How to Segment Industrial Markets

Despite how difficult it is to segment consumer markets, it is much simpler and easier than segmenting industrial markets. often the same industrial products have multiple applications; likewise, several different products can be used in the same application. customers differ a lot and it is difficult to discern which differences are important and which are trivial to develop a marketing strategy.

Little research has been done on industrial market segmentation. None of the ten articles in the August 1978 special issue of Marketing Research magazine, “Market Segmentation Research,” for example, dealt with industry market segmentation more than briefly. Our research indicates that most industry marketers use segmentation as a way to explain results and not as a way to plan.

You are reading: Segment of the trade industry.

In fact, industry segmentation can help companies in several areas:

  • market analysis: better understanding of the total market, including how and why customers buy.
  • selection of key markets: rational choice of market segments that best suit the company’s capabilities.
  • marketing management: the development of strategies, plans and programs to profitably satisfy the needs of different market segments and give the company a clear competitive advantage.

In this article, we integrate and build on previous schemes for segmenting industry markets and offer a new approach that enables not only the simple grouping of customers and prospects, but also the more complex grouping of buying situations, events, and personalities. therefore, it serves as an important new analytical tool.

Consider the dilemma of an industry marketing expert who recently observed: “I can’t see any basis on which to segment my market. we have 15% of the market for our type of plastics manufacturing equipment. there are 11 competitors serving a large and diverse set of customers, but there is no unifying theme for our set of customers or for each other.”

Your frustration is understandable, but you shouldn’t give up, because at least you know that 15% of the market buys a product, and that knowledge, in itself, is a basis for segmentation. segments exist, even when the only apparent basis for differentiation is brand choice.

Other times, a marketer may be bewildered by the plethora of targeting criteria. customer groups and even individual customers within these groups may differ in demographics (including industry and company size), operational differences (production technology is one example), purchasing organization, ” culture” and personal characteristics. Typically, a marketer can group customers, prospects, and buying situations in different ways depending on the variables used to segment the market. the problem is to identify relevant targeting bases.

We have identified five general segmentation criteria (see annex 1), which we have organized as a nested hierarchy, as a set of boxes that fit one inside the other. moving from the outer nest to the inner one, these criteria are: demographics, operational variables, customer buying approaches, situational factors, and personal characteristics of buyers.

Annex 1 shows how the criteria relate to each other as nests. the segmentation criteria of the largest and outer nest are demographics: general and easily observable characteristics about industries and companies; those of the smaller and inner nest are personal characteristics, specific, subtle traits, difficult to assess. the marketer moves from the more general and easily observable targeting characteristics to the more specific and subtle ones. this approach will become clearer as we explain each criterion.

We should note at this point that it may not be necessary or even desirable for all industrial marketers to use all stages of the nested approach for every product. Although it is possible to omit irrelevant criteria, it is important for the marketer to fully understand the approach before deciding on omissions and shortcuts.

demographic data

The outermost nest contains the most general segmentation criteria, demographics. These variables give an external description of the company and are related to the general needs of the clients and the patterns of use. can be determined without visiting the customer and include the customer’s industry, company size, and location.

the industry.

Industry knowledge enables a broad understanding of customer needs and perceptions of buying situations. Some companies, such as those that sell paper, office equipment, business-oriented computers, and financial services, market to a wide range of industries. for these, the industry is an important basis for market segmentation. hospitals, for example, share some computing needs, yet differ markedly as a customer group from retail stores.

Marketers may want to subdivide individual industries. for example, although financial services is in some sense a single industry, commercial banks, insurance companies, brokerage firms, and savings and loan associations differ dramatically. their differences in terms of product and service needs, such as peripherals and specialized terminals, data handling, and software requirements, make a more detailed segmentation scheme necessary to sell computers to the financial services market.

company size.

The fact that large companies justify and require specialized programs affects market segmentation. it may be, for example, that a small supplier of industrial chemicals, after segmenting its potential customers according to company size, chooses not to approach large companies whose volume requirements exceed its own production capacity.

client location.

The third demographic factor, location, is an important variable in decisions related to the deployment and organization of sales staff. A manufacturer of heavy-duty pumps for the petrochemical industry, for example, would want to provide good coverage on the Gulf Coast, where customers are concentrated, and put little effort into New England. The location of the customer is especially important when proximity is a requirement for doing business, such as in the marketing of products with low value per unit of weight or volume (such as corrugated cardboard boxes or prestressed concrete), or in situations where the personal service is essential (as in shop printing).

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As stated, a marketer can easily determine all of these demographic variables. General and industry-oriented directories are useful for developing customer lists in terms of industry, size, and location. government statistics, reports from market research companies, and trade and industry association publications provide a wealth of demographic data.

Many companies base their industry marketing segmentation approach solely on demographic data. but although demographic data is useful and easy to obtain, it does not exhaust the possibilities of segmentation. they are often just a start.

operational variables

The second segmentation nest contains a variety of segmentation criteria called “operational variables”. most of these allow a more accurate identification of existing and potential customers within demographic categories. operating variables are generally stable and include technology, user/non-user status (by product and brand), and customer capabilities (operational, technical, and financial).

company technology.

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A company’s technology, whether in its manufacturing process or its product, goes a long way in determining its purchasing needs. soda ash, for example, can be produced by two methods that require different equipment and capital supplies. Japanese color television production is highly automated and uses a few large integrated circuits. In the United States, on the other hand, the production of color televisions once involved many discrete components, manual assembly, and fine tuning. In Europe, production techniques made use of a hybrid of integrated circuits and discrete components. the technology used affects companies’ requirements for test equipment, tools, and components, and thus helps determine the most appropriate marketing approach for a vendor.

state of use of the product and the brand.

One of the easiest and, in some situations, the only obvious way to segment a market is by product and brand usage. users of a certain product or brand generally have some characteristics in common; At a minimum, they have a common experience with a product or brand.

Manufacturers who replace metal gears with nylon gears in capital goods likely share a perception of frisk, manufacturing process, cost structure, or marketing strategy. They have probably experienced similar sales presentations. having used nylon gears, they share common experiences including, perhaps, similar changes in manufacturing approaches.

A supplier of nylon gears might argue that companies that have already committed to replacing metal gears with nylon gears are better prospects than those that have not yet, since it is often easier to generate demand for them. a new brand than for a new product. but another supplier might reason that manufacturers who have not yet switched to nylon are better prospects because they have not experienced its benefits and have not developed a working relationship with a supplier. a third party vendor could choose to approach both users and non-users with different strategies.

Current customers are a different segment from potential customers using a similar product purchased elsewhere. Current customers are familiar with a company’s product and service, and company managers know something about customer needs and buying approaches. Some companies’ marketing approaches focus on increasing sales volume from existing customers, either through customer growth or gaining a larger share of the customer’s business, rather than increasing sales volume from new customers. In these cases, industrial sales managers often follow a two-step process: They first seek to get an initial order on trial, and then they seek to increase the share of customer purchases. banks are often more committed to increasing the business share of major customers than to generating new accounts.

It is sometimes useful to segment customers not only based on whether they buy from the company or from its competitors, but also, in the latter case, based on the identity of the competitors. This information can be useful in several ways. sellers may find it easier to attract customers from competitors who are weak in certain respects. When Bethlehem Steel opened its state-of-the-art Burns Harbor plant in the Chicago area, for example, it went after customers of a local competitor known for poor quality.

client capabilities.

Marketers can find companies with known operational, technical, or financial strengths and weaknesses as an attractive market. for example, accompanying the operation with tight material inventories would greatly appreciate a supplier with a responsible delivery record. and customers who cannot perform quality control tests on incoming materials may be willing to pay for the supplier’s quality checks. Some raw material suppliers may choose to build a thriving business among less sophisticated companies, for which lower-than-usual average discounts are well worth additional services.

Technically weak customers in the chemical industry have traditionally relied on suppliers for formulation assistance and technical support. some vendors have been astute in identifying customers who need this support and providing it very effectively.

Technical strength can also set customers apart. For many years, Digital Equipment Corporation specialized in selling its minicomputers to customers capable of developing their own software, and Prime Computer sold computer systems to business users who did not need the intensive support and “hands-on” offered by IBM and others. manufacturers. both companies used segmentation for market selection.

Many operating variables are easily investigated. On a quick tour of a soda ash plant, for example, a supplier could identify the type of technology being used. data on financial strength is available, at least partially, from credit rating services. the client’s staff may provide other information, such as the name of current providers; “Reverse engineering” (tearing down or disassembling) a product can provide information about the type and even the producers of the components, as can simply noting the names on delivery trucks entering a potential customer’s facility.

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buying approaches

One of the most neglected but valuable methods of segmenting an industrial market involves consumer buying approaches and company philosophy. Factors in this middle segmentation nest include the formal organization of the buying function, power structures, the nature of buyer-seller relationships, general buying policies, and buying criteria.

organization of the purchasing function.

The organization of the purchasing function determines to some extent the size and functioning of a company’s purchasing unit. a centralized approach can merge individual buying units into a single group, and suppliers with decentralized manufacturing operations may have difficulty meeting centralized buying patterns.1 To meet these different needs, some suppliers handle sales to centralized buyers through through the so-called national accounts programs. and those to companies with a decentralized approach through field-oriented sales forces.

power structures.

these also vary widely between clients. The impact of influential organizational units varies and often affects buying approaches. The powerful financial analysis units of General Motors and Ford may, for example, have made these companies unusually price-oriented in their purchasing decisions. or a company may have a powerful engineering department that strongly influences purchasing; a vendor with strong technical skills would be a good fit for that customer. A provider may find it useful to tailor its marketing program to customer strengths, using one approach for customers with strong engineering operations and another for customers without.

buyer-seller relationships.

A supplier is likely to have stronger ties to some customers than to others. the link can be clearly established. A lawyer, commercial banker, or investment banker, for example, might define an unattractive market segment as all companies that have a competitor’s representative on the board.

general purchase policies.

A financially strong company offering a leasing program may want to identify potential clients who prefer to lease capital equipment or who have meticulous asset management. When AT&T could lease but not sell equipment, this was an important segmentation criteria for it. Customers may prefer to do business with long-established or small independent businesses, or they may have particularly strong affirmative action purchasing programs (minority-owned businesses were attracted to Polaroid’s widely publicized socially conscious program, for instance). or they may prefer to purchase systems rather than individual components.

A potential customer’s approach to the buying process is important. Some buyers require a cost-based agreement from the supplier, particularly auto companies, the us. uu. the government and the three big general merchandise chains: sears, roebuck; montgomery district; and jc penny other buyers negotiate from a market price and some use offers. Bidding is an important method of obtaining government and quasi-government business, but because it emphasizes price, bidding tends to favor suppliers who, perhaps because of a cost advantage, prefer to compete on price. Some vendors may find buyers who choose vendors through offers desirable, while others may avoid them.

purchase criteria.

The power structure, the nature of buyer-seller relationships, and general purchasing policies affect purchasing criteria. Benefit segmentation in the consumer goods market is the process of segmenting a market based on the reasons customers buy. it is, in fact, the most insightful form of consumer goods segmentation because it deals directly with customer needs. In the industrial market, consideration of the criteria used to make purchases and the application of these purchases, which we consider later, approximate the benefit segmentation approach.

situational factors

Until now we have focused on the grouping of client companies. now we consider the role of the purchase situation, even single-line entries on the order form.

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Situational factors resemble operational variables but are temporary and require more detailed knowledge of the customer. they include the urgency of order fulfillment, product application, and order size.

urgency of order fulfillment.

It is worth differentiating between products that will be used in routine replacement or to build a new plant and those for emergency replacement of existing parts. Some companies have found that a degree of urgency is helpful in market selection and in developing a manufacturing- and marketing-centric approach that leads to a “rush shop,” a factory that can supply small, rush orders quickly.

A supplier of large, heavy-duty stainless steel pipe fittings, for example, defined its core market as quick-order replacements. A chemical or paper mill that needs to replace an accessory quickly is often willing to pay a premium price for a vendor’s application engineering, flexible manufacturing capabilities, and installation skills that would be unnecessary with routine replacement parts. .

application of the product.

The requirements for a 5 horsepower motor used in intermittent service in a refinery will be different than a 5 horsepower motor in continuous use. The requirements for an intermittent duty motor will vary depending on whether its reliability is critical to refinery operation or safety. the application of the product can have a great impact on the purchasing process and the purchase criteria and, therefore, on the choice of the supplier.

order size.

Market selection can begin with the individual line entries on the order form. A company with highly automated equipment could segment the market so that it could focus only on items with high unit volumes. a non-automated business, on the other hand, might want only small-quantity, short-run items. ideal for these vendors would be a split order into long-run and short-run items. In many industries, such as paper mills and pipe fittings, distributors split orders this way.

Marketers can differentiate individual orders in terms of product uses and users. the distinction is important; users may search for different providers for the same product under different circumstances. The pipe fitting manufacturer that focused on rush orders is a good example of a marketing approach based on these differences.

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Situational factors can greatly affect purchasing approaches. General Motors, for example, makes a distinction between purchases of products, that is, raw materials or components for a product that is being produced, and purchases that are not products. The urgency of order fulfillment is so powerful that it can change both the purchasing process and the criteria used. a rush replacement is usually purchased based on availability, not price.

The interaction between situational factors and purchase approaches is an example of the permeability of segmentation nests. factors in one nest affect those in other nests. industry criteria, for example, a demographic description of the outer nest, influence but do not determine the application, a situational criteria of the middle nest. nests are a useful mental construct but not a clean framework of independent units because in the complex reality of industrial markets, criteria are interrelated.

The nesting approach cannot be applied like a cookbook, but instead requires careful and intelligent judgment.

personal characteristics of buyers

People, not companies, make purchasing decisions, although the organizational framework in which they work and company policies and needs may limit their options. Traders of industrial goods, like those of consumer products, can segment markets according to the people involved in a purchase in terms of buyer-seller similarity, buyer motivation, individual perceptions, and risk management strategies.

Some buyers are risk-averse, others are risk-averse. The level of risk a buyer is willing to take is related to other personality variables such as personal style, intolerance of ambiguity, and self-confidence. The amount of attention a purchasing agent will pay to cost factors depends not only on the degree of uncertainty about the consequences of the decision, but also on whether the creditor will blame him. risk-averse buyers are not good prospects for new products and concepts. Risk-averse buyers also tend to avoid unproven sellers. Some buyers are meticulous in their purchasing approach: they compare prices, look at multiple suppliers, and then split their order to ensure delivery. others rely on old friends and past relationships and rarely make vendor comparisons.2 Companies can segment a market in terms of these preferences.

Data on personal characteristics is expensive and difficult to collect. It is often worthwhile to develop good formal sales information systems to ensure that salespeople pass on the data they collect to the marketing department for use in developing segmented marketing strategies. A chemical company attributes part of its sales success to the routine collection of data on buyers from its sales information system. such data collection efforts are more justified in the case of clients with high sales potential.

reassemble the nest

Marketers are interested in purchasing decisions that depend on company variables, situational factors, and personal characteristics of buyers. the three outer nests, as shown in annex 2, cover the variables of the company; the fourth inner-middle nest, situational factors; and the most intimate nest, personal characteristics.

Moving from external to internal nests, the segmentation criteria change in terms of visibility, permanence and intimacy. Data in external nests is generally highly visible (even to outsiders), more or less permanent, and requires little intimate knowledge of clients. but situational factors and personal characteristics are less visible, more transient, and require a thorough vendor investigation.

An industrial marketing executive can choose from a wide range of segmentation approaches other than the nested approach. in fact, the myriad of possibilities often have one of four outcomes:

  • no segmentation. “the problem is too big to address.”
  • post-fact segmentation. “our market research shows that we have captured a high share of the distribution segment and a low share of the others; therefore, we must be doing something right for customers in high-engagement segments.”
  • shallow segmentation. “although we know that all banks are different, it is easier to organize marketing plans around banks because we can identify them and tell sellers who to call “. this dangerous outcome gives a false sense of security.
  • obtuse, convoluted and disorganized segmentation. “we have a 300-page report on market segmentation and customer buying patterns, but it contains too much information. so we have decided to focus on insurance companies and hospitals to avoid another two-day market planning meeting.”

The hierarchical structure approach is easy to use. marketers can, in most cases, systematically work from the outer nests to the inner nests. they can walk through the entire set of criteria and identify important factors that might otherwise be overlooked. and they can balance reliance on easily acquired data from external nests and detailed analyzes from internal nests.

We suggest that a marketer start at the outer nest and work inward because the data is more available and the definitions are clearer in the outer nests. on the other hand, the situational and personal variables of the inner nests are usually the most useful. In our experience, managers often neglect situational criteria. In situations where insights and analytics exist, a marketer might decide to start at a middle nest and work inward or, less likely, outward.

After several attempts to fully work through the process, companies will discover which segmentation criteria are likely to generate greater profits than others and which cannot be carefully considered without better data. however, a caveat is necessary. a company should not decide that an approach is not useful because data is missing. the segmentation process requires that assessments of analytical promise and data availability be performed independently. the two steps should not be confused. when the necessary data is collected, managers can weigh segmentation approaches.

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