He who pays the piper can call the tune.
John Ray (1670)
As its name implies, the Tuba Exchange is a North Carolina-based clearinghouse for new and fine used tubas, euphoniums, sousa-phones, and accessories. Unlike its major competitors, this firm sells no other musical instruments. Target markets for Tuba Exchange include marching bands, music students, professional musicians, and symphonies. And this niche marketing strategy is effectiveāsales are growing 20 percent annually.1
In fast-changing and increasingly hypercompetitive markets, successful twenty-first-century companies have to be superb segmenters to survive and thrive. Having superior quality goods or services are no longer sufficient. Companies must satisfy discriminating customers who can choose from a multitude of product offerings in a global marketplace. Mass marketing is now a distant memory; todayās marketers must aggressively attack target markets and niches that exhibit unique needs and wants. Segmentation-based marketing is the essence of sound business strategy and value creation. For example, the Farm Journal responds to advertiser demand and customer desires. The publisher of Farm Journal Media, Steve Custer (personal communication), notes that
Farm Journal has a circulation of more than a half a million. Using a database that identifies all its readers by crops, acreage, livestock raised, geography and even farm practices, it often publishes well over 1,000 different versions of an issue based on readersā interests.
Segmentation marketing means knowing your customers, giving them exactly what they want or may want, building strong relationships with channel affiliates and comarketing partners, and communicating via highly targeted promotional media, e.g., event sponsorships, interactive Web sites, personalized e-mails, trade magazines/shows, etc. Emulating Marriott Hotelās multibrand model, Air Canada recently introduced four subbranded airlines. Air Canada Jazz is the consolidation of several regional airlines: AirBC, Canadian Regional Airlines, Air Ontario, and Air Nova. Air Canada Jetz is a premium charter service for corporate clients and professional sports teams. Tango is a no-frills domestic, long-haul air service (extras are available for a price). Zip flies low fare, short-haul routes in Western Canada.2
Segmentation: The Key to Marketing Success
A marketing orientation is based on a customer-driven focus. During the past two decades we have seen the rise of market segmentation in business markets. Introduced into the marketing community by the late Wendell Smith in 1956, a half a century later, segmentation has evolved from an academic concept into a viable āreal-worldā planning strategy.3 Everyone has jumped on the market segmentation bandwagon, from global giants to mom-and-pop small businesses. In addition to business and high-tech companies, service organizations, the professions (accounting, legal, etc.), and even nonprofit institutions have embraced the benefits of building marketing muscle.
The Segmentation Imperative
Segmentation is the process of partitioning markets into groups of potential customers with similar needs and/or characteristics who are likely to exhibit similar purchase behavior. It has emerged as a key marketing planning tool and the foundation for effective strategy formulation in American and international companies. The objective of segmentation research is to analyze markets, find niche opportunities, and capitalize on a superior competitive position. This can be accomplished by selecting one or more groups of users as targets for marketing activity and developing unique marketing programs to reach these prime prospects (market segments).
From a practical perspective, segmentation efforts must be managed to be successful. It is impossible to pursue every market opportunity so marketers must make strategic choices. First, recognize that everyone is not a prospect for every good or service offered. Remember when IBM dominated the personal computer business? Today, Dell is in command but must carefully watch strategic moves by IBM, Hewlett-Packard, and the Japanese (Sony, Toshiba, etc.), among others.
Second, a firmās product mix has to be controlled for maximum efficiency. Business costs have escalated in all areas (e.g., personnel salaries and benefits, technology and equipment, real estate, plant, materials, and insurance). Ideally, just-in-time production runs should reflect customersā needs and wants for optimal resource utilization. Hence, the marketing challenge is to efficiently match your products to customersā desires and stay one step ahead of your competitors.
Segmentation in Action
Marketing professionals recognize that segmentation is both a science and an art. One can learn a lot about market segmentation analysis through the guidelines and techniques discussed in this book and other valuable published references (as a starting point, see the chapter notes). Also, it is a marketing discipline that can be acquired and enhanced through experience, executive training, observation, and strategic thinking.
There are many alternative methods for segmenting business markets. Many of these approaches are derived from the consumer behavior field. Decision making is impacted by rational and emotional factors (e.g., demographics, geographics, benefits, motivations/needs, purchasing habits, etc.).
Let us assume that a major oil company wants to segment its market. Business marketers can research its customersā customers. A territorial sales analysis of its dealers is a logical starting point. Consumer demographic and socioeconomic measures (age, gender, income, etc.) could be studied. Product consumption (types of unleaded or diesel grade gasoline) can be evaluated. In addition, credit card utilization, brand loyalty/switching patterns, and price sensitivity issues may be insightful for segmenting this market.
As you can see, the options are many; therefore, further research is necessary to determine the best approach(es). The following short examples illustrate six common business segmentation dimensions in action:
- Geographic: A medical instrumentation firm can obtain data from American Hospital Association directories to target hospitals by region and bed size. This approach was valuable for defining markets for a new blood gas analyzer.
- Business demographics: A graphic supplies distributor can easily target advertising agencies by using business demographic variables or firmographics. Using Advertising Age and Adweek references, the company can find information about the size of prospects (annual billings), media specialization, services offered, major accounts, key personnel, etc.
- Adopter categories: In research I conducted for Cordis Corporation, part of Johnson & Johnson, we identified potential physician adopter segments (progressives, black-box devotees, and show-meās) and nonadopter groups (nonbelievers, no perceived need, and techies) for a proposed medical technology (see Chapter 7). This segmentation technique can be most informative for new product concepts using exploratory studies and qualitative procedures.
- Benefits: What is a firm seeking when buying office copying machines? Is it price, service, special features (enlargement or reduction capabilities, color availability, high volume, speed, etc.), and/or reputation of the seller (Xerox or Brand X)? A benefit to one customer (enhanced features) may be a drawback to another (higher price).
- Product usage: Business markets can be segmented according to consumption levels of various user groups (heavy, medium, light). In addition, the ābestā customers can be identified by several criteria: number of orders, unit sales, revenues, profitability, share of customer volume, etc.
- Purchasing approaches: Dellās strategy of seeking sophisticated buyers and large accounts not requiring much āhand-holdingā (i.e., limited technical support) is sound target marketing.
Segmentation Options
A company has two basic strategic choices: (1) to segment the market or (2) to treat the entire market as potential customers for its goods or services. This latter option means that the firm uses an undifferentiated marketing strategy. There are few (if any) companies that can benefit from this approach. One can argue that utilities can employ this strategy, since you must have their service in an essentially monopolistic environment. But even that is not true anymore. In todayās free market, you do not have to use the electricity provided by your local power company if you do not choose to (options include solar panels, windmills, and other environmentally friendly energy sources). In the once uncontested telecommunications industry, AT&T now faces formidable competition in all sectors in which it competes (long distance, local, wireless).
Despite the fact that undifferentiation is for virtually no one, too many companies still treat their marketing as if everyone is a likely customer, rather than targeting those who are the most likely prospects for their products. Recognizing the great diversity in the marketplace, it is clearly desirable to segment markets to improve marketing performance. By segmentation we mean the development of unique marketing strategies for the various needs of the marketplace. Segmentation options include differentiation, concentration, and atomization (segment-of-one marketing). Business Segmentation Insight 1 reviews the usage and effectiveness of business-to-business (B2B) market selection strategies in the United States and United Kingdom.
Business Segmentation Insight 1: Segmentation Research Findings in High-Tech and Industrial Markets
Example 1
A national segmentation study was conducted in technology-based industries by this writer.4 Two hundred three top-level U.S. marketing executives in nine industries (automation, biotechnology, computer hardware, computer software, electronics, medical equipment and instrumentation, pharmaceuticals, photonics, and telecommunications) participated in this research project. A breakdown by annual sales revenue indicated that 110 firms were small (less than $10 million sales) and ninety-three were medium/large (greater than $10 million sales). Three key market selection findings from the study are summarized here:
- High-technology firms were dependent on a primary market segment that accounted for 69 percent of their business.
- Nearly two-thirds of the firms (130,65 percent) used a differentiation strategy; the balance was split fairly evenly between an undifferentiated approach (36, 18 percent) and a concentrated strategy (35, 17 perc...
