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A Practical Guide to Market Segmentation, Part 3 of 5

Yesterday we looked at how any market segmentation analysis must take into account the needs of customers. That being the case, identifying those needs through effective market research is key. With that in mind, today we take a closer look at the role of market research in segmentation analysis and how the needs of customers may well be simpler than you think.

Step 5: Use Market Research to Find Out Needs

The first and very obvious problem is that needs are difficult to recognise. Market researchers are able to help in this regard. Certainly it is possible for market researchers to devise questions which ask people what they require from suppliers, though this is not without some difficulties. How do we decide whose needs are to be satisfied? Is it the needs of the company, or the needs of the department that is involved in choosing the supplier, or is it the needs of the individual within the department who is a key decision maker?

All three of these needs must be addressed but there could be conflicts. At a company level, there could be an overriding need to choose suppliers that offer quality products, suppliers that are committed to the market, and suppliers that can be trusted. And yet, at a personal level, the purchasing manager may think he has to drive down prices to demonstrate that he is doing an excellent job. A market research question addressed to the buyer may elicit an answer that leads us to believe that the company is price driven when in fact the company demands quality products with full service.

The decision-making unit in many businesses comprises no less than two or three people. The professional buyers look after the day today procurement of supplies. The same company may also have chemists, engineers or technicians who play an active role in screening products and suppliers before they end up on an approved list. A production manager could have a say in which suppliers are used as the choice could materially affect output levels on his production line.

Another problem in classifying companies according to their needs is that they can change quite quickly. When products are in short supply, deliveries are critical and many business to business markets have a large segment expressing a need for suppliers to deliver full orders, on time, every time. If the same market takes a downturn and frees up the supply of products, delivery may not be the issue that it once was. In a recessionary environment the company purchasing the products may be fighting for its life and be driven by the need to get costs as low as possible. A needs based segmentation would have to be capable of recognising the shift that can take place in a company’s needs if they change or if the personalities involved in the decision-making unit change. If these changes cannot be recognised an offer could be pushed to a group of customers who simply are not interested in it.

These cautionary notes do not mean that needs based segmentations are inappropriate in business to business markets. Quite the opposite. They are the ultimate segmentation if they can be achieved. Indeed, it is healthy for every company to constantly be reviewing its customers’ needs and responding to them. If a company has a mechanism for recognising the needs and making adjustments when they change, this focus on customers and what they want will pay huge dividends. Sales forces will become skilled and practiced at asking customers what they want and ensuring that the right offer is directed at them, so satisfying them and achieving the maximum profit. A needs based segmentation is the best means by which business-to-business companies can change from being product orientated to marketing orientated.

Step 6: Customers’ Needs are Much Simpler than you Think

The starting point of a needs based segmentation is to have a heart searching review of what these needs may be. It is wise to keep the list of possible needs relatively short. Although we like to believe that buying decisions are a sophisticated synthesis of the many attributes in an offer, the reality is that there are usually just one or two factors that drive the choice of which product to buy or supplier to use. This is the action of cognitive misers. People are economical with their mental resources and make decisions based on just one or two criteria rather than a multi-attribute utility decomposition [1] . Some of these criteria could be in the following list

1. Quality products
2. High levels of sales service
3. The excellent reputation of the company
4. Low prices
5. High levels of technical service
6. On time and reliable delivery
7. Ease of doing business with the supplier

The list could be extended and modified according to the market but there will almost certainly be many of the above criteria that look and feel similar. And there should never be more than 10 factors on the list – eight is better.

It is now necessary to find out how important these different criteria are to our customers. We can do this in general conversation but that would make it difficult to analyse the results from hundreds of conversations with customers. Also customers may say that something is important and fail to mention others factors which they take for granted. It is helpful therefore to remind respondents of the different criteria by showing them the list or reading it out.

Some researchers use scales (from 1 to 10) to indicate the importance of the criteria to the customer. The trouble with this approach is that all the factors are seen to be important generating scores of 7, 8, 9, or 10. It is more useful to use a simple tradeoff question in which the respondent is given 20 points and asked to spend these points to indicate what they look for in a supplier. This forced choice is getting closer to how decisions are made for, as has been said, most people have just one or two criteria that are really important.

This entry was posted on Wednesday, January 16th, 2008 at 10:13 am and is filed under Market Research, Segmentation, White Papers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.