28
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March 2019
12 minutes

Market segmentation – factor of success in strategic work

Any of our activities focus on our customers. (Image: BoBaa2/shutterstock.com)

How does a clear market/customer segmentation benefit strategic business development? How can segmentation be carried out pragmatically? The following article provides food for thought on the basis of our experience with lots of medium-sized family businesses.

What is the problem?

“Any of our activities focus on our customers.” Most family businesses have meanwhile adopted this motto.

However, it’s a fact that just a rather small number of family businesses in the B2B field (markets for industrial goods or services) have so far made themselves familiar with the segmentation of markets in a consistent way. It’s also a fact that next to zero companies have got the resources to actively work absolutely any target market or target customer equally. Segmenting markets accurately is therefore crucial for a decision on the “route of march” (On which subsegments of the market do we focus? Which ones do we ignore?) and the effective use of resources.

In fact, a clear focus on market segments means a massive change of perspective and philosophy for most of these companies – even in the B2B field.

Up until now, they have often concentrated on their own product and technology (inside-out-perspective). Now, the customer is to move into the center of attention respectively be the starting point for (frequently strategic) deliberations (outside-in-perspective).

This is appropriate and sensible since it’s the only option to increase one’s own ability to survive, especially on stagnating markets.

Generally speaking, enterprises are more successful than others when they succeed in solving their customers’ problems in a perceivably better way than their competitors.

When looking closely, it turns out that only very few companies of a branch can constantly satisfy all their customers. Mostly, it’s one or two customer groups a company develops successfully with. In other segments the same company acts within the gray area of replaceability and is one out of many, partly much more established players. Usually, this culminates in rather small amounts and margins.

Segmentation as a starting point and success factor for strategic development

Everything starts with an adequately deep understanding of customers’ needs. Profoundly knowing customers’ concrete requirements for applications (How do our customer’s applications for our products/services look like?) and their purchase behavior are decisive when it comes to a problem solution that fits and working a market in an appropriate way.

However, only single cases offer the opportunity to consider each characteristic of any customer in strategic work as well as in operative market development. Therefore, customers need to be classified into market segments according to single criteria they’ve got in common.

The other way round, considering customers and markets, those activities of a company get marked out, which can be developed independently and are, if applicable, even based on different business models. Probably it’s worth to consider separate and individual strategies for them.

Pragmatic segmentation criteria

Just in the area of industrial markets/corporate markets (B2B) the following method for approaching segmentation has proved itself:

Markets/customers are classified into macrosegments on the basis of relevant criteria in connection to the customer enterprise as a whole. These are easy-to-grasp criteria like geographic location, size and branch of the customer enterprises. Usually, required information can be obtained relatively cost-efficiently. However, it’s not for sure that companies for example from the same geographic area with the same number of employees or form the same branch do have the same needs.

In case this (macro-)segmentation is not detailed enough for covering the according customer in a targeted and differentiated way, the macrosegments can be further divided up into microsegments related to persons involved (users, decision makers, procurement managers, etc.) in the customer company and other, more qualitative aspects.

In doing so, we have to compromise regularly: In the first step, macrosegmentation as described above is the first step. Thus, segments, for instance according to region and customer branches, are set up. Microsegmentation on the level of the agents on the customer companies’ side is covered – sometimes in a better and sometimes in a worse way – by the employees involved (sales, technical, etc.) in a pragmatic way: Key account managers and technical application developers, for example, know all the relevant people (technical as well as commercial) on the customer’s side in person, so they can estimate their respective behavior and their respective preferences and work with that actively. Frequently, this evolves from a longtime relationship with the individual customers. However, when it comes to the active entry into new segments, this kind of knowledge is of course incomplete. This can directly affect business success.

All in all, a pragmatic approach with a “sense of proportion” is mandatory especially for medium-sized family businesses. Otherwise, the segmentation will fail already in the beginning or, as a singular project, won’t be of any lasting effect. This is also true for a sensible amount of “active” segments (mostly between five and ten).

Using segmentation in strategic work

Essentially, relevant segments are used during the whole strategy development process. For each segment, individual strategic considerations should be made. This requires an assessment of the at-tractiveness of each segment in the next step.

Some aspects have shown themselves to be crucial for this:

Quantitative aspects

Market volume and market development in the segment

  • Total market (in units and/or value)
  • Addressable volume (What part of the segment can we theoretically serve with our scope of services?)
  • Market growth (What growth rates are to be expected in the years to come?)

Margin potential

  • What margins – even in comparison to other segments – are possible within the respective segment?

Qualitative “matching analysis”

How well does the respective market segment fit us?

Existing business relationships

  • Do we already sell anything in this segment?

Technical requirements

  • How well does the customers’ technical requirement level in this segment fit our scope of services?

Technical customer access

  • Can we access or contact relevant people in the technical units at the respective customers?

Commercial customer access

  • Can we access or contact relevant people in the commercial units at the respective customers, i. e. procurement?

Market position and competitive situation

Market share

  • How big is our market share and how will it develop?

Competitors

  • What do the structure and behavior of competitors look like?

On this basis, some segment strategies can be established, which then can be used for the targeted further development of one’s own scope of services and active market cultivation.

Three examples may make this clearer

Example 1
A growth segment (customer branch) with high margins was identified. However, one’s own scope of services (up to now) does not fit the respective customers’ needs (for instance, cleanroom compatibility of equipment in the segment medical engineering).

Consequence: a strategic decision has to be made in order to develop adequate solutions for this segment (cleanroom certification, etc.)– or not.

Another consequence could be to clearly focus on the development department on projects dealing with medical engineering. Thus, anybody involved will know the priority rules (particularly when there is a lack of resources).

Example 2
Sales have declined in a previous core segment, as the need for the company’s products did. In practice, this happens where, for example, conventional electrical products have been replaced by electronic solutions (e. g. controls of engine cooling in the automotive sector).

There is still a need in the market segment, but for solutions leveraging innovative technologies (electronics).

Strategic decision has to be made, if customer segment is to be kept in the future: Investment in establishment of competencies in the field of electronics.

Example 3
An attractive growth segment was identified, but required solutions/products are far beyond what the respective company has stood for up to now.

Possible strategic decision on this segment: Deliberate waiver of cultivating this segment actively, requests will be treated in an “opportunity driven” way only.

In the same way, gaps in the segment portfolio of a company can be identified. This way, new segments can be assessed as strategically relevant and, as a consequence, be cultivated practically.

Conclusion

All in all, a clear market segmentation is essential for focusing on the customer and making a difference. Segmentation should be approached pragmatically, but it should also play an important role in any strategy development process.

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