Industrial market segmentation is a scheme for categorizing industrial and business customers to guide strategic and tactical decision-making. Government agencies and industry associations use standardized segmentation schemes for statistical surveys. Most businesses create their own segmentation scheme to meet their particular needs. Industrial market segmentation is important in sales and marketing.
Webster describes segmentation variables as “customer characteristics that relate to some important difference in customer response to marketing effort”. (Webster, 2003) He recommends the following three criteria:
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 a 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. 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. 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 principles and models in their attempt to bring some sort of structure.
The goal for every industrial market segmentation scheme is to identify the most importantly significant differences among current and potential customers that will influence their purchase decisions or buying behavior, while keeping the scheme as simple as possible (Occam's Razor). This will allow the industrial marketer to differentiate their prices, programs, or solutions for maximum competitive advantage.
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 additional complications include role of financing, contracting, and complementary products/services.
Approaches
A generic principle
One of the recommended approaches in segmentation is for a company to decide whether it wants to have a limited number of products offered to many segments or many products offered to a limited number of segments. Some people recommend against businesses offering many product lines to many segments, as this can sometimes soften their focus and stretch their resources too thinly. See figure 1.
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 – in 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”.
Examples are Coca-Cola and some of the General Electric businesses. The drawback is that the business would risk losing business as soon as a weakness in its supply chain or in its marketing forces it to withdraw from the market. Coca-Cola's attempt to sell its Dasani bottled water in the UK turned out to be a flop mainly because it tries to position this “purified tap water” alongside mineral water of other brands. The trigger was a contamination scandal reported in the media.
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. However, there are many companies that have dedicated themselves to only one market segment, e.g. Flowserve is a US-based supplier of many different types of pumps, valves, seals and other components – all dedicated to fluid motion and control.
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 (see figure 2).
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 (1974) suggested industrial market segmentation based on broad two-step classifications of macro-segmentation and micro-segmentation. This model is one of 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.
Macro-segmentation centres on the characteristics of the buying organisation [as whole companies or institutions], thus dividing the market by:
Company / organization size: one of the most practical and easily identifiable criterion, 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. Geographic location is equally as 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. SIC code (standard industry classification), 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, non of which have been classified under the SIC. 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 globalisation 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 this criterion. 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”. (Freytag & Clarke, 2001) Benefit segmentation: The product's economic value to the customer (Hutt & Speh, 2001), which is one of the more helpful criterion in some industries. It “recognises that customers buy the same products for different reasons, and place different values on particular product features. (Webster, 1991) 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. Type of institution, (Webster, 2003) e.g. 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.
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 on price but in return are willing to forego service. Purchasing strategies, e.g. global vs. local decision-making structure, decision-making power of purchasing officers vs. engineers or technical specifiers.