Business Marketing Chapter-Four: Segmentation, Targeting and Positioning 2023
Chapter-Four
Segmentation, Targeting and Positioning (STP) In Industrial Marketing
Chapter objectives
✓ Identify general market segmentation strategy
✓ Analyze market strategies for business segmentation
✓ Identify approaches to market segmentation
✓ Discuss product positioning strategy
Chapter Overview
Market segmentation has long been considered among the most fundamental concepts of
marketing. Business market segmentation is the practice of dividing a business market into distinct
groups of buyers with similar requirements and that will respond similarly to a specific set of
marketing actions. The goal of segmentation in an industrial setting is the same as that in a
consumer product environment to divide larger markets into smaller components that are
homogeneous with respect to their response to a market mix. To be successful, the business
marketer must:
▪ Identify, analyze, and evaluate potentially attractive market segments;
▪ Target the segments to serve; and then
▪ Develop & communicate a positioning strategy which differentiates the firm’s offerings from
others.
4.1 General market segmentation strategy
Industrial market segmentation can assist firms in several areas
• Market analysis- developing a better understanding of the total marketplace, including how and
why customers buy.
• Market selection- a rational choice of market segments that best fit the company’s capabilities.
• Marketing management- developing strategies, policies, and programs to meet the needs of
different market segments profitably and to give the company a distinct competitive advantage.
Business-to business firms vary in needs and wants, size, economic activities, procurement
structure, and location.
Marketing segmentation links market needs to an organization’s marketing actions
Take marketing actions
Identify market needs Process of
A marketing program in
Benefits in terms of: Segmenting and targeting
Terms of:
Product features
Markets
Product
Exspense quality
Price
Savings in time and convenience
Place and promotion
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Business Marketing Chapter-Four: Segmentation, Targeting and Positioning 2023
4.2 Market strategies for business segmentation
Business marketing managers must determine what strategy to use for different market segments.
Three alternative market-selection strategies are:
1. Undifferentiated strategy, 2. Differentiated strategy, and 3. Concentrated strategy.
1. Undifferentiated marketing strategy
An undifferentiated marketing strategy uses the concept of “market aggregation”, wherein the total
market is treated as one homogeneous market segment. Marketing management creates a single
marketing mix to serve potential customers within this market. This approach focuses on common
needs among buyers, rather than on how buyers’ needs differ. Consider, for example, the
marketing mix adopted by a business cleaning or business waste removal firms. Undifferentiated
marketing is appropriate due to cost economies, with the narrow product line keeping down
production, inventory, and transportation costs. This particular strategy also lowers the cost of
marketing research and product management. An undifferentiated marketing strategy might be
employed by firms offering a homogenous, staple product, such as gasoline or industrial lubricants,
for which product usage varies little by customer type.
2. Differentiated marketing strategy
A differentiated marketing strategy attempts to distinguish a product from competitive products
offered to the same aggregate market. An example of a firm using a differentiated marketing
strategy is IBM, which offers many hardware and software variations to different segments in the
computer market. By differentiating its product or product line, the firm identifies several potential
target markets. Each of these target markets may be attractive in demand but may differ from one
another substantially in other important aspects (such as size, product application, and technical
expertise). The following costs are likely to be higher when a firm elects to pursue a differentiated
marketing strategy:
1. Product modification costs- modifying a product or product line to serve different segment
requirements usually involves additional research and development, engineering, and/ or
special costs.
2. Production costs- for each product, the longer the production setup time and the smaller the
sales volume, the more expensive it becomes. For a product sold in large volume, however,
the higher cost of setup time can be quite small per unit.
3. Administrative costs- the firm must develop separate marketing plans for different
segments, usually necessitating additional effort in marketing research, forecasting, sales
analysis, promotion planning, and channel management strategy.
4. Inventory cost- managing inventories is more costly generally than managing an inventory
of only one product.
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5. Promotion costs- in trying to reach different market segments with variations of the
promotional mix, each segment may require separate creative advertising planning, sales
strategy, and so forth.
3. Concentrated marketing strategy
A firm using concentrated marketing strategy selects one or a relatively few segments on which to
focus all its marketing effort. Through concentrated marketing, the firm achieves a strong market
position in the segment because of its greater knowledge of the segment’s needs. Furthermore, the
firm enjoys many operating economies through specialization in its production, distribution, and
promotion functions. Concentrated marketing is, however, not without risk. A particular market
segment’s demand can turn downwards, or a competitor may decide to enter the same segment
4.3 Approaches to market segmentation
Fundamental means of segmenting business markets include:
1. Macro/micro segmentation,
2. The nested approach to segmentation,
3. Segmentation for maturing markets, and
4. Segmentation by purchase responsibilities of individuals within organizations.
5. Other approaches to market segmentation
1. Macro/Micro segmentation
Macro segmentation involves dividing the market into subgroups based on over all characteristics
of the prospect organization:
o The size of buying units, Type of industry and Location
Micro segmentation, on the other hand, involves dividing the market into subgroups based on
specific characteristics of the decision-making process and the buying structure within the prospect
organization:
o Buying-center authority, Attitudes towards vendors, and so on
In either case, the business marketer identifies subgroups that share common macro or micro
characteristics and then selects target segments from among these subgroups.
2. Nested approach
Thomas Bonoma and Benson Shapiro have developed a more detailed approach to market
segmentation that they refer to as a nested approach. Their premise is that the distinction between
macro segments noted above leaves out a number of potentially valuable segmentation variables.
In contrast, the nested approach stress segmentation according to the amount of investigation
required to identify and evaluate different criteria. Layers of the nest are arranged according to
ease of assessment of the information, beginning with organization demographics. They will
become increasingly complex criteria, including company variables (operating and purchasing),
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situational factors, and personal characteristics. The nested approach assumes a hierarchical
structure that moves from abroad, general bases for segmentation to very specific bases. As
illustrated, macro layers, or characteristics are outer most, and micro characteristics are innermost.
In other words, more specific customer characteristics are nested inside the broader organizational
basis.
Exhibit: major potential bases for segmenting (nesting)
Emporographics (organizational demographics)
• Industry
General observable • Company size
• location
(Macro)
Operating variables
• Technology
• User-nonuser status
• Customer capabilities (financial)
Purchasing approaches
(Intermediate)
• Organization of DMU
• Purchasing policies
• Purchasing criteria
Situational factors
• Urgency
Specific, subtle (Micro) • Application
• Size of order
Personal characteristics
• Motivation
• Buyer- seller 1 to1
relationship
• Risk perceptions
➢ Emporographics (organizational demographics)
Size of buying unit: The giant companies are given much publicity because they command the
resources. They understand well each other’s practices and constraints. Small firms are often
trendsetters in their activities, and they can thus serve as proving grounds without undue risk
taking.
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Type of industry: SIC (standard industrial classification) code, has received wide acceptance by
both the public and private sectors. Its equivalent at the international level is the SIC (standard
industrial classification) code can compare its sales data with existing statistics.
Geographic location: Knowing the location of actual and potential customers will assist greatly in
sizing up and segmenting markets. Good decisions in this area have a major impact on planning
distribution centers and promotional campaigns. The first step is to pinpoint the resources or
facilities of a given industry.
Combining size, industry, and location: more meaningful in combination. Knowing where clients
are located, to which industries they belong, and how big they can assist the marketing manager
in the segmentation process. Few companies can serve all possible markets.
3. Segmentation for maturing markets
In mature markets, some try to segment on size, industry, or products alone. However, segmenting
on these variables alone, while often done, is rarely sufficient. Customer behavior in terms of trade-
offs between price and service is an important additional criterion. Often, the nested approaches
(and others) do not capture the underlying dynamics of a maturing market. Considerable value can
often be gained by attempting to move toward buying-behavior based segmentation.
Exhibit 4-2 examples of segmentation variables for organization markets
Categories of segmentation Segmentation variables
Types of economic activity • Agriculture, forestry, fisheries
• Mining
• Construction
• Manufacturing
• Transportation
• Communication
• Wholesale trade
• Retail trade
Size of organization • Number of establishments
• Number of employees
• Volume of shipments
• Annual sales
Geographic location • Global regions
• Nations
• National regions
• States
• Counties
• Cities
• Neighbourhoods
• Climate
• Terrain
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• Population density
Product usage • How used
• Usage rate
Structure of the procurement • Centralized
function • Decentralized
• Buyer centre
• Buyer situation
4. Segmentation by purchase responsibilities of individuals within organizations.
Many marketers believe that the use of purchase responsibilities among individuals within
organizations as a basis for segmenting business markets is a valid approach to segmentation.
Knowledge that a firm’s market may be segmented by purchase responsibilities may lead to more
effective deployment of marketing resources. The use of purchase responsibilities to classify
organizations represents an attempt to reduce some of the complexity involved in understanding
the concept of the buying centre, different kinds of organizations may give rise to different kinds
of buying centres, at least insofar as purchase responsibilities within the buying center are
concerned.
5. Other approaches to market segmentation
Many of the variables generally used by the marketer to segment the consumer market also can be
used by the business marketer to segment the organizational market (for example, user status,
degree of customer loyalty, and customer attitude toward the product). To expand upon the
previous discussion of business market segmentation, some of the categories of variables for
segmentation organizational markets are identified in exhibit 4-2 and are discussed in the following
sections.
o Type of economic activity: Industrial Classification System (ICS) is a useful starting place to
segment business-to business firms’ according to primary economic activity.
o Size of organization: Segmentation on the basis of size, using variables such as volume of
shipments, number of employees, market share enjoyed, and so on, may be a useful technique
for business market segmentation.
o Geographic Location: Segmentation on the basis of such as textile manufacturing and
furniture manufacturing are concentrated geographically. Additionally, segmentation is
possible by product usage rate, that is, light, moderate, and heavy use.
o Structure of the procurement function: Market segmentation strategy can not be affected by
the structure of the buying organization such as centralized buying situation and decentralized
buying situation influence a lot.
4.3.1Evaluating potential market segments
Market segmentation reveals the potential market opportunity faced by firms and what would appear
to be the most attractive markets the business firm can serve. Before target markets can be chosen,
however, the marketing manager has to decide which segments will provide the best return, given
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limited resources. The two useful tools in evaluating the overall evaluation of potential segments
are:
1. Market profitability analysis: A market segment might have desirable size and growth
characteristics, yet still not be attractive from a profitability point of view. Michael porter has
identified five forces i.e.
1) Industry competitors,
2) Potential entrants,
3) Substitutes,
4) Buyers and
5) Suppliers bargaining power that determine the intrinsic long-run attractiveness of a whole
market, or any segment within it.
2. Market competitive analysis: This is accomplished through a competitive analysis, which
answers the number of competitors, their strengths and weakness and their market share?
o The basic criteria: Five criteria must meet for pinpointing a market and its subcategories. The
market and its specific segments should be: Measurable, Substantial, Accessible, Stable and
Compatible.
1. Measurable: specific information about the size and expenditures
and characteristics of any segment can be determined through primary or secondary research.
2. Substantial: large enough to justify a firm’s expenditures of
manpower and capital.
3. Accessible: the segment must be accessible. The firm must be able to reach the segment
through marketing efforts.
4. Differentiable: it is homogeneous within and heterogeneous between.
5. Stable: a supplier can retain old customers and pinpoint new ones.
6. Compatible: shows degree of similarity between sellers and buyers in regard to risk taking,
service standards, and corporate style.
4.4 Product positioning strategy
Business marketers must carve a position or niche for their respective products in the minds of prospective
customers. Product position is the way the product is defined by customers on important attributes, or the
place the product occupies in customers’ mind relative to competing product. Positioning is one of the
central ideas of the marketing disciplines. Positioning is placing a product in that part of the market at
which it will have a favourable reception compared to competing products as a matter of strategy, a
product should be matched with the segment of the market in which it is most likely to succeed. The
product should be positioned so as to stand apart from competitive products, reflecting the firm’s unique
combination of marketing variables that differentiate the product from competitive offerings.
APPROACHES TO POSITIONING
Positioning represents the place that a business product occupies in particular market and is determined
by researching the organizational buyer’s perceptions and preferences for the product in relation to the
competition, There are six possible approaches emphasized by the marketing strategist include
positioning by Technology, Quality, Price, Distribution, Image and Service.
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1. Technology- the high-technology business marketer must ascertain which industries or buying
groups can use the firm’s products and then array the industries in an ordered fashion. High-tech
firms should be able to determine which industries offer the greatest potential; there is a multitude
of possible application for any technology the firm could employ.
2. Quality- although organizational buyers resist paying for unnecessary high quality, generally they
will not compromise quality for lower price. Earlier explorations of the relationship between
profitability and sales volume focused on the experience curve and the relationship between volume
and cost. High product quality can have a positive impact on performance measures, such as market
share, profit, and return on investment.
3. Price- astute business marketer knows that their respective firms’ total costs are (fixed, variable, and
incremental) and will set prices accordingly. By achieving the lowest delivered-cost position relative
to competition (including freight charges and installation expense), the firm can build a strong
position, in that the lowest costs generally provide the highest margins.
4. Distribution- Many business-to-business firms think of distribution as a dilemma or, possible, as an
unpleasant problem. Management’s difficulties with distribution should be part of the marketing or
sales organization, the manufacturing organization, or some other internal discipline. A business
firm cans employ efficient and innovative means for distribution positioning and gain a competitive
edge.
5. Image- image positioning emphasizes the importance of creating an exclusive image for product by
establishing a distinctive quality perception of the product’s category that will place it in a class
unique from all other products in the category. It should be noted, though, that image positioning is
vulnerable to losing ground to more specific product-oriented concepts by the competition.
6. Services- service positioning describes an attribute provided by the business market to assist the
ongoing activities of the business buyers. This category can include technical assistance, repair
services, information, delivery, parts availability, and financing, as well as advisory services such as
tax or legal counsel. Clearly, service positioning offers the business marketer an important means of
differentiation.
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