A Framework for B2B Customer Segmentation – Part 1: Why Segment Your Market?

Marketing segmentation is about subdividing markets into segments of customers that have similar needs and behaviors. This way, vendors can optimize their product offering, marketing, and sales approach to meet the specific requirements of the segment better and more cost efficiently than the competition.

But the craft of identifying and selecting the right segments is too often rushed and under-appreciated. Many companies don't segment at all, segment only superficially, or copy segments that seem to be working for their competitors but without really understanding the rationale for selecting target segments.

In complex markets, segmentation is not trivial. And many companies simply don't allocate sufficient resources for defining the right segments. Often, segmentation is seen as "artificially" reducing the addressable market. Why go after only a few target segments when there are so many buyers outside of these segments to be converted? This argument is a fallacy that doesn't recognize the impact of dramatically higher conversion rates and capture of higher value customers within target segments, or the opportunity cost of deviating from your strategy and core competencies by going after less than ideal prospects outside of the target segment.

Benefits of Segmentation
The benefits of segmentation are substantial. With tighter segmentation, vendors can better satisfy customers and produce more revenue in shorter amounts of time, at lower cost. Segmentation is critical as vendors evolve from technology-focused business models to customer-needs driven engineering and development, sales, marketing, and operations.

Because prospects in defined, targeted segments are a better fit with the vendor’s offering, prospects are more likely to buy, they close faster, produce bigger deals, and remain more loyal. In short, they are more profitable. For marketing, well-defined segments means more targeted messages and programs that resonate with buyers. This results in higher response rates, better engagements, shorter conversion cycles, and overall better return on marketing investment.

Marketing Automation Drives Renewed Focus on Segmentation
Market segmentation is experiencing a renaissance. A key driver for this renewed focus on segmentation is marketing automation. Why? Because B2B marketing teams needs to have a sound understanding and definition of the target market segments first in order to create compelling messages and content that addresses segment-specific business drivers and pain points, guides buyers through the buying process, and enables mass customized marketing and automated email nurturing campaigns that execute based on prospects' demographics and behaviors.

Part 2 of this series will explore how to go about segmentation and why the reasons customers buy (motivations) are often more important than who they are (demographics).

How do you approach segmentation in your organization?


russel said...

thanks for sharing

David Worrell said...

Great points Holger:
Segmentation is too often overlooked. And its really as important for operations and finance as for marketing. The other way to segment for these operational issues can be as easy as looking at "Total Spend" or "Profit Margin" per customer. I used Quintiling to look at profitable and not-so-profitable accounts. Here's a link to the whole story: http://rocksolidfinance.com/segment_customers_for_profit

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