1. A report on
INDUSTRIAL MARKET SEGMENTATION
• SUBMITTED TO • SUBMITTED BY
• Prof VIVEK SIR • MOHITE GOKHALE
• CHETAN KANOJIA
• ANKIT VEDA
• ASHISH GHANGORIYA
2. • Introduction: -
• A market segment is commonly defined as "a group of
present or potential customers with some common
characteristics which is relevant in explaining / predicting
their response to a supplier's marketing stimuli “
• In contrast to consumers, industrial customers tend to be
fewer in number and purchase larger quantities. They
evaluate offerings in more detail, and the decision process
usually involves more than one person. These
characteristics apply to organizations such as
manufacturers and service providers, as well as
resellers, governments, and institutions.
3. • Many of the consumer market segmentation variables can
be applied to industrial markets.
• Moreover, companies collaborate among themselves
heavily even in consolidated industries. One eg. is the
automobile industry. There is not one single car
manufacturer in the world that does not collaborate with at
least one other car manufacturer either on drive-train
technology, platform design, assembly, marketing or some
other discipline. This makes it highly challenging for
suppliers to differentiate themselves according to the
needs of any one particular customer or segment. Yet
others propose a totally different method by emphasizing
on supply chain analysis and competitive advantage.
4. • Segmentation Variables for Industrial
products
• Segmentation variables as "customer
characteristics that elate to some important
difference in customer response to marketing
effort" & recommends the following three
criteria:
5. • 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 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.
6. • 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 loose 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 as 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.
7. • 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 eg., 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.
8. • 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 too many
segments or many products offered to a limited
number of segments. Businesses are encouraged not to
offer many product lines to many segments, as this
would dilute their focus and stretch their resources too
much. Yet this happens relatively often in
practice, which hints to the question, to what extent
the recommended models realistic.
9. • The advantage in attempting the above approach is that although it
may nor 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. In "kills many birds with one stone".
• Eg.s: Coca Cola and some of the General Electric businesses. The
drawback is that the business would risk loosing 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 Mineral
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.
10. • Two-Stage Market Segmentation
• 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.
11. • Macro-segmentation centers on the characteristics of the buying
organisation, thus dividing the market by:
• - Company / organisation 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.
• - Geographic location is equally as feasible as company size. It tells
a company a lot about culture and communication requirements.
For eg. A company would adapt a different bidding strategy with an
Asian company than an American customer. Geographic location
also relates to culture, language and business attitudes. For
eg., Middle Eastern, European, North American, South American
and Asian companies will all have different sets of business
standards and communication requirements.
12. • - SIC core (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. Eg.s are access control
equipment, thermal spray coatings and uninterruptible
power supply systems, none of which have been classified
under the SIC.
13. • - Purchasing situation, 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.
14. • - 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. & "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".
15. • - Benefit segmentation: The product's economic value
to the customer, 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 eg. 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
16. • 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 centers. 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.
17. • Customers' business potential assuming supply
can be guaranteed and prices are acceptable by a
particular segment. For eg., '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 ob price but in return
are willing to forego service.
18. • Purchasing strategies, global vs. local decision-making
structure, decision-making power of purchasing officers vs.
engineers or technical specifies.
• - 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 customised 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, emphasises on
functionality and requires relationship-based marketing mix.
19. • 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
• E.g. - Buying decision criteria (product quality, delivery, technical
support, price, and 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".
20. • - 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
fulfils the buying criteria. These tend to include more
OEM's than public sector buyers. Second, organizations
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 eg. not spending time and
resources unless officially approved in the buyer's vendor
list.
21. • 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 has / have real decision-
making power. For eg., 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.
22. • Perceived importance of the product to the customer's business (e.g. automotive
transmission, or peripheral equipment, e.g. manufacturing tool)
• - Attitudes towards the supplier: Personal characteristics of buyers
(age, education, and 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.
• The above criteria can be highly beneficial depending on the type of business.
However, they may be feasible to measure only in high-capital, high-expense
businesses such as corporate banking or aircraft business due to high cost
associated with compiling the desired data. "There are serious concerns in practice
regarding the cost and difficulty of collecting measurements of these micro-
segmentation characteristics and using them".
23. • Perceived importance of the product to the customer's business (e.g.
automotive transmission, or peripheral equipment, e.g. manufacturing
tool)
• - Attitudes towards the supplier: Personal characteristics of buyers
(age, education, and 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.
• The above criteria can be highly beneficial depending on the type of
business. However, they may be feasible to measure only in high-
capital, high-expense businesses such as corporate banking or aircraft
business due to high cost associated with compiling the desired data.
"There are serious concerns in practice regarding the cost and difficulty of
collecting measurements of these micro-segmentation characteristics and
using them".
24. • Nested Approach to Segmentation:
• The application of all the criteria recommended by
Wind and Cardozo and subsequent scholars who
expanded upon their two-stage theory became
increasingly difficult due to the complexity of modern
businesses, Bonoma and Shapiro suggest that the same
/ similar criteria be applied in multi-process manner to
allow flexibility to marketers in selecting or avoiding
the criteria as suited to their businesses. "They
proposed the use of the following five general
segmentation criteria which they arranged in a nester
hierarchy:
25. • Demographics: industry, company size, customer location
• Operating variables: company technology, product/brand use
status, customer capabilities
• Purchasing approaches: purchasing function, power
structure, buyer-seller relationships, purchasing
policies, purchasing criteria
• Situational factors: urgency of order, product application, size
of order.
26. • Buyers' personal characteristics:
• The idea was that the marketers would move from the
outer nest toward the inner, using as many nests as
necessary". As a result this model has become one of
the most adapted in the market, rivaling the Wind &
Cardozo model head-on. One of the problems with the
nested approach "is that there is no clear-cut
distinction between purchasing approaches, situational
factors and demographics. Bonoma and Shapiro are
aware of these overlaps and argue that the nested
approach is intended to be used flexibly with a good
deal of managerial judgment.
27. • Bottom-up Approach
• According to Kotler, where masses of customer data are
studies and similarities searched to make up segments that
have similar needs, i.e. assessing the customer base
quantitatively and grouping them – i.e. building up – the
segments based on similarities in purchasing attitude.
• When starting the segmentation process, instead of seeing
customers as identical, the build-up approach begins by
viewing customer as different and then proceeds to identify
possible similarities between them. In a turbulence market
[pretty much all markets today], using a build-up approach
is more suitable than a breakdown approach".
28. • Targeting and Positioning
• "There is a critical difference in emphasis between target market
and audience. The term audience is probably most useful in
marketing communication". (Croft, 1999) Indeed, people to whom a
product or service is sold are target markets. Therefore, marketing
operations include the entire go-to-market processes such as
product lifecycle management, pricing, distribution, sales and after
sales service as well as communication.
• Target markets can include end user companies, procurement
managers, company bosses, contracting companies and external
sales agents. Audiences, however, can include individuals that have
influence over purchasing decision, but may not necessarily buy a
product themselves, e.g. design engineers, architects, project
managers and operations managers, plus those in target markets.
29. • Competition
• Attempting to include two vast topics such as India and China into this
discussion is naive. However, one element that should never be left out of
sight while segmenting, targeting and positioning, is competition. This is a
key concern that may impact the success of the company, especially as
one of segmentation's core objectives is differentiation.
• Apart from the expected competition within a company's known
geographic reach, competition is seriously taking shape from China and
India, both of whom have been predicted to become global economic
superpowers within a few years. The bulk of the threat is facing Europe
and North America. "Italy is the sick man of Europe–its economy has
shrunk 4% since 1999. Along with Germany and France, the nation has
been struggling with weak consumer spending, waning productivity and
rising government deficit. Italy's economic structure is almost perfectly
shaped for an attack by China. "The threat is not only relevant to Italy, but
the whole of Europe, including the UK,
30. • The second major threat comes from India. Where China is turning
into the world's 'manufacturing house', India is focusing on IT
outsourcing, software development, business process off shoring
(BPO), banking, insurance and legal services. "Exports from India's
IT industry and from BPO are on track to reach $60 billion a year by
2010, representing a 28% annual growth rate. India currently
accounts for 65% of the world's offshore IT services and 46% of its
BPO."
• As modern industries are driven by mechanical and electronics
technologies, and both of these are being dominated by either
China or India, the balance of economic power is bound to shift
from West to East. This will impact the way companies do business.
Those that can offer low-cost, efficient solutions sourced in either
of those countries are likely to survive and prosper provided they
take advantage of the modern communication skills to market
themselves appropriately.
