Market Segmentation for Industrial Marketers – Why You’re Probably Doing it Wrong

As a marketer, you are undoubtedly familiar with the concept of market segmentation, where you divide your market into identifiable customer groups to improve your targeting. A key concept for proper market segmentation is that customers should be grouped by values (needs and wants) and the behaviors these values drive. Additionally, well-executed segmentation assures that the priorities of these values for each customer in the group are similar. While this concept was originally developed in the consumer marketing arena (and has been far more thoroughly researched there), it is a key tool for building growth strategies in industrial markets as well.

Segmentation helps you develop more effective product development and marketing programs by differentiating your offerings and message to meet key segment needs. It also helps you define where your capabilities best align with customer needs to better focus your limited resources and achieve greater returns on your efforts. Showing that you understand a segments needs also helps to engender customer loyalty; think of Apple and the love they have long received from the graphic design community, for example.

Unfortunately, too many marketers confuse segmentation with classification. If you are defining your “segments” by the characteristics of the customer, instead of their values, you are guilty of this mistake. For example, it is tempting to use SIC (or NAICS) codes, number of employees, location, or size, or company structure (public vs. private) to define segments. While classification has its place, it is insufficient for providing the insights you need to develop a meaningful market plan. The customers within each classification will differ; for example, participants in the medical device industry (a classification based on an NAICS code) may differ in how they procure equipment, or the factors that provide them a competitive edge, as just two examples. Thus, one solution will not fit all medical device manufacturers; even worse, trying to meet all their needs with one solution and message may lead to satisfying no one.

Segmentation is challenging because it requires the kind of knowledge that is not possible by web research or internal meetings and analysis. You have to spend time with numerous customers to understand their values and priorities. This requires significant planning in developing the questions that will give the insights you need; such questions touch on how customers make decisions, what their most important metrics are, how receptive they are to new technologies, the type of relationships they want with suppliers and customers, and similar topics. It is only through numerous data points that patterns may start to emerge; you will know that you are reaching some definition when you can start to explain the differences between groups and define value propositions that would appeal distinctly to members of each segment. It can be helpful to use visualizations, such as matrices, to position your segments and make sure they are truly distinct.

Once you think you are done with your segmentation and have tested it to ensure that the segments truly are differentiated, you need to assign some estimates of the market opportunity in each segment to make sure they are sufficiently large to target. If you have cut too fine, you may need to combine adjacent segments to achieve scale, but be careful to make sure that there are still enough common values within a combined segment to communicate a meaningful and unique offer. It is then typical to assign catchy names to the segments based on their characteristics to remind you of their driving values. You should then develop profiles of each segment that drive your action plans, keeping in mind that “ignore” is an action plan that will be appropriate for some of your segments, due to either limited potential or a poor fit to your capabilities.

Segmentation can yield tremendous benefit for your business when done properly and is well worth the time invested, especially when related to key initiatives such as new market development or new product commercialization. But if not done properly, a segmentation exercise yields little better results than just taking a shotgun approach and hoping you hit a target.  The next post provides an example of how market segmentation is executed to identify attractive segments for growth for a new product.

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