Market Segmentation: Quick Guide to Pricing Across B2B Market Segments
- Why do you need an effective market segmentation process?
- What major market segment variables should you select if you are looking to improve or change your pricing?
- How can you improve pricing across major market segments and customer groups?
For some businesses, these are really simple questions to answer. They’ve probably got a world-class pricing and marketing teams working together to look at major market segments for more revenue pricing opportunities. Including a detailed analysis of what happening within these segments.
For other businesses’ however, price and market segmentation are still a mystery. There’s a lot of guessing about what’s happening within major market segments. The debate is over which variables to omit, and which are best for price optimisation and analytics projects.
In this article, we argue that informed pricing decision making, like informed marketing and sales decision making largely depends on a clear understanding of your major market segments and customer groups.
First of all we’ll offer tips on how to segment a B2B market and where to start segmenting. We’ll also look at the difference between major market segments and customer classification. Followed by major market segmentation variables for business markets. And finish by looking at the most effective ways of identifying major market segments and targets in your industry.
The difference between major market segments and customer classification
A good place to start learning more about major market segments is understanding the differences between market segments and customer classification. As this will help you understand how major market segments and customer groups should be divided and classified.
There are different types of market segmentation for major market segments. The most common types of market segmentation are:
Each of the different types of segmentation (listed above) is defined by a category of market segmentation variables.
For example, when a B2B business chooses a geographic segmentation to divide a major market segment, they will most likely investigate geographic market segmentation variables, such as country, city, suburb, etc.
It is possible for B2B businesses to choose some or all types of market segmentation variables to segment the market. When a B2B business chooses more than one type of market segmentation to segment a market, this is called a nested approach.
A nested approach to understanding major market segments is sometimes referred to as a multi-dimensional approach to segmenting business markets.
A nested approach is the opposite of a mass marketing approach, which views all major market segments and customer groups as the same (or a homogeneous group).
Market segmentation variables definition
The market segmentation variables B2B businesses choose largely depend on their business’ strategic objectives, operations, and wider industry dynamics.
For example, if a B2B business is undertaking a market segmentation process to improve their pricing decisions, they would typically want to understand segment level activity, as well as sub-group activity.
A micro-segment is another name for a subgroup. A micro-segment are small groups within a larger market segment.
Like a major market segment, smaller, micro-segments within a major market segment can change depending on the business’s objectives and line of investigation. It is possible to create both customer subgroups as well as competitive subgroups to understand micro-segments activity at different levels.
Before selecting variables to analyse a micro-segment or segment, a B2B business needs to understand the dominant drivers in major market segments. As a result they will typically divide a major market segment into subgroups or micro-segments based on these drivers.
Micro-segment analysis allows B2B pricing teams to adjust prices across segments and products (sometimes referred to as price optimisation).
To know if a market segmentation has been successful or not, B2B businesses often use a criterion for market segmentation.
The four basic criteria B2B businesses use for market segmentation are as follows:
- A market segment must be substantial and have enough potential customers to be viable,
- A market segment must be identifiable and measurable,
- Members of a market segment must be accessible to marketing efforts,
- A market segment must respond to particular marketing efforts in ways that distinguish it from other segments.
How to segment a B2B market
Segmenting a B2B market is not easy especially if your primary reason for doing so is to improve overall price decision making in the business.
Key issues to consider before you segment a B2B market for pricing projects are as follows:
- Often, the same industrial products often have multiple applications.
- You can use several different products in the same application.
- Customers can differ greatly and don’t want and need the same things or think in the same way.
- It can be difficult to discern which differences are important and which are trivial for price optimisation
- It can be difficult to convert customer value drivers into quantifiable estimates of value.
Consequently, the biggest problem with segmenting a B2B market is identifying the best variables for segmenting.
It is almost inevitable that pricing and marketing teams will be overwhelmed at the start of a segmentation project. There lots of different approaches to segmenting out there. There are also lots of segmentation criteria and variables to choose from.
Customer groups and even individual customers within these groups may differ in demographics (including industry and company size), operating differences (production technology is an example), purchasing organisation, “culture,” and personal characteristics.
Usually, a pricing and marketing team can group customers, prospects, and purchase situations in different ways depending on the variables used to segment the market. The problem is to identify relevant segmentation bases.
If there is a lot of uncertainty about what the best approach to segmenting is, then it is possible to include all major market segment criteria, i.e., from geographic, demographics to value-based and psychographic. However, having a strategic focus is always more preferable because you’ll need to undertake a series of hypothesises testing as well.
A multi-dimensional or nested approach to major market segments (as discussed above) typically starts with an analysis of demographic variables first. Demographic variables are easier to develop, observe and monitor. However, they are not sufficient. After analysing demographic variable across major market segments, pricing teams move to a more specific and detailed customer and purchase characteristics. Behavioural and psycho-graphics variables are much more subtle and thus harder to develop, observe and monitor in major market segments. It is also quite difficult to bring together transaction level data too.
A multi-dimensional approach to major market segments will become clearer as we explain the criteria and associated variables for major segmentation variables for business markets (below).
Major segmentation variables for business markets
Major segmentation variables for business markets vary according to the pricing approach you choose (your rationale). It also depends on the industry and market you serve. A business must have clarity around their approach to pricing and target market segmentation before they form major segmentation variables for business markets segmentation or major market segments.
Below listed are some major segmentation variables for business markets. We have also integrated the major segmentation variable for major market segments under different pricing approaches.
This should help you understand the area of focus under each approach and how this impacts a segmentation process.
- A traditional approach to market segmentation divides the market based on geography variables, such as neighbourhoods, towns, cities or countries. Traditional segmentation can also be based on demographic variables, such as gender, age, family size, and life-cycle stage
- A customer characteristics approach to segmentation divides the market based on consumer behaviour – i.e., buying behaviours, customer loyalty, usage rates, features, and benefits buying.
- A purchase-situation approach to segmentation divides the market based on the purchase situation itself. Things like: the quantity customers buy, the company’s purchase policy, purchase department structure, relationship with the company, the company’s market positioning.
- A value-based approach to segmentation divides the market based on specific customer value drivers: Variables like perceived value (from the customers’ perspective) and the value delivered to the customer (from the business’ perspective). Key to value-based segmentation is the concept of value in use and value at risk.
- A psychographic approach to market segmentation divides the market based on a customer’s mission, motivations, interests, and habits.
- Someone that’s concerned the latest products and trends
- A person that tends to prefer quality over cost
- Someone that’s career or family-focused
- Someone that’s gregarious with a wide circle of friends or prefers a smaller, close-knit circle of friends
- Staff who tend to be a brand advocate because their mission aligns with the business’ brand and mission
It is important that pricing and marketing teams understand the differences between approaches to then identify the right variables for investigation. A clearer understanding of major segmentation variables for business markets helps business to identify and omit variables during their segmentation process (discuss in more detail below).
Ways of identifying market segments and targets for price optimisation
As you can see, there are a lot of different approaches to target market segmentation. There are lots of marketing tools on offer. Each proposing various segmentation-modelling frameworks to segment major market segments.
However, a lot of marketing tools used for segmenting are set up to provide segment level descriptions only. They are completely unsuitable for detailed price segmentation and analysis.
Some emphasise the obvious, such as statistical differences in personal demographics or company variables (i.e., customer size, standard industrial classification, and so forth). In contrast others are really difficult to implement or incredibility difficult to integrate with a pricing and revenue management system.
To avoid a lot of confusion when segmenting for better pricing decision making, we advise pricing teams work systematically. Disect all the different approaches and segmentation variables from general demographic variables to specific behavioural and psychographic variables. As this is easier to do.
You can run through different types of market segmentation and approaches (listed above) and identify important factors and variables. These are sometimes neglected. This helps to balance between reliance on the easily acquired demographic data and the detailed analyses required from value-based and psychographic variables. However, we recommend gathering enough necessary data and information first at a segment level. Then weigh up what variables and approaches you need to take at a subgroup level.
In this article, we showed that a large amount of price, marketing and sales decision making is based on the effectiveness of your segmentation. We provided a quick guide to target market segmentation in a B2B market, as well as a market segmentation variables definition.
Above all, we argued that informed pricing decision is based on a customer-focused segmentation.
We see an increasing number of B2B companies looking forward to marketing and pricing at the segment, niches, local and individual level. However, there are still a lot of companies choosing traditional or behavioural segmentation models over value-based models.
Therefore we advise a business to choose their market segmentation models and pricing tools carefully. A lot of marketing tools are set up to examine segments rather subgroups within those segments. You need a subgroup level understanding to make better decisions across multiple segments and products.
We find that more useful market segmentation for pricing decision making tends to be value-based segmentation models or nested segmentation models.
Therefore, most marketing and pricing tools come with a pre-defined segmentation and cannot be changed. Make sure when you buy pricing software that your segmentation strategy fits with the pre-programmed segmentation framework in the software.
Don’t waste another dollar on the wrong pricing team strategy.
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Did you know that…
How you set up and recruit strategic pricing analysts is a key determinant of how fast you accelerate earnings growth. Hence with the right pricing team strategy and implementation in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6-12 months, the team is often able to find additional earnings. They identify more complex and previously unrealised revenue and margin opportunities.