What is Market Segmentation
Market segmentation, along with positioning, is one of the two strategic components necessary for effective sales and marketing.
Without market segmentation, there is no marketing strategy. The pursuit of any objective without strategy will likely turn into failure. Even when success looks prevalent, it very likely came about at too high of a cost to achieve truly promising results.
That is, after all, the purpose of strategy - to discover the optimal way with which to consistently achieve an objective.
Therefore, consistently and predictably achieving revenue goals requires a well-thought out strategy; and market segmentation is a crucial foundation element of any revenue strategy.
In this article, we will further explore why market segmentation is critical and suggest a practical approach to properly segmenting a B2B market.
Why Market Segmentation Is Critical
Market segmentation, at its core, focuses a company’s sales and marketing efforts. Simply put, it is a statement of decision to pursue a singular important objective and forego other less fundamental pursuits.
Once a company identifies “XYZ” as its optimal market segment, that company commits to marketing and selling to that specific market, and only that market.
That being said, if a customer from a market other than XYZ comes to the company and indicates that they want to buy its products and services, the company will, of course, sell them what they desire.
There exists a very big cost difference between processing an inbound lead and generating a lead through an active outbound marketing and sales campaign. A company should always process an inbound lead, provided that the prospect is willing to bear the full cost. We are saying that a company should carefully select which market it wants to sell, and then commit to optimizing everything in its power towards that chosen market.
The purpose of market segmentation, therefore, is to enable the optimization of all resources around a chosen customer profile so that it can maximize value for the customer and profits for the company, simultaneously.
Why Companies Don’t Segment their Market
Clearly, experienced executives understand this segmentation concept, so why do they hesitate to pick a specific market segment and commit to it?
The hesitation seems to come from the fear that perhaps they would lose business and profits from other areas of the market if they didn’t elect to go after those as well.
However, what ends up occurring is the opposite:
- Either a company must sell a watered-down version of their product to a broad market, losing out to focused competitors who maximize value for the customer, or
- A company has to spend a massive sum of money optimizing its products for a broad category of customers, thereby losing out on maximizing profits.
Either option is a losing proposition – hence the need for strong market segmentation.
Sometimes, executives simply cannot choose among a number of segments that all appear equally attractive. In such a case, it doesn’t really matter much which market segment the company chooses to focus on. What matters is that the executive selects one, and only one, segment and commits to it maniacally.
Assuming we have made the case for market segmentation and why it is critical for high growth, we will now turn our attention to the question of how to segment. There are many books on this subject, and segmentation is one of the oldest topics in marketing, especially in consumer marketing.
However, for B2B market space, the techniques are somewhat different. Below, we offer a simplified version.
The steps are to first segment the market and then segment that space by account. We discuss this in some detail below.
Step 1: B2B Market Segmentation
B2B market segmentation typically consists of three elements: Role, industry, and geography—in that specific order. The chart shows that as a company starts looking at potential customers that are further away from its “sweet spot”, they will look less and less similar, making it significantly more expensive to maximize value for these outlying potential customers.
In B2B, products are sold to solve the problem of a specific business manager (typically called a business driver). This person may or may not also be the decision maker in their respective company.
An example of a Role of a business driver might be “Head of HR,” “Head of Sales,” or “Head of Compliance”. Note that in some companies, this could be a C-level role, in others a VP role, and still others, a director level role. Therefore, it makes more sense to simply refer to it as a “Head of something” for segmentation purposes. Once an actual list is purchased, specific titles may be requested.
Role is the single most important criterion for segmentation, as all features and capabilities of a product/service are targeted towards making that the Role’s headaches go away and their burdens lifted.
While Role might be sufficient, adding industry to segmentation will make it significantly more focused, enabling both the maximization of value for the customer and increasing profits for the company. The reason is that while the heads of HR of the Hospitality industry have many things in common with the heads of HR of the Financial industry, the degree to which the two are regulated are different, thereby requiring more controls in products for more regulated industries.
For example, if we have products that target heads of Compliance, the degree to which an industry is regulated becomes a significant issue in determining how complete a product is for that market.
Some industries are also more concentrated than others. For example, the Pharmaceutical and Oil industries are typically more concentrated than the Financial Services industries.
Concentrated industries tend to be more uniform in size and type, while more fragmented industries have significant variations in size from the smallest to the largest. Therefore, in fragmented industries, there are more niches than in more concentrated ones.
3. Geographic Location
The geographic location of a company is important because the further out the customer is from the provider, the higher the cost. The most obvious cost is that of travel. But there are additional costs that come as a result of distance including differences in time zones, idioms and languages, local customers and laws, and more.
If it is important to meet face to face in order to build rapport, then selling becomes expensive when the customer is further out than the provider. Either the provider has to spend traveling expenses, or has to open and maintain an office local to the customer.
The issue of geography is typically not a problem in concentrated industries since they also tend to be geographically concentrated. However, in fragmented industries, a provider will either have to pick a geopgraphic location, or find an optimal way to sell products and services on a national or international scale.
The first step in market segmentation is to decide whom to sell to, which is a factor of the targeted role (function), what specific industry, and where is the geographic location of potential customers.
In the end, we want to arrive at a statement for our company such as “Hospitality Industry Heads of HR in the DC Metro Area” - this focuses product development, support, marketing, and sales.
Part 2: B2B Account Segmentation
Once we have chosen the specific market segment we want to go after, the next step is to segment all accounts in that market to focus our resources such that our most expensive resources are allocated to the most profitable accounts.
A simple and practical approach is to segment accounts into three categories: Tier 1, Tier 2, and Tier 3. The chart below shows how we would allocate resources to each tier.
|Tier 1||These are the crème de la crème accounts and they typically represent between 5 to 10% of all accounts, but probably would represent 50% or more of all sales potential in that segment.
Winning these accounts enable the provider to say, “Our clients include Hyatt, Sheraton, and Holiday Inn”, names that most of your prospects would immediately recognize.
|Sales Executive Led
Your top sales reps aided by highly experienced Business Development Reps (BDRs) to help them get in.
|Tier 2||These are less well known, perhaps local or regional players that nevertheless are significant sized customers. They consist of 20-25% of your target segment in number, but probably make up 35 to 40% of the sales potential in that market segment.
Winning them brings both sales and profits, but not necessarily name-dropping benefits.
Prospect with experienced Business Development Reps (BDRs) and assign to your sales reps.
|Tier 3||These are the rest of the market. They typically represent 65 to 75% of the market in number but probably would not exceed more than 10-15% of the sales potential in the market.||Marketing Led
Use Marketing to prospect and process only inbound leads.