Ramesh.

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An Article Review on INDUSTRIAL By Yoram Wind and Richard Cardozo

MARKET SEGMENTATION

Industrial Marketing Management, 3 (1974) 153-166, Elsevier Scientific Publishing Company, Amsterdam (Netherlands)

Source:
http://marketing.wharton.upenn.edu/documents/research/7407_Industrial_Marketing_Segmentati on.pdf

Mr. Wind and Mr. Cardozo define market segment as, A group of present or potential customers with some common characteristic which are relevant in explaining their response to a suppliers marketing stimuli. Effective segmentation of markets is the first step in crafting a marketing strategy because the characteristics and needs of each segment will define what elements must be included in how the firm approaches each of the segments in which they choose to do business. Segmentation that is done well provides the necessary information for understanding what elements of the marketing mix are going to be critical in satisfying the target customers in those segments. Academics recognizes the need for operational models of organizational buying, which (1) isolate the major variables affecting organizational decisions; and (2) relate them in an explicit way to controllable marketing variables. This paper proposes such an operational structure. First, is a brief review of literature about organizational buying. Followed by, the identification of major variables affecting organizational buying and how these variables can be conceptually linked to the Organizational buying decision process. This conceptual structure, which describes the decision process at the organizational level, provides the basis for the operational model. Yoram Wind and Richard Cardozo suggest that industrial market segmentation is based on a broad two-step classification of macro-segmentation and microsegmentation. This model is one the most common methods applied in industrial markets today. It is sometimes extended into more complex models to include multistep and three- and four-dimensional models. Macro-segmentation centres on the characteristics of the buying organisation, thus dividing the market by:

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Company / organization size: one of the most practical and easily identifiable criteria, it can also be good rough indicator of the potential business for a company. However, it needs to be combined with other factors to draw a realistic picture.

Geographic location is equally as feasible as company size. It tells a company a lot about culture and communication requirements. For example a company would adopt a different bidding strategy with an Asian customer than with an American customer. Geographic location also relates to culture, language and business attitudes. For example, Middle Eastern, European, North American, South American and Asian companies will all have different sets of business standards and communication requirements. SIC code (standard industry classification), which originated in the US, can be a good indicator for application-based segmentation. However it is based only on relatively standard and basic industries, and product or service classifications such as sheet metal production, springs manufacturing, construction machinery, legal services, cinemas etc. Many industries that use a number of different technologies or have innovative products are classified under the other category, which does not bring much benefit if these form the customer base. Examples are access control equipment, thermal spray coatings and uninterruptible power supply systems, non of which have been classified under the SIC.

Decision-making units. This criterion can only apply to newcomers. In cases of long-term relationship, which is usually the objective of most industrial businesses, the qualified supplier is normally aware of the purchase requirement, i.e. they always get into the bidding process right at the beginning. It is clear that firms have to move away from transaction-oriented marketing strategies and move towards relationship-oriented marketing for enhanced performance.

Benefit segmentation: The products economic value to the customer, which is one of the more helpful criteria in some industries. It recognises that customers buy the same products for different reasons, and place different values on particular product features. Type of institution: few examples for this would be, banks require designer furniture for their customers while government departments would suffice with functional and durable sets. Hospitals would require higher hygiene criteria while buying office equipment than utilities. And airport terminals would need different degrees of access control and security monitoring than shopping centres.

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However, type of buying institution and the decision-making stage can only work on paper. As institutional buyers cut procurement costs, they are forced to reduce the number of suppliers, with whom they develop long-term relationships. This makes the buying institution already a highly experienced one and the suppliers are normally involved at the beginning of the decision-making process. This eliminates the need to apply these two items as segmentation criteria. Micro-segmentation on the other hand requires a higher degree of knowledge. While macro-segmentation put the business into broad categories, helping a general product strategy, micro-segmentation is essential for the implementation of the concept. Microsegments are homogenous groups of buyers within the macro-segments. Macrosegmentation without micro-segmentation cannot provide the expected benefits to the organisation. Micro-segmentation focuses on factors that matter in the daily business. The most common criteria include the characteristics of the decision-making units within each macro-segment,

Buying decision criteria: The marketer might divide the market based on supplier profiles that appear to be preferred by decision-makers, e.g. high quality prompt delivery premium price vs. standard quality less-prompt delivery low price. Purchasing strategy, which falls into two categories: First, there are companies who contact familiar suppliers (some have vendor lists) and place the order with the first supplier that fulfils the buying criteria. These tend to include more OEMs than public sector buyers. Second, organisations that consider a larger number of familiar and unfamiliar suppliers, solicit bids, examine all proposals and place the order with the best offer. The article says that experience has shown that considering this criterion as part of the segmentation principles can be highly beneficial, as the supplier can avoid unnecessary costs by, for example not spending time and resources unless officially approved in the buyers vendor list.

Structure of the decision-making unit can be one of the most effective criteria. Knowing the decision-making process has been shown to make the difference between winning and losing a contract. If this is the case, the supplier can develop a suitable relationship with the person / people that has / have real decision-making power.

Perceived importance of the product to the customers business (e.g. automotive parts, or related equipment.) Attitudes towards the supplier: Personal characteristics of buyers (age, education, job title and decision style) play a major role in forming the customers purchasing

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attitude as whole. Is the decision-maker a partner, supporter, neutral, adversarial or an opponent? Industrial power systems are best sold to engineering executive than purchasing managers; industrial coatings are sold almost exclusively to engineers; matrix and raw materials are sold normally to purchasing managers or even via web auctions. The above criteria can be highly beneficial depending on the type of business. However, there are serious concerns in practice regarding the cost and difficulty of collecting measurements of these micro-segmentation characteristics and using them. The prerequisite to implementing a full-scale macro- and micro-segmentation concept is the companys size and the organisational set-up. A company needs to have beyond the certain number of customers for a segmentation model to work. Smaller companies would not need a formal segmentation model as they know their customers in person.

Yoram and Wind provide a flowchart for an IDEAL segmentation model:

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In conclusion, if the requirements for effective segmentation are met, several benefits accure to the firm. First, the mere attempt to segment the business market forces the marketer to become more attuned to the unique needs of customer segments. Secondly, knowing the needs of particular market segments helps the business marketer focus product development efforts, develop profitable pricing strategies, select appropriate channels of distribution, develop and target advertising messages and train and deploy the sales force. Thus, market segmentation provides the foundation for efficient and effective business strategies. Thirdly, market segmentation provides the business marketer with valuable guidelines for allocating marketing resources, Business-tobusiness firms often serve multiple market segments and must continually monitor their relative attractiveness and performance. Research by Mercer Management indicates that for many companies, nearly one third of their market segments generate no profits and marketing and customer service costs are wasted on efforts to acquire and retain customers in such segments.

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