Last month we discussed market segmentation in consumer, or retail, markets. But, market segmentation is a technique which can also be effectively applied in B2B or industrial markets.

Market Segmentation – Definition & Benefits

Market Segmentation is the process of dividing a market into smaller, distinct sub-markets (or “segments”) of buyers who share common characteristics. It’s used to identify groups of customers who are likely to have similar needs and, therefore, buy similar products. Once a company identifies a number of unique groups of buyers (“market segments”), it can develop specific products or services which will better satisfy their needs than a generic product would. The main benefit is to allow a company to sell more to each market segment, and the overall market, than it could by selling a single standardized product to all segments!

The Process – How To Segment Business Markets

There are a number of different methods for segmenting business markets:

1. Geographic Segmentation – by country, state, county, or zip code where businesses are located
2. Demographic Segmentation – by industry or size of the businesses
3. Purchasing Behavior Segmentation – by centralized or de-centralized purchasing structures; preference to buy based on price, quality or service; or usage rates (heavy, medium or light users of a product)
4. Product Application Segmentation – by the type of application for the product

The Geographic and Demographic methods are the most important, and frequently used, ways to segment business markets. Information on the number, size (by number of employees), and industry (by SIC classification code) of companies in a state, county or zip code is readily available from the US Commerce Department’s Census Bureau. Similar to the US population census, this information is collected in a census of US businesses every 5 years. It is also available from private corporate marketing database companies such as D&B or InfoUSA.

Most companies will segment markets using multiple methods in order to more precisely identify groups of companies that are likely to be high potential customers. For example, a company will first segment by industry to identify clusters of potential business customers for its products. Then, it will segment by company size to further refine its analysis. Finally, it will segment by state, county or zip code to locate the largest clusters of potential customers.

How To Evaluate/Select Market Segments

After completing its segmentation analysis, a company will evaluate the segments to identify the most attractive business market segments to target for sales. The criteria typically used to evaluate the segments are:

• Size
• Growth rate, and
• Profitability.

It will compare the segments against these criteria and select the largest, fast growing and/or most profitable ones to pursue. (NOTE: Information on segment profitability is usually inferred based on the amount and intensity of competition in each segment.)

A Case Study

Let’s look at an example of how to use market segmentation in a B2B market. One of our clients asked our firm to investigate the national market for a new, specialized type of equipment used to detect leaks in flexible packaging for food products. Using US Census data and our client’s preliminary knowledge of the market, we were able to identify five (5) different industries which were high potential users of the machinery. We also segmented the companies in these industries by company size (based on employees), and then segmented by state to identify the largest concentrations of potential customers. Our client used this market segmentation analysis to identify the largest and fastest growing market segments to target in its marketing and sales campaign.

If you have any questions, don’t hesitate to contact us. We’d love to hear your comments on our blog too!

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Gene Principato, President
The Marketing Difference LLC
Tel.: 856-465-7372