The Importance of Segmentation

In this week’s Business Surgery, Gerry Caffrey tells us all about using voice of the customer research for effective B2B strategy formulation.

It is often said that “at the end of the day, all marketing is about segmentation”. This adage reflects the importance of understanding and responding to the differing needs of users of products and services in order that they can be met.

At B2B International, we believe the best b2b market segmentation research gets as close as possible to meeting customers’ needs as this is more likely to resonate with customers and it is much more difficult for a competitor to copy. This philosophy is captured in Figure 1 below:

Figure 1

In most markets, needs correspond to value – if a company really needs something, they will value it and pay for it. Therefore, b2b pricing strategy research and segmentation are very closely linked. Done correctly, segmentation arms organizations with knowledge to deliver customer value on factors that are both relevant and important to them, and executing on this strategy enables the firm to gain competitive advantage, or simply increase margins and profit levels, if that is the goal.

Not surprisingly, however, companies often fail when doing market segmentation. According to a recent article in MRA’s Alert! Magazine:

“Many are doomed from the beginning by the firm pre-selecting the attributes for respondents to score with little or no external input. Furthermore, after extensive data gathering employing various survey instruments, results are scored and compared only to reach the startling conclusion that customers in “segments” as diverse as waste water treatment and metal furniture all ascribe highest value to quality, price and delivery.”

The article, entitled “Using the Voice of the Customer to Develop an Alternative Market Segmentation: More Impactful Business Strategy For B2B Manufacturers”, supports our views by pointing out, as seen in Figure 1, that many industrial firms take the easy approach, sticking with common segmentation approaches such as by vertical industry, geographical region, or sensitivity to price, delivery and quality. There is nothing wrong with these segmentation approaches. However, merely employing these approaches often overlooks current and future customer needs.

We often discover in our client work that overlooked needs typically include unmet needs – needs that are not being met by any competitor, and which the firm can exploit to their advantage.

A sounder approach to traditional segmentation analysis starts with customer ‘voiced’ preferences – data obtained by speaking with the customers themselves in a structured manner, accomplished though in-depth, one-on-one interviews and/or focus groups. These two methods engage customers in discussions seeking to get the respondent to articulate both current and anticipated future needs, probing for higher level strategic needs.

Following the interview process, the list of potential benefit attributes identified as important are then presented to existing/potential customers for ranking in some way. One methodology we employ is the Constant Sum Scale, an ordinal technique in which respondents are given a fixed sum to “spend” (e.g., 20 points or $100) and asked to allocate this sum across a set of factors uncovered during the prior phase of the voice of the customer research. The approach produces a more realistic and very focused set of value drivers which can then be used to support the segmentation analysis.

A useful set of validation criteria, summarized below in Figure 2, is often used to guide our final analysis and recommendations to our clients.

Figure 2

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