12e

Chapter 4
Segmenting the Business Market and
Estimating Segment Demand
 Chapter Outline
i. The benefits of and requirements for segmenting the
business market
ii. The potential bases for segmenting the business market
iii. A procedure for evaluating and selecting market segments
iv. The role of market segmentation in the development of
business marketing strategy
v. A process for estimating demand in each market segment
vi. Specific techniques to effectively develop a forecast of
demand
Key to Successful High-Growth Companies

Selecting a well-defined group of potentially

profitable customers

Developing a distinctive value proposition that

meets these customers’ needs better than their
competitors

Focusing marketing resources on acquiring,

developing, and retaining profitable customers
 Business Sectors
 Commercial enterprises, institutions, and government
 Each sector has many segments
 Each segment has unique needs and requires a unique
marketing strategy
 Market Segment

Group of present or potential customers with some

common characteristic which is relevant in explaining
their response to a supplier’s marketing stimuli

Characteristics and needs of each segment define the

direction and focus of the marketing program

Segmentation involves identifying groups of

customers that are large and unique enough to justify
a separate marketing strategy
Criteria for Evaluating the Desirability of
Potential Market Segments

easurability

ccessibility

esponsiveness

ubstantiality
 Market Segmentation Benefits
 Attunes marketer to unique needs of customer
segments
 Focuses product development efforts
 Develops profitable pricing strategies
 Selects appropriate distribution channels
 Provides valuable guidelines to allocate marketing
resources
Classifications for Commercial
Markets

Centers on the
characteristics of the
Macrosegmentation buying organization and
the buying situation

Focuses on the characteristics

of decision-making units within
each macrosegment
Microsegmentation
Requires a higher degree of
market knowledge
 Two-Stage Approach to Business
Market Segmentation

Divide the
Identify
macrosegments
meaningful
into
macrosegments
microsegments
 Table 4.1 - Selected Macrolevel Bases of
Segmentation
Variables Illustrative Breakdowns
Characteristics of Buying Organizations
Size (the scale of operations Small, medium, large; based
of the organization) on sales or number of
employees
Geographical location USA, Asia Pacific, Europe,
Middle East, and Africa

Usage rate Nonuser, light user, moderate

user, heavy user

Structure of procurement Centralized, decentralized

 Table 4.1 - Selected Macrolevel Bases of
Segmentation (continued)
Variables Illustrative Breakdowns
Product/Service Application
NAICS category Varies by product or service
End market served Varies by product or service
Value in use High, low
Characteristics of Purchasing Situation
Type of buying situation New task, modified rebuy,
straight rebuy
Stage in purchase decision Early stages, late stages
process
 Table 4.2 - Selected Microlevel Bases of
Segmentation
Variables
Key criteria
Purchasing strategies
Structure of decision-making
unit
Importance of purchase
Organizational innovativeness
Illustrative Breakdowns
Quality, delivery, supplier
reputation
Single source … multiple
sources
Major decision participants (for
example, purchasing manager
and plant manager)
High importance … low
importance
Innovator … follower
 Table 4.2 - Selected Microlevel Bases of
Segmentation (continued)
Variables Illustrative Breakdowns

Personal characteristics

Demographics Age, educational background

Decision style Normative, conservative, mixed mode

Risk Risk taker, risk avoider

Confidence High … low

Job responsibility Purchasing, production, engineering

 Key Criteria

Prompt and
Product Technical
reliable
quality support
delivery

Supply Supplier
Price
continuity profiles
 Types of Buyers
 Programmed buyers: Neither price or service
sensitive
 Relationship buyers: Value partnerships and are not
price sensitive
 Transactional buyers: Price is important but
considerations are made to service, depending upon
importance of product
 Bargain hunters: Price sensitive but always relative
to importance of product
 Customer Segments
Innovation-focused customers
• Committed to being the first in the market with new products
and technologies.
• Seek NPD expertise and innovative solutions

Customers in fast-growing markets

• Constantly under pressure from competitors in fast-growth

markets.
• Seek performed in technology, manufacturing and supply chain.
Customers in highly competitive markets
• Have mature products in highly competitive markets.
• Seek cost-effective solutions to keep the overall manufacturing
and production costs down
 Purchasing Strategies
 Microsegments can be classified according to their
purchasing strategies
 Some buyers have several suppliers and give each a
healthy volume of business
 Some buyers need an assured supply, giving most of
their business to a few suppliers
 Other Microsegments

Appropriate when
product is applied in
Importance of purchase various ways by various
customers

Some organizations
Organizational innovate more and thus
are more willing to
innovativeness purchase new industrial
products
Other Microsegments (continued)

Research is needed on
segmentation based on
Personal characteristics individual characteristics to
explore its potential

When new products are

introduced, marketers may
New products need to approach new
influencers versus
traditional buyers
Methods of Forecasting Demand

- Rely on informed judgment

Qualitative techniques and rating schemes
- Called management - Include the executive
judgment or judgment method, the sales
subjective techniques force composite method,
and the Delphi method

Quantitative
Offers time series and
techniques - Called
regression or causal
systematic or
methodologies
objective forecasting
 Qualitative Method:
Executive Judgment
 Combines and averages top executives’ estimates of future
sales
 Easy to apply and understand
 Limitations
 Does not systematically analyze cause-and-effect
relationships
 New executives may have difficulty making reasonable
forecasts as there is no established formula for deriving
estimates
 Difficult to asses the accuracy of the method
 Qualitative Method:
Executive Judgment (continued)
 Produces accurate forecasts when:
 They are made frequently and repetitively
 Environment is stable
 Linkage between decision, action, and feedback is short
 Qualitative Method:
Sales Force Composite
 Sales force knows their customers, markets, and
competition, and they can estimate the sales volume
effectively
 Sales force’s involvement in forecasting process helps them
understand how the forecast is derived and boosts their
incentives to achieve desired sales levels
 Composite forecast is attained by combining the sales
estimates from all salespeople
 Sales Force Composite

Benefits

•Ability to draw on sales force knowledge about

markets and customers
•Executed with relative ease at minimal cost

Limitations

•Does not involve systematic analysis of cause and

effect
•Reliance on informed judgment and opinions
•Overestimation of the forecast to look good
 Qualitative Method:
Delphi Method
 Opinions of a panel of experts on future sales are converted
into an informed consensus through a highly structured
feedback mechanism
 Process involved:
Continue until reach consensus

Analyst assembles,
Written opinions Responses to the clarifies, and
about the likelihood first questionnaire consolidates
of some future are used to produce information for
event are sought a second one dissemination in the
succeeding round
Throughout the process, panels
i.e. sales volume, Obj: To provide feedback
are asked to reevaluate their
competitive reaction, to the group
estimates based on the new
technological breakthrough. information from group.
 Qualitative Method: Delphi Method
(continued)

 Generally applied to long term forecasting of

demand
 Suitable for new products or for situations that are
not well suited for quantitative analysis
 Difficult to measure the accuracy of the estimates
 Quantitative Methods:
Time Series
Uses historical data ordered
Past patterns can be applied to
chronologically to project the the future
trend and growth rate of sales

Time series of sales may include trends, seasonal, cyclical,

and irregular patterns

Well suited for short range forecasting

 Quantitative:
Regression or Causal Analysis

Identifies factors that have affected past sales

and implements them in a mathematical model

Projecting values for each of

the factors in the model
Forecast is derived by: Inserting these values into the
regression equation
Solving for expected sales

Reliable for intermediate forecasts

Collaborative Planning Forecasting
and Replenishment

One individual in the firm is Parties who may

influence sales
given the responsibility for
performance will
coordinating the forecasting
participate directly
process with functional in the demand
managers across the firm estimation process

Results in a very accurate forecast of demand due to

the intensive sharing of information