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How to conduct a B2B market segmentation

How to conduct a B2B market segmentation
Contents

What is B2B market segmentation?

Why conduct B2B market segmentation?

What are the different types of B2B market segmentation?

Best practices when conducting a B2B market segmentation

What is B2B market segmentation?

Each B2B customer or prospect is unique.

To illustrate this, let’s consider a B2B SaaS vendor trying to sell to two companies – Company A and Company B.

Both companies are food manufacturers with 500 employees. But these two companies can still differ in many ways. For example:

  • Strategic priorities. Company A may be on a cost-cutting drive. Company B may be trying to evolve so that it can break into a new market
  • The decision-making unit. The Finance Director may lead company A’s decisions. Company B may make decisions by committee, with IT leading the way
  • Decision-makers’ preferences. Company A’s Finance Director may be very relationship-driven, insisting on ‘chemistry’ meetings with the vendor’s representatives during the buying process. Company B’s committee may be focused on technical details and less interested in ‘chemistry’ meetings

Ignoring these differences and taking a ‘one-size-fits-all’ approach is a recipe for wasted budgets and lost opportunities.

For example, messaging about productivity might appeal to Company A, which is on a cost-cutting drive. But it is unlikely to be of interest to Company B, who might want to hear about unique functionality. That makes it easier for a competitor to win Company B’s business.

A more personalized sales and marketing approach would increase the SaaS vendor’s chances of making a sale. Indeed, HBR has shown that ‘personalization can deliver five to eight times the ROI on marketing spend, and can lift sales by 10% or more’.
At the same time, creating a customer journey that is completely personalized to each buyer is incredibly challenging when you are considering many buyers.

The compromise between a ‘one-size-fits-all’ approach and complete personalization is market segmentation (also called customer segmentation). Depending on your perspective, B2B market segmentation is either:

  • The process of grouping unique organizations by finding common characteristics
  • The process of dividing the target audience into groups with common characteristics

Why conduct B2B market segmentation?

Segmentations can help with a variety of B2B sales and marketing activities:

Targeting prospects

Not every prospect is equally attractive:

  • Some may be a better fit for your business
  • Some may be higher percentage opportunities
  • Some may be more lucrative opportunities

Segmentation can identify which types of prospects are most attractive – i.e., it can help you build the profile of your ‘ideal prospect.’

It can then tell you:

  • Where to find organizations that fit this profile
  • Which individuals you should be talking to within these organizations
  • How to tailor your efforts to increase your chances of winning their business (e.g., optimal messaging)

As a result, segmentation enables organizations to prioritize higher percentage opportunities and increase win rates.

Prioritizing specific customers

Not all customers are created equal:

  • Some customers are more expensive to sell to
  • Some are more expensive to manage and retain
  • Some have a higher churn rate
  • Some are harder to up-sell to

Segmentation can identify which customers are most attractive – i.e., it can help you to build the profile of your ‘ideal customer’ – and help you to personalize their experience.

As a result, segmentation enables organizations to:

  • Boost margins (by ensuring money is better spent)
  • Improve customer loyalty and retention
  • Boost revenues through more effective cross- and up-selling

Refining marketing messages

When you have a better understanding of your target audience’s motivations, pain points, and needs, you can develop more resonant marketing messages.

You can engage with each segment as a peer, increasing credibility by speaking their language.

Not only that, you can avoid generic language. Being more specific about your proposition enables you to differentiate from companies.

Optimizing channel strategy

Business decision-makers use a variety of media to keep up-to-date on their industry. They also tend to use a variety of channels to gather information on vendors during the purchasing process.

But not every decision-maker is the same. Some may rely more on face-to-face events and conferences. Others may read niche industry blogs.

Segmentation allows companies to understand which channels to use to engage with decision-makers who are trying to stay informed, and how to be present when they’re looking to purchase.

Developing the right content

Segmentation enables organizations to understand what content to push at each step in the sales journey. Specifically, it can help you to understand:

  • Which content formats to create, e.g., videos, case studies
  • What messages to include in content

Optimizing proposition or product development

When you segment your target audience, you can develop new products that they will like, and adapt existing products to suit their needs better.

Segmentation also helps you to improve the overall proposition. For example, you can change your approach to customer support to better suit a specific segment.

Allocating budget and resources

Ultimately, market segmentation makes it easier for businesses to allocate their budgets and efforts by enabling them to understand their customers and prospects better.

For example, MailChimp has found that segmented campaigns get 14% more opens and 101% more clicks than non-segmented campaigns. That’s because those messages resonate.

What are the different types of B2B market segmentation?

Many different techniques and approaches exist under the umbrella of ‘segmentation.’

Generally, when people talk about segmentation, they refer to the robust statistical analysis of quantitative data sets.

However, not all segmentations are developed through the analysis of quantitative data. Buyer personas, which are based on the interpretation of qualitative data such as in-depth interviews, are another flavor of segmentation.

While personas tend to have less rigor behind them, they can be incredibly useful, especially for marketers and UX teams. That is because qualitative information can provide a depth of insight about each persona that explains the ‘why’ behind people’s behavior.

Whether you are using a quantitative statistical approach or a qualitative persona-based approach, you should also consider which factors you will use to segment the target audience.

Segmenting by organization type

You can obtain a lot of information about an organization online and offline, including:

  • Sector
  • Number of employees
  • Approximate revenue
  • Legal structure
  • Location(s)

Many businesses segment their target market by such ‘firmographic’ data. For example, some companies develop SMB-focused propositions and messaging that are separate from their corporate approach. Others develop propositions and messaging to target specific sectors.

This approach has its advantages:

  • It is easy to obtain firmographic data, as it is publicly available
  • Firmographic data tends to change rarely, if at all. For example, very few companies suddenly change their sector or legal structure. And while company size changes frequently – a company may suddenly hire ten new employees, for example – very few companies suddenly go from being an SMB to a corporate enterprise
  • It is easy for marketing to explain a segment if it is based on firmographic information. Everyone understands what a small business’ pain points might be

But there is a reason that many businesses turn to other types of segmentation. One coffee show with ten employees isn’t necessarily going to think and act the same as another coffee shop with the same profile.

While they are likely to have some common problems – both shops are likely to similar regulatory issues – each will have unique needs and challenges.

Therefore, targeting both cafes with the same product or messaging is a risk, as it may lead to vastly different results.

Segmenting by decision-maker type

Some companies segment their target market at an individual level, rather than at an organizational level. The result is typically a series of buyer personas based on qualitative research.

Segmenting by decision-maker type has the same benefits and drawbacks to segmenting by organization. Job title data is easy to obtain, and it is easy for a salesperson to find someone who has a specific title. But one IT Director in a large bank isn’t going to think and act the same as another IT Director at a similar company.

Segmenting by decision-maker is ideal if you want to use the segmentation to inform your messaging and communications strategy.

After all, you communicate with individuals, but you can’t communicate with organizations. That is why sales and marketing tools tend to focus on individual-level data. It should be easier to build resonant messaging if you are considering the individuals that you communicate with.

However, individual-level segmentations have drawbacks:

  • Some companies have multiple individuals within a decision-making unit. If each individual belongs to a different needs-based segment, it won’t be clear which message to emphasize in your sales pitch
  • Additionally, segmenting by decision-maker is not ideal if you want to use the segmentation to inform product development. After all, B2B products are often built to help organizations, rather than individuals, achieve a specific task. If you only know what an individual wants, and not their employer, you won’t be able to develop new products

Segmenting by profitability or potential

Some businesses will ‘tier’ customers or prospects based on how well they match the goals of their business. For example, you can tier organizations based on:

  • The expected lifetime customer value
  • The expected profitability of that organization (e.g., there may be lower customer acquisition costs for certain company types)
  • The extent they match your sales and marketing strategies (e.g., if you rely on inbound leads via Google, is there a segment that relies only on Google searches?)
  • The extent to which they are a high percentage opportunity for a sale

This type of segmentation has several advantages:

  • It enables companies to allocate their resources better. For example, a business might target large companies because they are likely to have larger budgets. But there may be a segment of (smaller) businesses that have much lower acquisition costs and are far more profitable
  • It can support and inform an organization’s Account-Based Marketing (ABM) strategy. After all, Account-Based Marketing projects typically start with identifying a tier of organizations that are higher potential

But this approach also has some drawbacks:

  • It is not always immediately apparent what a company’s potential or profitability will be. If you get a new lead and have limited information on the prospective buyer, you won’t be able to sort the prospect into a tier or segment
  • As with firmographic segmentation, it is often incorrect to assume that organizations in the same segment or tier have identical needs or wants. Therefore, developing a proposition or message for each level can be difficult

Segmenting by needs and attitudes

In the last few decades, many businesses have adopted so-called ‘psychographic segmentations.’ This approach segments organizations based on more subjective factors, such as:

  • Personality traits
  • Personal values and beliefs (e.g., wanting to build a relationship with a vendor)
  • Content interests
  • Motivations (e.g., business priorities)
  • Pain points
  • Purchasing or product needs (e.g., decision-making criteria when purchasing a product)

For example, a B2B SaaS company might categorize its customers as follows:

  • A segment that values price
  • A segment that values relationships
  • A segment that values ease of use and productivity

This approach enables sales and marketing teams to develop more targeted strategies. It is a lot easier to develop messaging for a needs-based segment (e.g., ‘Price-focused’ segment) than for a firmographic segment (such as a ‘small business’ segment).

But there are a few downsides to psychographic segmentation.

First, it’s not always easy to identify what segment a company is in. Unlike firmographic data, which is available in databases, subjective information can only be gathered in one of two ways:

  • You can infer it from behavior. For example, if a person visits your website and looks at a specific product page or blog, it suggests that they are interested in that topic. However, behavioral data is often limited and doesn’t always provide enough information to assign someone to a segment
  • You can ask the organization some questions to identify which segment they fall into. Generally, you can sort businesses into a segment based on their answers to a small number of questions. Unfortunately, not everyone is willing to take part in a short survey. You can embed the questions into existing processes, e.g., as part of the onboarding process. Even then, your data will be limited – you can’t profile prospects or existing customers, as they aren’t onboarded

Second, psychographic segments are more challenging for sales teams to work with. It is easy to identify a firmographic segment. For example, everyone knows what a coffee shop looks like. But how is a salesperson supposed to work out that a company is in the ‘price-based’ segment?

Segmenting by behavior

Firmographic and psychographic segmentations focus on who a customer is. But you can also segment companies based on how they act:

  • What they have purchased
  • Their spending habits
  • The channels they use to interact with you
  • The content they have consumed

For example, you can have a segment of leads who have signed up for a specific webinar have downloaded a particular report. That segment can be targeted with messaging, content, and propositions related to the webinar/report topic.

Behavioral segments, in theory, provide the best of psychographic and firmographic segments without the drawbacks.

  • Like psychographic segments, behavioral segments give sales and marketing teams unequivocal guidance about what buyers want, making it easier to build strategies
  • Like firmographic segments, behavioral segments are easy to identify in a database (as long as that database contains behavioral data)

However, behavioral segmentations have some significant drawbacks:

  • Behavioral data tends to be limited in scope. You might be able to track some interactions with your products and content online, but you can’t gather information about offline behavior (e.g., how a decision is made by committee)
  • Behavioral data tells you how someone has behaved in the past, not how they will behave in the future. It also usually only tells you what someone does, not ‘why’
  • Similarly, behavioral data doesn’t tell you how, or if, you can change a segment’s behavior. For example, if you planned to launch a completely new product, past behavioral data won’t tell you how a segment would react

Segmenting by ‘jobs-to-be-done’

The ‘jobs-to-be-done’ (JTBD) framework is a way of looking at customers and prospects that unlocks a better understanding of their needs and attitudes. This knowledge can be used to improve marketing, as well as to innovate.

The basic premise of JTBD is that, when businesses are launching a product or trying to acquire customers, they often focus on the wrong thing. Specifically, they focus on who their existing customers are and on which products those customers are currently buying.

That means that they define the market too narrowly. For example, a company that sees itself as a car paint manufacturer might ask itself, ‘how can we create a better paint’ or ‘how can we sell more car paint.’ JTBD practitioners say that these are the wrong questions, and they make the company blind to disruption.

JTBD forces you to change your mindset and think more broadly. It suggests focusing on the ‘job’ that customers are hiring a product for.

The critical thing is to define a ‘job’ by its outcomes, not its features. Returning to the car paint example, some people might say that the job that people are hiring car paint for is to “paint the car.” That is not entirely correct. The actual ‘job’ is to “maintain a blemish-free vehicle.”

If you reframe the ‘job’ like this, the manufacturer’s opportunity is different. Rather than focusing on making cheaper/better paint, they could consider developing a car paint that heals itself.

 

“The structure of a market, seen from the customers’ point of view, is very simple: They just need to get things done… When people find themselves needing to get a job done, they essentially hire products to do that job for them. The marketer’s task is therefore to understand what jobs periodically arise in customers’ lives for which they might hire products the company could make. If a marketer can understand the job, design a product and associated experiences in purchase and use to do that job, and deliver it in a way that reinforces its intended use, then when customers find themselves needing to get that job done, they will hire that product.”

Clayton M. Christensen, Scott Cook and Taddy Hall Harvard Business Review, December 2005

And the JTBD framework can form the basis of market segmentation. Businesses have different contexts when executing the job-to-be-done:

  • They have different levels of complexity
  • They have different pain points
  • They have different levels of sophistication in their current approach

For example, Company A may currently schedule its hourly workforce of 5 using Excel spreadsheets. Company B may have a paid-for workforce management solution to manage 2,000 staff. Their pain points, and needs, are likely to be different. As a result, the job that they want a new solution to perform will be significantly different.

The benefits and drawbacks of using the JTBD framework in segmentation are the same as for psychographic segmentations. After all, ‘jobs-to-be-done’ are subjective.

Best practices when conducting a B2B market segmentation

In any segmentation project, there are some fundamental principles and best practices to bear in mind.

best practices

Flexibility is key

There are many unknowns going into any segmentation project, and the best outcomes come when the research approach is flexible enough to adapt as the project evolves.

For example, it is essential to be flexible regarding the ‘type’ of segmentation you want to create.

You might go into the project wanting to create a needs-based segmentation, but find that every customer has the same core needs.

Indeed, you may find that a behavioral segmentation may be better for your objectives. To make that decision, you need to consider the option of a behavioral approach from the beginning of the process.

Ensure that internal stakeholders are engaged throughout

Segmentations are as much about change management as about research.

Market segmentation isn’t an academic exercise. It can have a significant impact on your business. The departments that can be impacted include Strategy, Analytics, Marketing, PR/Comms, R&D, Product Development, Design, UX, Sales, IT, and Customer Service.

And once developed, buyer segments or personas need to be used. The biggest challenge is changing how colleagues view the customer.

As such, great care needs to be taken to get their buy-in to a new approach. Key internal stakeholders need to be involved across the journey:

  • They should be included in workshops at the beginning of the process so that they can share their hypotheses and guide some of the scoping decisions
  • They should be updated throughout the project so that they feel part of the process
  • The results of the study should be shared with them so they can decide how they will implement the segmentation into their strategic plans

Use your existing data

Primary research is often required to gather the data needed to develop a segmentation. However, before you conduct any qualitative interviews or quantitative surveys, it is essential to review the information that you already have.

Secondary research can be a cost-effective, easy, and quick way to access information about customers and prospects:

  • There tend to be several sources of customer behavior data: CRM tools, Google Analytics, point-of-sale systems, Product Intelligence tools, Business Intelligence tools. These tools can show how much customers spend, the types of products and services they use, how they interact with products, and how often they interact with your marketing
  • Customer satisfaction surveys and customer feedback forms can also provide vital information about customers’ needs and pain points, as well as perceptions of your brand
  • Social media and online communities can give you insights about prospects. For example, they may provide insights into their challenges

Getting the right mix of ‘art’ and ‘science’ through qual and quant research

Most customer persona/segmentation models are based on some mix of art and science:

  • ‘Art’ – the deep understanding of customer needs that typically comes from qualitative research methods, which tend to lead to personas that feel recognizable to internal stakeholders
  • ‘Science’ – the robust validation that typically comes from undertaking quantitative research and, typically, running statistical analysis

Too much ‘art’ can mean that the segmentation isn’t based on tangible evidence and falls apart under scrutiny. Too much ‘science’ can create a segmentation that is statistically optimal but not very pragmatic because internal stakeholders can’t recognize the segments among their customers.

The key is finding the right balance between the two for each project. As a result, we typically recommend conducting both qualitative and quantitative research for segmentation projects.

There are a few exceptions to this:

  • If you only want to develop personas, qualitative research is sufficient
  • If you have a rich behavioral data set, and internal stakeholders have a detailed knowledge of customer needs, then qualitative research may not be necessary

Interview prospects, not just customers

Segmentations are more accurate and useful when based on the entire market, not just your customers. After all, your customers may represent a specific market niche rather than the target audience.

While it can be more challenging to access prospects for primary research, we recommend including them where possible in the research process.

‘Sense-check’ the final segmentation model

Once you have developed a possible segmentation model, check that it makes senses by asking yourself the following questions:

  • Is each segment different in a meaningful way?
  • Do they intuitively make sense? Would you have expected a model like this before the project started?
  • Are they easy to explain to colleagues who haven’t worked on the project?
  • Is it possible to develop a strategy to target each segment?
  • Are the segments large enough to justify all the resources that will be used on them?
  • Is it easy to place organizations into a segment without much effort?
  • Do organizations tend to belong to a single segment, or do they seem to belong to multiple segments (or none at all)?
  • Is each segment likely to exist in a few years, or are some likely to disappear

Build tools and materials to bring the final segments to life

We recommend developing materials that help internal stakeholders to understand and recognize the segments. For example, you can create one-pagers that show the size, value, and potential of each segment, as well as what makes them unique.

Additionally, it is critical to find a way to embed the segments within your existing processes, so it is easier to use them. For example:

  • Making sure there is a segment field in your CRM
  • Including segmentation profiling questions in the onboarding process so you can identify which customer falls into which segment
  • Ensuring that email marketing campaigns are targeted by segment

 

Summary

What Is B2B market segmentation?

B2B market segmentation is the process of grouping unique organizations into segments by finding common characteristics.

Why conduct B2B market segmentation?

Segmentation can help with a variety of B2B sales and marketing activities: targeting prospects; prioritizing specific customers; refining marketing messages; optimizing channel strategy; developing the right content; optimizing proposition or product development; allocating budget and resources.

What are the different types of B2B market segmentation?

Generally, when people talk about segmentation, they refer to the robust statistical analysis of quantitative data sets.

However, not all segmentations are developed through the analysis of quantitative data. Buyer personas, which are based on the interpretation of qualitative data such as in-depth interviews, are another flavor of segmentation.

The different types of segmentation or persona model are: segmenting by organization type; segmenting by decision-maker type; segmenting by profitability or potential; segmenting by needs and attitudes; segmenting by behavior; segmenting by ‘jobs-to-be-done’.

Best practices when conducting a B2B market segmentation.

In any segmentation project, there are some fundamental principles and best practices to bear in mind: flexibility is key; ensure that internal stakeholders are engaged throughout; use your existing data; get the right mix of ‘art’ and ‘science’ through qualitative and quantitative research; interview prospects, not just customers; ‘sense-check’ the final segmentation model; build tools and materials to bring the final segments to life.

Chris Wells
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