2.6: Segmenting organizational markets
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It is also important for the marketing manager to understand how business or organization customers can be segmented. Many firms sell not to ultimate consumers but to other businesses. Although there are many similarities between how consumers and businesses behave, there are also several differences, as mentioned earlier. Recall that business buyers differ as follows: (a) most business buyers view their function as a rational (problem-solving) approach; (b) the development of formal procedures, or routines, typifies most business buying; (c) there tend to be multiple purchase influences; (d) in industrial buying it is necessary to maintain the correct assortment of goods in inventory; and (e) it is often the responsibility of the purchasing executive to dispose of waste and scrap.
A number of basic approaches to segmenting organizational markets exist. An industrial marketing firm must be able to distinguish between the industries it sells to and the different market segments that exist in each of those industries. There are several basic approaches to segmenting organizational markets: (a) types of customers; (b) the Standard Industrial Classification; (c) end use; (d) common buying factors; and (e) buyer size and geography.2,16
Type of customer. Industrial customers, both present and potential, can be classified into one of three groups,
• Original Equipment Manufacturers (OEMs), such as Caterpillar in the road equipment industry
• end-users, such as farmers who use farm machinery produced by John Deere and OEMs
• after market customers, such as those who purchase spare parts for a piece of machinery
Similarly, industrial products can be classified into one of three categories, each of which is typically sold to only certain types of customers:
• Machinery and equipment (e.g. computers, trucks, bulldozers): these are end products sold only to OEM and end user segments.
• Components or subassemblies (e.g. switches, pistons, machine tool parts):these are sold to build and repair machinery and equipment and are sold in all three customer segments.
• Materials (e.g. chemicals, metals, herbicides): these are consumed in the end-user products and are sold only to OEMs and end users.
The Standard Industrial Classification (SIC). A second industrial segmentation approach employs the Standard Industrial Classification (SIC) codes published by the US Government. The SIC classifies business firms by the main product or service provided. Firms are classified into one of ten basic STC industries. Within each classification, the major groups of industries can be identified by the first two numbers of the SIC code. For example, SIC number 22 are textile mills, SIC number 34 are manufacturers of fabricated metals, and so on. An industrial producer would attempt to identify the manufacturing groups that represent potential users of the products it produces and sells. Exhibit 4 takes the two digit classification and converts it to three-, four-, five-, and seven-digit codes. As you can see in Exhibit 4, use of the SIC code allows the industrial manufacturer to identify the organizations whose principal request is, in this case, pliers. Based upon this list of construction machinery and equipment products, it is possible to determine what products are produced by what manufacturers by consulting one of the following sources:
• Dun's Market Identifiers—computer-based records of three million United States and Canadian business establishments by four-digit SIC.
• Metalworking Directory—a comprehensive list of metalworking plants with 20 or more employees, as well as metal distributors, by four-digit SIC.
• Thomas Register of American Manufacturers—a directory of manufacturers, classified by products, enabling the researcher to identify most or all of the manufacturers of any given product.
• Survey of Industrial Purchasing Power—an annual survey of manufacturing activity in the United States by geographic areas and four-digit SIC industry groups; reports the number of plants with 20 or more and 100 or more employees, as well as total shipment value.
End uses Sometimes industrial marketers segment markets by looking at how a product is used in different situations. When employing end-use segmentation, the industrial marketer typically conducts a cost/benefit analysis for each end-use application. The manufacturer must ask: What benefits does the customer want from this product? For example, an electric motor manufacturer learned that customers operated motors at different speeds. After making field visits to gain insight into the situation, he divided the market into slow speed and high speed segments. In the slow-speed segment, the manufacturer emphasized a competitively priced product with a maintenance advantage, while in the high-speed market product, superiority was stressed.
Common buying factors. Some industrial marketers segment markets by identifying groups of customers who consider the same buying factors important. Five buying factors are important in most industrial buying situations: (1) product performance, (2) product quality, (3) service, (4) delivery, and (5) price.2 Identifying a group of customers who value the same buying factors as important is difficult, as industrial organizations' and resellers' priorities often change.
Buyer size and geography. If organizations' markets cannot be easily segmented by one of the previous approaches, market advantages may still be realized by segmenting based on account size or geographic boundaries. Sales managers have done this for years, but only recently have organizations learned to develop several pricing strategies for customers that are both close and far away geographically. Similarly, different strategies can be developed for large, medium, and small customers.