Course: B2B Marketing (MKT 505) Session 9

Segmenting Business Markets And

Estimating Segment Demands

Instructor: Dr. Shaon Sen

Email: [email protected]
What key criteria best define a unique market
segment?

• Measurability

• Accessibility

• Substantiality

• Responsiveness
 1. Measurability

The degree to which information on particular buyer

characteristics exists or can be obtained.
 2. Accessibility

The degree to which the firm can effectively focus its

marketing efforts on chosen segments.
 3. Substantiality

The degree to which the segments are large or profitable

enough to be worth considering for separate market cultivation.
 4. Responsiveness

The degree to which segments respond differently to different

marketing mix elements such as pricing or product features.
 Art of Segmentation

Segmentation involves identifying groups of customers or business

groups that are…

1. Large enough
2. Unique enough
3. Financially independent enough
4. Reachable enough

…to justify a separate marketing strategy.

Segmentation Benefits

 Attunes marketer to unique needs of customer segments

 Focuses product development efforts, develops profitable pricing

strategies and selects appropriate distribution channels

 Provides valuable guidelines to allocate marketing resources

 Marketer’s Dilemma

 Marketing strategists spend too much attention

on “What is..” vs. “What could be…”

 By focusing only on existing markets, strategists

may:
Ignore new markets
Miss signals about emerging new markets
Miss signals about new opportunities

 To spot new opportunities, marketers should focus

on the following three customer groups…
Missed Opportunities – Three Customer Groups

1. Undershot customers –
Existing solutions fail to meet their needs, resulting in:
a. a purchase of new product versions
b. at steady or increasing prices.

2. Over Shot Customers –

Existing solutions are too good, so customer is reluctant to purchase new
version.

3. Non-Consuming Customers –
Customers who lack resources, skills or ability to benefit from existing
solutions.
 Missed Opportunities

 Often, marketers focus too much on Undershot and not enough

on Overshot or Non-Consuming customers.

 Consequently, marketers miss opportunities to:

◦ Recognize new innovations that could motivate Overshot and
Non-Consumers to buy.
◦ Invent new products that could revolutionize industries as we
know it.

Examples:
Computer industry – Mainframes vs. PCs
Printing Industry – Print shops vs. office printers
 Consumer vs. Business Profiling

 Consumer-goods marketers are interested in meaningful profiles of

individuals concerning:
 Demographics
 Lifestyle
 Benefits sought

 Business marketers profile:

 Organization size
 Organizational buyer’s decision styles & buying criteria

 Two broad classifications for commercial markets:

◦ Micro & Macro Segmentation
Business Marketing Segmentation
Geographic

Customer Type
Macro-
segmentation Customer Size

Product Use
Business
Markets
Purchasing Criteria

Purchasing Strategy
Micro-
segmentation Importance
Personal
Characteristics
 Macro-Level Bases

To find viable macro-segments, it is useful to partition buying

organizations into smaller groups based on certain criteria.

Criteria include:

1. Characteristics of the buying organization

2. Product service application
3. Characteristics of purchasing situation
 Segmentation: Value in Use

 Value in use is a product’s economic value to the user relative to

specific alternatives in a particular application

 Value in use can vary from one customer application, or one market
segment to another.
 Purchasing Situation

 Segmentation of purchasing situation has an enormous affect on

marketing strategy.

 New task buy vs. straight rebuy vs. modified rebuy demands different
marketing strategies.

 Because of these variables, marketers are forced to employ a

segmentation approach which allows them to develop effective
strategies that can be applied to commercial markets.
 Types of Buyers

 First-Time Prospects: customers who see a need but have not

purchased

 Novices: First-time purchasers who’ve purchased in the past 3

months

 Sophisticates: Experienced customers ready to buy/rebuy

 Micro-Level Bases

 Once macro-segments are identified, the next step is to

divide each macro-segment into smaller meaningful
micro-segments.

 Often, several micro-segments are buried within macro-

segments.

 To isolate them, marketers need to move to primary

sources of information from:
 Salespeople
 Present Customers
 Recall - Business Marketing
Segmentation Geographic

Customer Type
Macro-
segmentation Customer Size

Product Use
Business
Markets
Purchasing Criteria

Purchasing Strategy
Micro-
segmentation Importance
Personal
Characteristics
 Selected Micro-Level Bases of Segmentation

Developed by Cool Pictures and MultiMedia Presentations Copyright © 2007 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
 Key Criteria

Most business buyers value:

1. Quality
2. Delivery
3. Service
4. Supplier’s Reputation
5. Price (all other things being equal)
 Price vs. Service

 Often there are tradeoffs between buyers with respect

to Price vs. Service

 One study identified four types of buyer segments:

 Programmed buyers
 Relationship buyers
 Transaction buyers
 Bargain hunters
 Types of Buyers

1. Programmed Buyers - Neither price or service sensitive. They

buy routine products according to a purchasing program.

2. Relationship Buyers - Value partnerships and are not super price

sensitive. Product may be moderately important to operation.

3. Transactional Buyers - Price is important but considerations are

made to service, depending upon importance of product.

4. Bargain Hunters - Price is everything but always relative to

importance of product.
 Value Based Strategies

Many customers seek sellers who are able to offer innovative

solutions to help them become more competitive. Marketers
identify these customers as:

1. Innovation-focused customers
2. Customers in fast-growing markets
3. Customers in highly competitive markets
1. Innovation-Focused Customers
 Committed to being the first in the market with new products
and technologies

 Want suppliers who offer innovative solutions or opportunities that

help them attract new customers
2. Customers in Fast-Growing
Markets
 Constantly under pressure from competitors in fast-growth
markets

 Seek suppliers who offer proven performance in technology,

manufacturing, marketing and supply-chain management
3. Customers in Highly Competitive
Markets
 Have mature products in highly competitive markets
 Look for suppliers who offer products/services that speed up
manufacturing and related processes
 Are efficient and effective at keeping overall costs down
 Purchasing Strategies

Micro-segments can be classified according to their purchasing

strategies:

1. Some buyers have several suppliers and give each a healthy

volume of business

2. Some buyers need an assured supply, thus giving most of their

business to a few suppliers
 Structure of the Decision Making Unit

 Whoever makes the buying decisions often dictates how to

market to that customer.

 Would it be the engineers, the purchasing agents, or top

management?
Other Meaningful Micro-Segments

 Importance of purchase – Appropriate when product is applied in

various ways by various customers

 Attitudes toward vendors – Analysis of how various buyer clusters

view alternative sources of supply; often uncovers opportunities

 Organizational Innovativeness – Some organizations innovate more

and thus are more willing to purchase new industrial products

 Personal Characteristics – Although some interesting studies have

shown viability of segmentation based on individual
characteristics, further research is needed to explore its potential
as valid base for micro-segmentation

 New Products – When new products are introduced, marketers

may need to approach new influencers vs. traditional buyers
An Approach to Segmentation of Business Markets
 Choosing Market Segments

 As you can see, there are numerous steps to choosing market

segments.

 We start by analyzing key characteristics of the organization

and of the buying situation (macro-dimensions) to identify,
evaluate and select a meaningful macro-segment.
 Segmentation Model
1. Identify key characteristics (macro-segments) based on
organizational characteristics (e.g.: size)

2. Consider the buying situation in terms of macro-dimensions

(i.e., Where are they in the procurement cycle – new task,
rebuy, modified rebuy?)
Segmentation Model

3. Select set of acceptable macro-segments based on corporate

objectives and resources.

4 Evaluate each segment that possesses distinct needs, is open

to a distinct message and is responsive to your marketing
program.

5. If Step 4 is successful, select macro-segment as the target

market and complete a cost/benefit analysis for marketing to
it.

Is it worthwhile?
 Segmentation Model

A. If a particular macro-segment is not the right market, then do a micro-

segment analysis based on key decision-making characteristics (i.e.,
What is their purchasing strategy? Attitude towards vendors? etc.)

B. Select a new desired micro-segment based on a cost/benefit

analysis.

C. Identify the complete profile of the segment based on macro &

micro-level characteristics.
 Utilizing Segmentation

 Management can utilize segmentation in different ways.

 Companies can categorize their present business customers from:

1. Bad – Good – Great
2. Unprofitable to Profitable

 Segmenting both new prospects and present customers in this manner

can result in a more profitable organization.
 Account-Based-Marketing (ABM)
 ABM is an approach that treats an individual account as a
market.

 Done right, it ensures that key accounts are:

 Fully serviced
 Understood with respect to important issues

 The strategy is to:

 Focus on that single client
 Develop a collaborative relationship
 Work with the client to mutually develop value propositions
that meet the client’s business needs
Implementing a Segmentation Plan

A well-developed segmentation plan will fail unless the following issues

are addressed:

1. How should the sales force be organized?

2. What services will the new segment require?
3. Who will provide the new services?
4. How do we contact the new segment?
5. Can we support the new operation?
6. Will new adaptations be necessary to serve the international
market?
 Segmentation Summary

 Managing the implementation of segmentation is a difficult

task at best. It means the product/service mix needs to be
customized for diverse segments.

 It demands inter-organizational coordination and

cooperation.

 Managing critical points of customer contact is one of a

marketing manager’s fundamental roles.
Estimating Demand
 Estimating demand within selected markets is vital to
marketing management!

 Forecasting demand represents probable sales. It takes

into account:
 Potential business
 Marketing efforts

 Virtually all business decisions are predicated on the

forecast, both formal and informal.
Relationship between Potential Demand
and the Forecast
 Business Plan Prerequisites
 Before anyone can formulate a business
plan, they need to formulate a marketing
plan.

 Before they can formulate a marketing plan,

they need to estimate demand (potential
market for their firm’s product).

 Without a plan, it is very difficult to allocate

scarce resources to segments, products,
territories, etc. effectively or efficiently.

42
Affected Stakeholders

Demand analysis (or lack thereof) affects three broad stakeholder

groups:

1. Engineering Design and Implementation teams

2. Marketing and Commercial Development teams
3. External Stakeholders, including:
a. Investors
b. Government regulators
c. Equipment suppliers
d. Distribution partners
 Commercial Questions?
 Where are the customers?
 Where should sales outlets be located?
 How many are outlets are required to meet target market needs?
 What sales level is expected of each outlet?
 What are expected level of revenues, profits, and cash flow are needed to
support loans and pricing structures?

Without this knowledge, executives cannot develop sound strategies or

effectively allocate resources.
 Application of Demand
 The application of demand rests in the
planning and control of marketing strategy
by market segments.

 Once demand is estimated by segment,

the manager can allocate resources on
the basis of potential sales volume.

 Spending money on promotion has little

benefit if the market opportunity is minimal
or the competition is fierce.
Estimates of Probable Demand
Estimates of probable demand should only be made after a firm
has decided on its marketing strategy.

 Only after a marketing strategy has been developed can

expected sales be forecasted!

 Many firms use the forecast to determine the level of

marketing expenditures.
This is a mistake!

 Marketing strategy determines sales (not vice versa).

Supply Chain Links

 Sales forecasts are critical to a smooth operation throughout

the supply chain.

 Timely forecasts allow supply chain members to effectively

coordinate their efforts and share in the benefits.
 Sales Forecast Data
Sales Forecast Data is used to:
 Distribute inventory within the supply chain
 Manage stock at each level
 Schedule resources at all levels
 Provide material, components and service to a manufacturer
 Accurate forecasts go hand-in-hand with good business
practices throughout the supply chain
 Methods of Forecasting Demand
1. Qualitative
 Executive Judgment
 Sales Force Composite
 Delphi Method
2. Quantitative
 Time Series
 Regression (causal)
3. Collaborative Planning Forecasting and Replenishment
4. Combining Techniques
 Qualitative Method: Executive

Judgment
Executive Judgment:
This method is very popular because it is:

1. Easy to understand
2. Easy to apply

 Executives from various departments (Sales, Marketing,

Accounting, Finance, Procurement) are brought together
and apply their collective knowledge to the forecast.
 Executive Judgment: Benefits
 Executive judgments are often used in conjunction with
quantitative approaches to forecasting
 Tend to be fairly accurate when:
1. Forecasts are made frequently & repetitively
2. The environment is stable
3. The link between decision, action and feedback is short
Executive Judgment: Limitations
 Does not offer systematic analysis of cause & effect relationships
 No formula for estimating derived demand
 New executives may have trouble making a reasonable forecast
 The forecast is only as good as executives’ collective knowledge
and experience
 Difficult to compare against alternative techniques
 Qualitative Method:
Sales Force Composite
 Rationale is that the sales force knows their
customers, markets and competition, thus they
can estimate their market fairly accurately.
 Having the sales force involved in the
forecasting process helps them understand
how the forecast is derived and boosts their
incentives to achieve desired sales levels.
 The composite forecast is attained by getting
input from all their salespeople.
Sales Force Composite: Benefits

• More successful if the dyadic (buyer/seller) relationship is close

• Inexpensive
• Facilitates salespeople to review their account in terms of future sales
• However, few companies rely solely on their sales force estimates
• They are reviewed by top management and are compared to
quantitative methods
 Sales Force Composite: Limitations
Limitations are similar to the executive judgment approach

 Not a systematic analysis of cause & effect

 It’s still only judgment/opinion
 Some salespeople overestimate their
forecast to look good
 Some salespeople underestimate to lower
their quota or increase commissions
 Generally, short term estimates are accurate,
but long-term estimates are lacking
 Qualitative Method:
Delphi Method

1. It starts with a moderator (analyst) who attains a

forecast opinion from a panel of anonymous
experts
2. These estimates (along with reasons) are
passed around to the entire group and new
estimates are evoked.
3. Rounds continue until a consensus is reached.
4. A panel may consist from 6 to 100’s depending
upon the purpose, and numerous rounds are
conducted until a consensus is attained.
 Delphi Method

 It is generally applied to long term forecasting of demand.

 It’s good for new products or for situations that are not well
suited for quantitative analysis.

 Finally, like other qualitative approaches, the Delphi method is

difficult to accurately measure.
 Summary of Qualitative Forecasting Techniques

Typically, qualitative estimates are merged with quantitative ones.

Copyright © 2007 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Quantitative Methods: Time Series

 Time Series uses historical data

 Rationale is that the past patterns will apply to the future
 The analyst needs to understand all possible patterns to
include:
 Trends
 Seasonal patterns
 Cyclical patterns
 Irregular patterns
 Time Series methods are well suited for short range forecasting
Quantitative: Regression or Causal
Analysis

 Uses factors that are identified as affecting

past sales

 Y = a + bX Linear Regression equation

 To be valid, there needs to be a direct link

between X (independent) & Y (dependent)
variables. For example, X cause (housing
starts) should affect future sales (demand) of
Y (new furniture or hardware or wood, etc.)
 Regression Analysis

 Much historical data is needed

 Some will come from accounting data
 Other data can come from both primary and/or secondary sources
such as:
 Project specific surveys (primary), or
 Survey of Current Business (secondary)
 Reports developed by the Dept. of Labor that are especially data related
to employment statistics
 Industry specific research studies
 Census data
 Regression Analysis: Limitations
 Although regression analysis is fairly accurate, there are some
limitations, thus the need for caution:

 Although some variables are highly correlated, they may not have a
genuine cause/effect relationship.
 Again, there is a need for much data, however some data may not be
available.
 Regression analysis uses past data and may not be relevant to rapidly
changing events, thus invalidating past relationships.
Quantitative: Which Method?
 Research suggests that strategists should choose a forecast
method that is based on the market’s “underlying behavior” rather
than on a “time horizon”

 When markets are sensitive to market or environmental changes,

causal methods work best

 When market shows no sensitivity to market or environmental

factors, time series is more accurate
 Using CPFR to Estimate
Demand

 CPFR: Collaborative Planning Forecasting &

Replenishment involves deriving and sharing
information by combining the efforts of many functional
areas within the firm and between channel partners to
estimate demand.

 With respect to the supply side, functional areas include

Sales, Marketing, Production, Logistics and Procurement
will be called upon to discuss their upcoming plans.

 On the demand side, planners will reach out to

customers, distributors and manufacturers to discover
their plans.
 Result of CPFR
Result: Often, the forecast of demand is very accurate!

Partners can map this shared information in a way that:

1. Fits into their organizational needs
2. Points out where plans deviate from their own
3. Allows collaboration that assesses assumptions
which may lead to different estimates

 This iterative process encourages the supply chain to

synchronize activities better while keeping the
enterprise planning process intact.
Combination Approach to Forecasting

• Research suggests that forecasting can be

improved by combining several forecasting
methods.

• Experts suggest that management should use a

composite forecasting model to include both
Qualitative and Quantitative factors.

• Furthermore, rather than searching for a “one

best method”, they should consider the broader
range of factors that affect sales, and integrate
them into a “composite” forecasting approach.
 References &
Acknowledgements

• B2B Marketing, Hutt, Sharma, And, Speh - Text Book And

Slides
• Various online learning resources
• Google Images