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The Importance of B2B Segmentation

The importance of segmentation research

You must target your offers at people who need and are willing to pay for your product or service - setting aside those who do not. Segmentation, the grouping together of customers with common needs, is the key to satisfying those needs profitably.

There are major differences between segmenting in consumer and B2B markets:

Greater complexity in decision-making

Unlike consumer markets, the DMU in businesses is complicated. Industrial purchases may involve many people, each having their own set of priorities. Segmenting a target audience that is multifaceted, complex and ephemeral is challenging.

Greater rationality among buyers

Consumers tend to buy what they want - B2B buyers what they need. Segmenting an audience based on needs is easier than segmenting a consumer audience. However, it is critical to identify the drivers of those needs.

Greater complexity in products

Even the simplest B2B products may have to be integrated into a larger system, needing a qualified purchasing expert.

Less customers

In almost all B2B markets, a small number of customers dominate the sales ledger. Even in the largest companies about 100 customers, or fewer, really make a difference to sales. B2B markets generally have fewer needs-based segments than consumer segments.

 

Greater focus on relationships

Most B2B market segments demand a level of personal service. The supplier must make firm choices, offering relationships only to those who will pay the premium for it. B2b market segmentation research can provide a full understanding of exactly what ‘relationship’ comprises.

Greater focus on the long-term

Purchases expected to be repeated over a long period of time are common in B2B markets. So is service back-up. B2B segments are also less subject to whim. The risk is complacency and paying inadequate attention to the changing needs and characteristics of customers over time.

Less innovation

B2B companies usually innovate only as a response to an innovation that has happened further upstream. They have the luxury of responding to trends rather than predicting or even driving them. They have time to continually re-evaluate their segments and CVPs and respond promptly to the evolving needs of their clients.

Less variance

B2B markets typically have far fewer behavioural or needs-based segments than consumer markets. They tend to be price, quality and brand, service and partnership focused.

How to carry out the segmentation

B2b segmentation can be based on company size, customers strategic to the future of the company, or a transactional typology – these demographic segmentations are sometimes referred to as ‘firmographic’.

A more challenging segmentation is based on behaviour or needs, so a good database is vital. As well as contact details of people involved in the DMU, a mechanism is needed for determining the needs of every company on the database. The common sense answer might be - just ask them. But often a simple question and answer is not enough.

Segmenting with statistics

Statistical techniques like multivariate analysis allow more sophisticated segments to emerge. In a segmentation study, respondents are asked to what extent they agree with a number of statements. These statements are designed to determine the needs and interests of the respondents.

Using factor analysis, statisticians work out which groups of attributes best fit together. Looking through the different statements or attributes that make up these groupings, it is usually possible to see common themes, reducing the large number of attributes to a smaller but representative sub-set. These sub-sets are then given labels such as ‘Price Fighters.’

The groupings are run through further computations using cluster analysis whose algorithms rearrange the data into the partitions that have been specified, determining how neatly the population fits into the different groupings. The statistical approach to a needs-based segmentation has become extremely popular.

Will it work?

Whatever means the segmentation is arrived at, they must pass a four-question test:

  1. Are they truly different in a meaningful way?
  2. Are the segments big enough?
  3. Do companies fall clearly into one of the segments?
  4. Can each company be easily identified as belonging to a specific segment?

Deciding which segments to target

By plotting the different segments, it is possible to determine which are worth targeting and which are not. The two factors influencing this decision are the attractiveness of the segment against the supplier’s competitive position within that segment. In this way, it is possible to clearly identify targets.