Segmenting the Business Market

The business market, often referred to as B2B (Business to Business) is a very different place than the consumer market.  Each has their own pros and cons. Personally, I have worked in both and prefer B2B, but everyone has their own preferences.  Technically there are three types of segmentation for the business market, but I am going to tweak this some.  In a business market, we can break down segments into geographical, customer type, and buyer behavior. 

As mentioned, the first way to segment a business market is by geographical location.  For some businesses, this segmentation is a great way to determine their market and not as much for others. Variables that we take into consideration when defining a geographical segment include: location, customer concentration, industrial growth rate, and macroeconomic factors. 

Notice that these are different from the geographic segmentation for consumers.  Location is obvious, your customers are more likely to want to meet you in a nice office than a back alley, white van, or in a field somewhere. 

Now, some of the other variables can be as hard to grasp as a greased pig.  We should explore these in more detail.

Consumer Concentration

Consumer concentration is one of those variables that prove challenging for most people to either explain or understand.  Hopefully, I can explain this well for you.  Customer concentration is when a business focuses on a small handful of large paying clients.  A business may have a high customer concentration rate if they have one customer that supplies 50% of their revenue.  I have seen businesses who relied on one contract to stay going.  That is a high consumer concentration issue.  Now, let’s apply this to the geographical segmentation.  If there are only three or five potential accounts that your business can get because of a geographical restriction, then you may have a high customer concentration issue.  It’s not a game ender, but you will need to be creative in finding ways to branch out of your geographical location.

Industrial growth rate in your graphical location is something to consider.  The industrial growth rate in your region will help you realize trends in the areas market and if the location you operate in is going to be beneficial for your business. 

Let’s pretend for a moment that we make hydraulic pumps, which sounds a lot cooler than a dieting program!  If you operate in Detroit, MI and they have a rapidly falling industrial growth rate for machines that use your hydraulic pumps, it may make sense from a logistics perspective to move to Denver, CO, which has a stronger industrial growth rate.

Macroeconomic factors are part of economics.  This side of economics has to do with large-scale economic factors, such as: interest rates, inflation, price levels, national income, gross domestic product, and changes in unemployment.  Macroeconomics focuses on the economic trends and how the global economy flows as a whole. 

All of these factors impact different industries in different ways.  Moving a business that deals with warehousing and logistics into a high unemployment region, may allow you to acquire human capital at a lower rate.  Areas with higher interest rates and taxes may be less desirable.  For a business of that nature, keeping costs low based on macroeconomic factors could be beneficial in times of inflation.

For a manufacturing facility, geographical segments are important.  You want to have highways and or railways easily accessible with quick routes to get raw materials.  If you locate in an area with a lot of buyers for your product (lower customer concentration), with strong industrial growth rates, your business is on a great track in this segment.

Now, I am most familiar with software companies and to an extent, geographical factors mater some, but not as much.  With a Software as a Service (SaaS) company, where the service is located remotely, the consumer concentration is very low.  You can provide services to clients that are virtually anywhere.  The same applies to the industrial growth rate, since you are competing on a national or international basis.  In terms of macroeconomic factors, those do have some implications if you are looking to expand operations into other countries. 

Additionally, unemployment rates and interest rates tend to not effect these types of companies as it does typical businesses.  Developing software requires skilled workers with a high level of knowledge.  The chances of finding them all in one area is challenging and it is likely that you will have to relocate them to your businesses corporate location, if you want them onsite.

As you can see, geographical factors apply differently to different types of businesses and industries.  If it was all the same, this wouldn’t be any fun!  I love researching the segments and determining the best places to position a business and its products.

Continuing to look at the various segments in the business market, we must understand customer types.  Customer types come in all shapes and sizes.  Variable factors for this segment include items such as company size, industry, and position in value chain.

Company size is easy to determine.  If we are selling hosting services for enterprise database systems, then we will likely target potential customers with over 100 employees.  On the other hand, if we are selling a service, such as bookkeeping, we may want to target smaller organizations with 10 or fewer employees.  All of this depends on what work load you can handle and what an ideal organization size is for your product or service.  Note:  company size does not have to be reserved to just the number of employees.  You can also use this area to account for size in terms of revenue, geographical reach, decision making management structure, and budget.

It is also fairly easy to determine the industry variable in the customer type segment.  If you are selling an inventory tracking system, then you would likely want to target the warehousing and retail industries.  If you are selling computer technology services, that can apply to a broader array of industries since virtually every business needs some form of a computer to operate.  This is too broad; we need to determine a niche.  This was something I struggled with for a long time.  You must realize that you cannot be all things to all people.  So, as we develop our initial strategy, we could start by targeting non-profit organizations for our technology services.  They could be a good starting point since many cannot afford a full-time IT person on staff.  Start small and then expand and grow.

The value-chain variable sometimes causes confusion and like the customer concentration, the value-chain within an organization is best described as support activities and primary activities.  Support activities include: firm infrastructure, human resource management, technology, and procurement.  Primary activities include: inbound logistics, operations, outbound logistics, marketing, sales, and service. 

What we need to decide is which activity area and department our product or service applies to.  If we were starting a video production company, who specializes in high end videos that capture a story about the company, what part of the value-chain do we approach?  Probably marketing & sales. A whole book could be written about value-chains, but we have a business to get started and economics really isn’t my specialty.

Buyer behavior is our next variable that we need to consider when determining our market pursuit.  We want to take into consideration their order sizes, typical usage patterns, and supplier loyalty.

This is a pretty easy variable to define.  If we were starting a paper distribution and delivery company for office paper products, we would want a buyer behavior segment that gets at least a monthly order for a large amount of product, who is a loyal customer.  Granted, we must make them disloyal to someone to get their business; after we do that, our service and pricing will keep them loyal to our company.

Now that we have an idea on how to “narrow down” our business to focus on a specific segment we are ready to move forward.  I know, you may be thinking that I am crazy to say we need to narrow the business to specific segments and variables, but to keep the company focused, driven, and unique this narrow starting point is more than necessary. 

As your business grows, you can expand offerings into other areas.  The problem when entrepreneurs are too broad, is the customer doesn’t understand how their product or service is applicable to them.  By focusing on a specific segment, the marketing pitch, and strategic planning for our earlier phases of business is much easier.

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