossible to get accurate strategic data on a large number of customers. Third, if gathered, the analysis of the data can be daunting task. These barriers lead most companies to use more qualitative and intuitive methods in measuring customer data, and more persuasive methods while selling, hoping to compensate for the gap of accurate data measurement.
2. Substantiality, i.e. “the variable should be relevant to a substantial group of customers”. The challenge here is finding the right size or balance. If the group gets too large, there is a risk of diluting effectiveness; and if the group becomes too small, the company will lose the benefits of economies of scale.
Also, as Webster rightly states, there are often very large customers that provide a large portion of a suppliers business. These single customers are sometimes distinctive enough to justify constituting a segment on their own.
This scenario is often observed in industries which are dominated by a small number of large companies, e.g. aircraft manufacturing, automotive, turbines, printing machines and paper machines.
3. Operational Relevance to Marketing Strategy:
Segmentation should enable a company to offer the suitable operational offering to the chosen segment, e.g. faster delivery service, credit-card payment facility, 24-hour technical service, etc. This can only be applied by companies with sufficient operational resources.
For Example – Just-in-time delivery requires highly efficient and sizeable logistics operations, whereas supply-on-demand would need large inventories, tying down the supplier’s capital. Combining the two within the same company – e.g. for two different segments would stretch the company’s resources.
Nevertheless, academics as well as practitioners use various segmentation principals and models in their attempt to bring some sort of structure.
One of the recommended approaches in segmentation is for a company to decide whether it wants to have a limited number of products offered too many segments or many products offered to a limited number of segments.
Some people recommend against businesses offering many product lines in many segments, as this can sometimes soften their focus and stretch their resources too thinly.
The advantage in attempting the above approach is that although it may not work at all times, it is a force for as much focus as practicable. The one-to-many model ensures about the theory that a business keeps its focus sharp and makes use of economies of scale at the supply end of the chain. It “kills many birds with one stone”.
The many-to-one model also has its benefits and drawbacks. The problem is that a business would stretch its resources too thinly in order to serve just one or a few markets. It can be fatal if the company’s image is ruined in its chosen segment.
Among the above models, the most popular is the many-to-many version. As companies constantly try to balance their risk in different technologies and markets, they are left with no choice but to enter into new markets with existing products or introduce new products into existing markets or even develop new products and launch them into new markets.
The problem with the many-to-many model is that it can stretch a company’s resources too thinly and soften its focus. One reason for the current financial problems of the world’s largest car maker, General Motors, is that it has tried to be everything to everybody, launching model after model with no clear segmenting, targeting or branding strategy.
Two-Stage Market Segmentation (Wind & Cardozo Model):
Yoram Wind and Richard Cardozo suggested industrial market segmentation based on broad two-step classifications of macro-segmentation and micro-segmentation. This model is one the most common methods applied in industrial markets today. It is sometimes extended into more complex models to include multi-step and three- and four-dimensional models.
(A) Macro-Segmentation:
Macro-segmentation centers on the characteristics of the buying organisation as whole companies or institutions, thus dividing the market by:
1. Company / Organization Size:
One of the most practical and easily identifiable criteria, it can also be good rough indicator of the potential business for a company. However, it needs to be combined with other factors to draw a realistic picture.
2. Geographic Location is Equal to Feasible as Company Size:
It tells a company a lot about culture and communication requirements.
For Example – A company would adopt a different bidding strategy with an Asian customer than with an American customer. Geographic location also relates to culture, language and business attitudes.
For Example – Middle Eastern, European, North American, South American and Asian companies will all have different sets of business standards and communication requirements.
3. SIC Code:
Standard Industry Classification (SID) which originated in the US, can be a good indicator for application-based segmentation. However it is based only on relatively standard and basic industries, and product or service classifications such as sheet metal production, springs manufacturing, construction machinery, legal services, cinema’s etc.
Many industries that use a number of different technologies or have innovative products are classified under the ‘other’ category, which does not bring much benefit if these form the customer base. Examples are access control equipment, thermal spray coatings and uninterruptible power supply systems, none of which have been classified under the SIC.
4. Purchasing situation, i.e. new task, modified re-buy or straight re-buy. This is another relatively theoretical and unused criterion in real life. As a result of increased competition and globalization in most established industries, companies tend to find focus in a small number of markets, get to know the market well and establish long-term relationship with customers.
The general belief is – it is cheaper to keep an existing customer than to find a new one. When this happens, the purchase criteria are more based on relationship, trust, technology and overall cost of purchase, which dilutes the importance of that criteria.
5. Decision-Making Stage:
This criterion can only apply to newcomers. In cases of long-term relationship, which is usually the objective of most industrial businesses, the qualified supplier is normally aware of the purchase requirement, i.e. they always get into the bidding process right at the beginning.
Sheth and Sharma are quoted to have suggested “with increasing turbulence in the marketplace, it is clear that firms have to move away from transaction- oriented marketing strategies and move towards relationship-oriented marketing for enhanced performance”.
6. Benefit Segmentation:
The product’s economic value to the customer (Hutt & Speh, 2001), which is one of the more helpful criteria in some industries. It “recognizes that customers buy the same products for different reasons, and place different values on particular product features.”
For Example – The access control industry markets the same products for two different value sets:
Banks, factories and airports install them for security reasons, i.e. to protect their assets against. However, sports stadiums, concert arenas and the London Underground installs similar equipment in order to generate revenue and/or cut costs by eliminating manual ticket-handling.
7. Type of Institution:
Banks would require designer furniture for their customers while government departments would suffice with functional and durable sets. Hospitals would require higher hygiene criteria while buying office equipment than utilities. And airport terminals would need different degrees of access control and security monitoring than shopping centres.
However, type of buying institution and the decision-making stage can only work on paper.
As institutional buyers cut procurement costs, they are forced to reduce the number of suppliers, with whom they develop long-term relationships. This makes the buying institution already a highly experienced one and the suppliers are normally involved at the beginning of the decision making process. This eliminates the need to apply these two items as segmentation criteria.
1. Customers’ business potential assuming supply can be guaranteed and prices are acceptable by a particular segment.
For Example – ‘global accounts’ would buy high quantities and are prepared to sign long-term agreements; ‘key accounts’ medium-sized regional customers that can be the source of 30% of a company’s revenue as long as competitive offering is in place for them; ‘direct accounts’ form many thousands of small companies that buy mainly of price but in return are willing to forego service.
2. Purchasing strategies, e.g. global vs. local decision-making structure, decision-making power of purchasing officers vs. engineers or technical specifies.
3. Supply Chain Position:
A customer’ business model affects where and how they buy. If he pursues a cost leadership strategy, then the company is more likely to be committed to high- volume manufacturing, thus requiring high-volume purchasing.
To the supplier, this means constant price pressure and precise delivery but relatively long-term business security, e.g. in the commodities markets. But if the company follows a differentiation strategy, then it is bound to offer customized products and services to its customers.
This would necessitate specialised high-quality products from the supplier, which are often purchased in low volumes, which mostly eliminates stark price competition, emphasizes on functionality and requires relationship-based marketing mix.
Micro-segmentation on the other hand requires a higher degree of knowledge. While macro- segmentation put the business into broad categories, helping a general product strategy, micro- segmentation is essential for the implementation of the concept. “Micro-segments are homogenous groups of buyers within the macro-segments”.
Macro-segmentation without micro-segmentation cannot provide the expected benefits to the organisation. Micro- segmentation focuses on factors that matter in the daily business; this is where “the rubber hits the road”.
The most common criteria include the characteristics of the decision-making units within each macro-segment:
1. Buying decision criteria (product quality, delivery, technical support, price, supply continuity). “The marketer might divide the market based on supplier profiles that appear to be preferred by decision-makers, e.g. high quality – prompt delivery – premium price vs. standard quality – less-prompt delivery – low price”.
2. Purchasing strategy, which falls into two categories, according to Hutt and Speh – First, there are companies who contact familiar suppliers (some have vendor lists) and place the order with the first supplier that fulfill the buying criteria. These tend to include more OEM’s than public sector buyers.
Second, organisations that consider a larger number of familiar and unfamiliar suppliers, solicit bids, examine all proposals and place the order with the best offer. Experience has shown that considering this criterion as part of the segmentation principles can be highly beneficial, as the supplier can avoid unnecessary costs by, for example not spending time and resources unless officially approved in the buyer’s vendor list.
3. Structure of the decision-making unit can be one of the most effective criteria. Knowing the decision-making process has been shown to make the difference between winning and losing a contract. If this is the case, the supplier can develop a suitable relationship with the person / people that had / have real decision-making power.
For Example – The medical equipment market can be segmented on the basis of the type of institution and the responsibilities of the decision makers, according to Hutt and Speh. A company that sells protective coatings for human implants would adapt a totally different communication strategy for doctors than hip- joint manufacturers.
4. Perceived importance of the product to the customer’s business (e.g. automotive transmission or peripheral equipment, e.g. manufacturing tool)
5. Attitudes towards the Supplier:
Personal characteristics of buyers (age, education, job title and decision style) play a major role in forming the customers purchasing attitude as whole. Is the decision-maker a partner, supporter, neutral, adversarial or an opponent?
Industrial power systems are best “sold” to engineering executive than purchasing managers; industrial coatings are sold almost exclusively to engineers; matrix and raw materials are sold normally to purchasing managers or even via web auctions.