B2B Market Segmentation – Part 2: How to Approach Segmentation

In part one of our segmentation series, we discussed the importance of and rationale behind market segmentation.

Let's take a closer look at actual implementation of market segmentation. The biggest segmentation error that people make is to start with the "who" or "what" and segmenting the market using criteria such as industry verticals, company size or geography and other dimensions because this data is easy to gather.

Focusing on WHO a buyer is makes for more easily observable and actionable data that can be used to define segments and their boundaries. But it doesn't get to the core of why companies are buying and what problem they are looking to solve (don’t get me wrong, demographics are still an important factor in the segmentation process, but they shouldn't drive the first steps of segmentation). Also, this approach often fails to identify new, un-served, profitable segments formed around buyer problems, needs and behavioral patterns that cut across "traditional" demographic segments.

As markets are changing rapidly and segments are disappearing and new ones are forming, it becomes more important to look at WHY companies are buying, and segmenting markets along motivational attributes.

A better segmentation strategy is to start with why companies purchase a solution. Understand what is driving demand and what distinct pockets of demand can be profitably served by your organization. Because there are so many attributes and dimensions of motivation and behavior based segmentation (such as business pains, adoption patterns, compelling external events such as introduction of new regulatory legislation, etc), it is important to find the most critical dimensions to use as a pivot point and build your segmentation framework around.

SEGMENTATION CRITERIA
Here are some examples of dimensions that can be used for segmentation:

• Value Drivers
  Are companies using your solution to reduce cost, increase revenues, comply with mandates, protect assets, improve agility, reduce risk? Especially for solutions that can solve different problems and meet different objectives. What value driver represents your best opportunities? What are the specific use cases of your product to realize the value customers are looking to unlock? Are there innovative or "exotic" uses of your products that you observe with new customers that might indicate a new or bigger market segment that is currently untapped?
• Adoption Patterns
  One of the best known market segmentation frameworks is the technology adoption model that segments markets into innovators, early adopters, early majority, late majority and laggards based on buyers' different needs and psychographic patterns at each phase of the adoption cycle. The challenge however is that this model segments markets over time, not necessarily across concurrent segments (although there is overlap between segments). This makes adoption valuable as one dimension of describing your segments, but it is not sufficient.
• Price Sensitivity
  Do you position your product in segments that are price sensitive and invite vendors to complete on price or segments that pay a premium for a solution that is highly differentiated?
• Go to Market / Buying Preference
  What is your target markets' preference in procuring solutions,  channel/direct preference?
• Event Triggers
  What events impact your target markets' business such as compliance with legislative mandates that are going into effect, mergers that cause operational or competitive problems which need to be resolved, new executive hired that need to demonstrate quick results, a disruptive product launched that impacts your customers' competitors, etc.

HOW DO I MARKET TO SEGMENTS? 
One of the first questions that arises is how do I segment markets based on attributes I cannot easily observe from the outside? For example, how do I know whether an organization is an early adopter or laggard without investing a tremendous amount of research (that often leads to ambiguous answers anyway)? How do I know how price sensitive a company's buying center is? Or what really drives value in a certain organization?

While company size or industry SIC/NAICS classifications are easy to gather for demographics-based segmentation, behavioral data is not that easy to come by. This is a significant problem for outbound marketing tactics where you need to identify your specific targets and contact information prior to executing a campaign.

Inbound tactics on the other hand provide an opportunity for "ideal-fit prospects" in the right segment to find you and your offering through compelling content. Content marketing is therefore an ideal approach for use in motivation-based market segments where you can create keyword rich content that is closely mapped to your buyer's specific business problem and decision chain.

In other words, motivation-based marketing enables buyers to find you rather than the other way around. This resonates with B2B marketing trends where buyer behavior has changed dramatically over the last decade - 80 percent of B2B purchases today result from buyers identifying and reaching out to vendors first, not the other way around.

Motivation-based segmentation also needs to inform and shape the scoring model you use for marketing automation. Many automation platforms score along two dimensions: demographics and behavior. Behavior is how users interact with your content and website and what marketing stimulus they respond to. But in a broader sense you can incorporate the dimensions and values from your segmentation efforts, and use behavior and interaction with your website content for lead scoring early in the engagement process.

DEMOGRAPHIC SEGMENTATION ATTRIBUTES
While we said earlier that you should not START your segmentation efforts with demographic attributes, demographic dimensions are still important as segmentation criteria as they often correlate with reasons why customers buy. Or they correlate with the expected profitability of a customer (for example as a function of company size or revenue).

For example:

• Vertical
  Are certain verticals more likely to have the problem you solve, a higher sense of urgency, more to gain by solving the problem? Regulatory drivers?
• Company Size
  Does your solution require a minimum number of users or budget to be sold profitably, does it solve a problem that correlates with the size of an organization (complexity, scale, process automation, etc)?
• Location
  Are customers in certain locations more likely to buy, based on ease of access, local market conditions, regulatory environments? 

This wraps up part 2 of our segmentation blog series. Part 3 will explore ideas on how to prioritize the identified segments to focus on the most profitable ones first. How do you approach B2B market segmentation?