Chapter 5: Segmenting

the Business Market and

Estimating Segment
Demand

Business Marketing Management – B2B 10e

Michael D. Hutt
Arizona State University

Thomas W. Speh
Miami University
Chapter Topics

1. Benefits of and requirements for segmenting the business

market

2. Potential bases for segmenting the business market

3. Procedure for evaluating and selecting market segments

4. Process for estimating demand in each market segment

5. Specific techniques to effectively develop a forecast of

demand
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 High-Growth
Companies
Succeed By:

Selecting well- Focusing

defined groups marketing
of potent ial l y resources on
profitable acquiring,
Developing
customers developing,
distinctive value
propositions and retaining
t h a t profitable
competitively customers
meet customer
needs 3
1. Business Market Segmentation
Requirements and Benefits

What Is A Market?
A market is…
• People or organizations who
• need & want what we offer
(all have the same problem
and need a similar solution)
• have the ability to purchase
and
• the willingness to buy ASAP.
A group of people that lacks
any one of these characteristics
is not a market.
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Market Segmentation
Market People or organizations with
needs or wants, the ability to purchase
and the willingness to buy.

Market A group of present or potential

Segment customers with some common
characteristics which we can explain
(predict) their actions when subjected
to marketing stimuli.

Market The process of dividing a market into

Segmentation meaningful, relatively similar and
identifiable segments or groups.
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Segmentation Requirements
Measurability

Accessibility

Substantiality

Responsiveness

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Segmentation Requirements
• Measurability: The degree to which information on
particular buyer characteristics exists or can be obtained.
• Accessibility: The degree to which the firm can effectively
focus its marketing efforts on chosen segments.
• Substantiality: The degree to which the segments are large
or profitable enough to be worth considering for separate
market cultivation.
• Responsiveness: The degree to which segments respond
differently to different marketing mix elements such as
pricing or product features.

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Art of Segmentation
• Segmentation involves identifying groups of customers or
business groups that are…

1. Large enough
2. Unique enough
3. Financially independent enough
4. Reachable enough

…to justify a separate marketing strategy.

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Missed Opportunities – Three
Customer Groups

1. Undershot customers - Existing solutions fail to meet

their needs, resulting in: a purchase of new product
versions at steady or increasing prices.
2. Overshot Customers - Existing solutions are too good,
thus customer is reluctant to purchase new version.
3. Non-Consuming Customers – Customers who lack
resources, skills or ability to benefit from existing solutions.

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Missed Opportunities (continued)

• Often, marketers focus too much on Undershot and not

enough on Overshot or Non-Consuming customers.

• Consequently, marketers miss opportunities to:

• Recognize new innovations that could motivate
Overshot and Non-Consumers to buy.
• Invent new products that could revolutionize industries
as we know it.
• Examples:
• Computer industry – Mainframes vs. PCs
• Printing Industry – Print shops vs. office printers

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Segmentation Benefits
• Attunes marketer to unique needs of customer segments

• Focuses product development efforts, develops profitable

pricing strategies and selects appropriate distribution
channels

• Provides valuable guidelines to allocate marketing resources

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2. Potential Bases for segmenting
the business market

• Consumer vs. Business Profiling

• Consumer-goods marketers are interested in meaningful
profiles of individuals concerning:
• Demographics
• Lifestyle
• Benefits sought
• Business marketers profile:
• Organization size
• Organizational buyer’s decision styles & buying
criteria
• Two broad classifications for commercial markets:
• Micro & Macro Segmentation
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Macro-Level Bases

• To find viable macro-segments, it is useful to partition

buying organizations into smaller groups based on certain
criteria.
• Criteria include:
1. Characteristics of the buying organization
2. Product service application
3. Characteristics of purchasing situation

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Selected Macro-Level Bases of
Segmentation

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Micro-Level Bases
• Once macro-segments are identified, the next step is to
divide each macro-segment into smaller meaningful
micro-segments.

• Often, several micro-segments are buried within macro-

segments.

• To isolate them, marketers need to move to primary

sources of information from:
• Salespeople
• Present Customers

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Selected Micro-Level Bases of
Segmentation

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Key Criteria

Most business buyers value:

1. Quality
2. Delivery
3. Service
4. Supplier’s Reputation
5. Price (all other things being equal)

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Price vs. Service

• Often there are tradeoffs between buyers with respect to

Price vs. Service
• One study identified four types of buyer segments:
• Programmed buyers
• Relationship buyers
• Transaction buyers
• Bargain hunters

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Types of Buyers
1. Programmed Buyers - Neither price or service sensitive.
They buy routine products according to a purchasing
program.

2. Relationship Buyers - Value partnerships and are not

super price sensitive. Product may be moderately
important to operation.

3. Transactional Buyers - Price is important but

considerations are made to service, depending upon
importance of product.

4. Bargain Hunters - Price is everything but always relative

to importance of product. 19
Value Based Strategies

Many customers seek sellers who are able to offer innovative

solutions to help them become more competitive. Marketers
identify these customers as:
1. Innovation-focused customers
2. Customers in fast-growing markets
3. Customers in highly competitive markets

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1. Innovation-Focused Customers

• Committed to being the first in the market with new

products and technologies

• Want suppliers who offer innovative solutions or

opportunities that help them attract new customers

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2. Customers in Fast-Growing
Markets

• Constantly under pressure from competitors in fast-

growth markets

• Seek suppliers who offer proven performance in technology,

manufacturing, marketing and supply-chain management

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3. Customers in Highly Competitive
Markets

• Have mature products in highly competitive markets

• Look for suppliers who offer products/services that speed
up manufacturing and related processes
• Are efficient and effective at keeping overall costs down

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Purchasing Strategies

Micro-segments can be classified according to their

purchasing strategies:
1. Some buyers have several suppliers and give each a
healthy volume of business.
2. Some buyers need an assured supply, thus giving most of
their business to a few suppliers.

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Structure of the Decision Making
Unit

• Whoever makes the buying decisions often dictates how to

market to that customer.
• Would it be the engineers, the purchasing agents, or top
management?

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Other Meaningful Micro-Segments
• Importance of purchase – Appropriate when product is applied
in various ways by various customers
• Attitudes toward vendors – Analysis of how various buyer
clusters view alternative sources of supply; often uncovers
opportunities
• Organizational Innovativeness – Some organizations innovate
more and thus are more willing to purchase new industrial
products
• Personal Characteristics – Although some interesting studies
have shown viability of segmentation based on individual
characteristics, further research is needed to explore its
potential as valid base for micro-segmentation
• New Products – When new products are introduced, marketers 26
may need to approach new influencers vs. traditional buyers
3. The Segmentation Process
1. Choosing Market Segments
As you can see, there are numerous steps to choosing market
segments.
We start by analyzing key characteristics of the organization
and of the buying situation (macro-dimensions) to identify,
evaluate and select a meaningful macro-segment.

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Segmentation Model
1. Identify key characteristics (macro-segments) based on
organizational characteristics (e.g.: size, NAICS)

2. Consider the buying situation in terms of macro-

dimensions (i.e., Where are they in the procurement cycle
– new task, rebuy, modified rebuy?)

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Segmentation Model
3. Select set of acceptable macro-segments based on
corporate objectives and resources.

4 Evaluate each segment that possesses distinct needs, is

open to a distinct message and is responsive to your
marketing program.

5. If Step 4 is successful, select macro-segment as the target

market and complete a cost/benefit analysis for
marketing to it.

Question: Is it worthwhile?
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Segmentation Model
A. If a particular macro-segment is not the right market,
then do a micro-segment analysis based on key decision-
making characteristics (i.e., What is their purchasing
strategy? Attitude towards vendors? etc.)

B. Select a new desired micro-segment based on a

cost/benefit analysis.

C. Identify the complete profile of the segment based on

macro & micro-level characteristics.

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Utilizing Segmentation
• Management can utilize segmentation in different ways.

• Companies can categorize their present business

customers from:
1. Bad – Good – Great
2. Unprofitable to Profitable

• Segmenting both new prospects and present customers in

this manner can result in a more profitable organization.

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Implementing a Segmentation Plan
A well-developed segmentation plan will fail unless the
following issues are addressed:

1. How should the sales force be organized?

2. What services will the new segment require?
3. Who will provide the new services?
4. How do we contact the new segment?
5. Can we support the new operation?
6. Will new adaptations be necessary to serve the
international market?
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4. Estimating Demand

• Estimating demand within selected markets is vital to

marketing management!

• Forecasting demand represents probable sales. It takes

into account:
• Potential business
• Marketing efforts

• Virtually all business decisions are predicated on the

forecast, both formal and informal.

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Application of Demand

• The application of demand rests in the planning and

control of marketing strategy by market segments.

• Once demand is estimated by segment, the manager can

allocate resources on the basis of potential sales volume.

• Spending money on promotion has little benefit if the

market opportunity is minimal or the competition is fierce.

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Supply Chain Links

• Sales forecasts are critical to a smooth operation

throughout the supply chain.
• Timely forecasts allow supply chain members to effectively
coordinate their efforts and share in the benefits.

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Sales Forecast Data

• Sales Forecast Data is used to:

• Distribute inventory within the supply chain
• Manage stock at each level
• Schedule resources at all levels
• Provide material, components and service to a
manufacturer
• Accurate forecasts go hand-in-hand with good business
practices throughout the supply chain

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5. Methods of Forecasting Demand

1. Qualitative
• Executive Judgment
• Sales Force Composite
• Delphi Method
2. Quantitative
• Time Series
• Regression (causal)
3. Collaborative Planning Forecasting and Replenishment
4. Combining Techniques

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Qualitative Method: Executive
Judgment

Executive Judgment:
This method is very popular because it is:
1. Easy to understand
2. Easy to apply

 Executives from various departments (Sales, Marketing,

Accounting, Finance, Procurement) are brought together
and apply their collective knowledge to the forecast.

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Executive Judgment: Benefits

Executive judgments are often used in conjunction with

quantitative approaches to forecasting
Tend to be fairly accurate when:
1. Forecasts are made frequently & repetitively
2. The environment is stable
3. The link between decision, action and feedback is short

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Executive Judgment: Limitations

• Does not offer systematic analysis of cause & effect

relationships
• No formula for estimating derived demand
• New executives may have trouble making a reasonable
forecast
• The forecast is only as good as executives’ collective
knowledge and experience
• Difficult to compare against alternative techniques

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Qualitative Method:
Sales Force Composite

• Rationale is that the sales force knows their customers,

markets and competition, thus they can estimate their
market fairly accurately.
• Having the sales force involved in the forecasting process
helps them understand how the forecast is derived and
boosts their incentives to achieve desired sales levels.
• The composite forecast is attained by getting input from
all their salespeople.

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Sales Force Composite: Benefits

• More successful if the dyadic (buyer/seller) relationship is

close
• Inexpensive
• Facilitates salespeople to review their account in terms of
future sales
• However, few companies rely solely on their sales force
estimates
• They are reviewed by top management and are compared
to quantitative methods

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Sales Force Composite: Limitations

• Limitations are similar to the executive judgment

approach

• Not a systematic analysis of cause & effect

• It’s still only judgment/opinion
• Some salespeople overestimate their forecast to look
good
• Some salespeople underestimate to lower their quota or
increase commissions
• Generally, short term estimates are accurate, but long-
term estimates are lacking
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Qualitative Method: Delphi Method

1. It starts with a moderator (analyst) who attains a

forecast opinion from a panel of anonymous experts.
2. These estimates (along with reasons) are passed around to
the entire group and new estimates are evoked.
3. Rounds continue until a consensus is reached.
4. A panel may consist from 6 to 100’s depending upon the
purpose, and numerous rounds are conducted until a
consensus is attained.

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Delphi Method

• It is generally applied to long term forecasting of demand.

• It’s good for new products or for situations that are not
well suited for quantitative analysis.

• Finally, like other qualitative approaches, the Delphi

method is difficult to accurately measure.

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Summary of Qualitative Forecasting
Techniques

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Quantitative Methods: Time Series

• Time Series uses historical data

• Rationale is that the past patterns will apply to the future
• The analyst needs to understand all possible patterns to
include:
• Trends
• Seasonal patterns
• Cyclical patterns
• Irregular patterns
• Time Series methods are well suited for short range
forecasting
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Quantitative: Regression or Causal
Analysis

Uses factors that are identified as affecting past sales

Y = a + bX Linear Regression equation

To be valid, there needs to be a direct link between X

(independent) & Y (dependent) variables. For example, X
cause (housing starts) should affect future sales (demand) of
Y (new furniture or hardware or wood, etc.)

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Regression Analysis

• Much historical data is needed

• Some will come from accounting data
• Other data can come from both primary and/or secondary
sources such as:
• Project specific surveys (primary), or
• Survey of Current Business (secondary)
• Reports developed by the Dept. of Labor that are
especially data related to employment statistics
• Industry specific research studies
• Census data

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Regression Analysis: Limitations

• Although regression analysis is fairly accurate, there are

some limitations, thus the need for caution:
• Although some variables are highly correlated, they may
not have a genuine cause/effect relationship.
• Again, there is a need for much data, however some
data may not be available.
• Regression analysis uses past data and may not be
relevant to rapidly changing events, thus invalidating
past relationships.

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Quantitative: Which Method?

• Research suggests that strategists should choose a forecast

method that is based on the market’s “underlying behavior”
rather than on a “time horizon”

• When markets are sensitive to market or environmental

changes, causal methods work best

• When market shows no sensitivity to market or

environmental factors, time series is more accurate

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Using CPFR to Estimate Demand

CPFR: Collaborative Planning Forecasting & Replenishment

involves deriving and sharing information by combining the
efforts of many functional areas within the firm and
between channel partners to estimate demand.
With respect to the supply side, functional areas include
Sales, Marketing, Production, Logistics and Procurement
will be called upon to discuss their upcoming plans.
On the demand side, planners will reach out to customers,
distributors and manufacturers to discover their plans.

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Result of CPFR

• Result: Often, the forecast of demand is very accurate!

• Partners can map this shared information in a way that:
• Fits into their organizational needs
• Points out where plans deviate from their own
• Allows collaboration that assesses assumptions which
may lead to different estimates
• This iterative process encourages the supply chain to
synchronize activities better while keeping the enterprise
planning process intact.

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Combination Approach to
Forecasting

• Research suggests that forecasting can be improved by

combining several forecasting methods.
• Experts suggest that management should use a composite
forecasting model to include both Qualitative and
Quantitative factors.
• Furthermore, rather than searching for a “one best
method”, they should consider the broader range of factors
that affect sales, and integrate them into a “composite”
forecasting approach.

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