Marketing business to business
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Chapter 4 Segmenting the Business Market and Estimating Segment Demand
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The benefits of and requirements for segmenting the business market
The potential bases for segmenting the business market
A procedure for evaluating and selecting market segments
The role of market segmentation in the development of business marketing strategy
Chapter Outline
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A process for estimating demand in each market segment
Specific techniques to effectively develop a forecast of demand
Chapter Outline (continued)
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Selecting a well-defined group of potentially profitable customers
Developing a distinctive value proposition that meets these customers’ needs better than their competitors
Focusing marketing resources on acquiring, developing, and retaining profitable customers
Key to Successful High-Growth Companies
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Commercial enterprises, institutions, and government
Each sector has many segments
Each segment has unique needs and requires a unique marketing strategy
Business Sectors
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Group of present or potential customers with some common characteristic which is relevant in explaining their response to a supplier’s marketing stimuli
Characteristics and needs of each segment define the direction and focus of the marketing program
Segmentation involves identifying groups of customers that are large and unique enough to justify a separate marketing strategy
Market Segment
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Measurability
Accessibility
Substantiality
Responsiveness
Criteria for Evaluating the Desirability of Potential Market Segments
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Attunes marketer to unique needs of customer segments
Focuses product development efforts
Develops profitable pricing strategies
Selects appropriate distribution channels
Provides valuable guidelines to allocate marketing resources
Market Segmentation Benefits
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Figure 4.1 - Classifying Commercial Enterprises
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Macrosegmentation
Centers on the characteristics of the buying organization and the buying situation
Microsegmentation
Focuses on the characteristics of decision-making units within each macrosegment
Requires a higher degree of market knowledge
Classifications for Commercial Markets
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Identify meaningful macrosegments
Divide the macrosegments into microsegments
Two-Stage Approach to Business Market Segmentation
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Useful to partition the market by size of potential buying organization
Usage rate - Buyers are classified on a continuum ranging from nonuser to heavy user
Structure of the procurement function influences the degree of buyer specialization, criteria emphasized, and composition of the buying center
Macrolevel Bases
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Centralized buyers - Stress on long-term supply availability and the development of a healthy supplier complex
Decentralized buyers - Tend to emphasize short-term cost efficiency
Centralized and Decentralized Buyers
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Specific industrial good can be used in different applications and, as a result, market can be divided by specific use applications
NAICS system and related information sources are valuable for this purpose
Product/Service Application
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Product’s economic value to the user relative to a specific alternative in a particular application
Frequently varies by customer application
Value in Use
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Buying organizations are classified as new-task, straight rebuy, or modified rebuy organizations
Marketing strategy is defined by one of the following
Position of the firm in the procurement decision process
Firm’s location on the buying situation continuum
Purchasing Situation
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Table 4.1 - Selected Macrolevel Bases of Segmentation
| Variables | Illustrative Breakdowns |
| Characteristics of Buying Organizations | |
| Size (the scale of operations of the organization) | Small, medium, large; based on sales or number of employees |
| Geographical location | USA, Asia Pacific, Europe, Middle East, and Africa |
| Usage rate | Nonuser, light user, moderate user, heavy user |
| Structure of procurement | Centralized, decentralized |
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Table 4.1 - Selected Macrolevel Bases of Segmentation (continued)
| Variables | Illustrative Breakdowns |
| Product/Service Application | |
| NAICS category | Varies by product or service |
| End market served | Varies by product or service |
| Value in use | High, low |
| Characteristics of Purchasing Situation | |
| Type of buying situation | New task, modified rebuy, straight rebuy |
| Stage in purchase decision process | Early stages, late stages |
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Table 4.2 - Selected Microlevel Bases of Segmentation
| Variables | Illustrative Breakdowns |
| Key criteria | Quality, delivery, supplier reputation |
| Purchasing strategies | Single source … multiple sources |
| Structure of decision-making unit | Major decision participants (for example, purchasing manager and plant manager) |
| Importance of purchase | High importance … low importance |
| Organizational innovativeness | Innovator … follower |
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Table 4.2 - Selected Microlevel Bases of Segmentation (continued)
| Variables | Illustrative Breakdowns |
| Personal characteristics | |
| Demographics | Age, educational background |
| Decision style | Normative, conservative, mixed mode |
| Risk | Risk taker, risk avoider |
| Confidence | High … low |
| Job responsibility | Purchasing, production, engineering |
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Key Criteria
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Product quality
Prompt and reliable delivery
Technical support
Price
Supply continuity
Supplier profiles
Programmed buyers: Neither price or service sensitive
Relationship buyers: Value partnerships and are not price sensitive
Transactional buyers: Price is important but considerations are made to service, depending upon importance of product
Bargain hunters: Price sensitive but always relative to importance of product
Types of Buyers
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Customer Segments
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Innovation-focused customers
Committed to being the first in the market with new products and technologies
Customers in fast-growing markets
Constantly under pressure from competitors in fast-growth markets
Customers in highly competitive markets
Have mature products in highly competitive markets
Microsegments can be classified according to their purchasing strategies
Some buyers have several suppliers and give each a healthy volume of business
Some buyers need an assured supply, giving most of their business to a few suppliers
Purchasing Strategies
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Importance of purchase
Appropriate when product is applied in various ways by various customers
Organizational innovativeness
Some organizations innovate more and thus are more willing to purchase new industrial products
Other Microsegments
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Personal characteristics
Research is needed on segmentation based on individual characteristics to explore its potential
New products
When new products are introduced, marketers may need to approach new influencers versus traditional buyers
Other Microsegments (continued)
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Approach that treats an individual account as a market
Ensures that marketing and sales are fully focused on a target client’s most important business issues
Work collaboratively to create value propositions
Account-Based Marketing (ABM)
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Estimating demand within selected markets is vital to marketing management
Forecasting demand represents probable sales and takes into account:
Potential business
Level and type of marketing effort demanded
Estimating Demand
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Sales forecasts are critical to a smooth operation throughout the supply chain
Timely forecasts allow supply chain members to effectively coordinate their efforts and share in the benefits
Supply Chain Links
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Used to:
Distribute inventory within the supply chain
Manage stock at each level
Schedule resources at all levels
Provide material, components, and service to a manufacturer
Accurate forecasts go hand-in-hand with good business practices throughout the supply chain
Sales Forecast Data
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Qualitative techniques - Called management judgment or subjective techniques
Rely on informed judgment and rating schemes
Include the executive judgment method, the sales force composite method, and the Delphi method
Quantitative techniques - Called systematic or objective forecasting
Offers time series and regression or causal methodologies
Methods of Forecasting Demand
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Combines and averages top executives’ estimates of future sales
Easy to apply and understand
Limitations
Does not systematically analyze cause-and-effect relationships
New executives may have difficulty making reasonable forecasts as there is no established formula for deriving estimates
Qualitative Method: Executive Judgment
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Difficult to asses the accuracy of the method
Produces accurate forecasts when:
They are made frequently and repetitively
Environment is stable
Linkage between decision, action, and feedback is short
Qualitative Method: Executive Judgment (continued)
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Sales force knows their customers, markets, and competition, and they can estimate the sales volume effectively
Sales force’s involvement in forecasting process helps them understand how the forecast is derived and boosts their incentives to achieve desired sales levels
Composite forecast is attained by combining the sales estimates from all salespeople
Qualitative Method: Sales Force Composite
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Benefits
Ability to draw on sales force knowledge about markets and customers
Executed with relative ease at minimal cost
Limitations
Does not involve systematic analysis of cause and effect
Reliance on informed judgment and opinions
Overestimation of the forecast to look good
Sales Force Composite
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Opinions of a panel of experts on future sales are converted into an informed consensus through a highly structured feedback mechanism
Process involved
Written opinions about the likelihood of some future event are sought
Responses to the first questionnaire are used to produce a second one
Qualitative Method: Delphi Method
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Analyst assembles, clarifies, and consolidates information for dissemination in the succeeding round
Generally applied to long term forecasting of demand
Suitable for new products or for situations that are not well suited for quantitative analysis
Difficult to measure the accuracy of the estimates
Qualitative Method: Delphi Method (continued)
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Uses historical data ordered chronologically to project the trend and growth rate of sales
Past patterns can be applied to the future
Time series of sales may include trends, seasonal, cyclical, and irregular patterns
Well suited for short range forecasting
Quantitative Methods: Time Series
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Identifies factors that have affected past sales and implements them in a mathematical model
Forecast is derived by:
Projecting values for each of the factors in the model
Inserting these values into the regression equation
Solving for expected sales
Reliable for intermediate forecasts
Quantitative: Regression or Causal Analysis
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One individual in the firm is given the responsibility for coordinating the forecasting process with functional managers across the firm
Parties who may influence sales performance will participate directly in the demand estimation process
Results in a very accurate forecast of demand due to the intensive sharing of information
Collaborative Planning Forecasting and Replenishment
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