12e

Chapter 4
Segmenting the Business Market and
Estimating Segment Demand

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 Agenda
 9:30-9:45 Individual Quiz
 9:45-10:00 Group Quiz
 10:00-10:30 Group Quiz Discuss
 10:30-10:45 break
 10:45-11:00 Discuss article in groups (nuggets)
 11:00-12:00 Ch 4 lecture
 12:00-12:20 Discuss group choices for companies

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 Marketing News

What Would you like to share?

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 Chapter Outline
 The benefits of and requirements for segmenting
the business market
 The potential bases for segmenting the business
market
 A procedure for evaluating and selecting market
segments
 The role of market segmentation in the
development of business marketing strategy

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 Chapter Outline (continued)
 A process for estimating demand in each market
segment
 Specific techniques to effectively develop a forecast
of demand

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 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

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 Business Sectors
 Commercial enterprises, institutions, and
government
 Each sector has many segments
 Each segment has unique needs and requires a
unique marketing strategy

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 Market Segment
 What is a Market Segment?
 Characteristics and needs of each segment define
the direction and focus of the marketing program
 Must identifying groups of customers that are large
and unique enough to justify a separate marketing
strategy

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 Criteria for Evaluating the Desirability of
Potential Market Segments
 Measurability – to what extent info on the buyer
characteristics 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
 Responsiveness – the degree to which segments
respond to different marketing mix elements

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 Market Segmentation Benefits
 What are the benefits of segmenting?
 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

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 Figure 4.1 - Classifying Commercial
Enterprises

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 Classifications for Commercial Markets

 Macro-segmentation
 Centers on the characteristics of the buying
organization and the buying situation
 Micro-segmentation
 Focuses on the characteristics of decision-making
units within each macro-segment
 Requires a higher degree of market knowledge

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 Two-Stage Approach to Business
Market Segmentation
 Identify meaningful macro-segments
 Divide the macro-segments into microsegments

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 Macrolevel Bases
 Useful to partition the market by size of potential
buying organization
 Usage rate - Buyers are classified on a continuum
ranging from nonuser to heavy user
 Structure of the procurement function influences
the degree of buyer specialization, criteria
emphasized, and composition of the buying center

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 Centralized and Decentralized Buyers

 Centralized buyers - Stress on long-term supply

availability and the development of a healthy
supplier complex
 Decentralized buyers - Tend to emphasize short-
term cost efficiency

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 Product/Service Application
 We can segment the business market by how goods
can be used (their specific application)

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 Value in Use
 Product’s economic value to the user relative to a
specific alternative in a particular application

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 Purchasing Situation
 Buying organizations are classified as new-task,
straight rebuy, or modified rebuy organizations
 Marketing strategy is defined by one of the
following
 Where in the procurement decision process is the
company?
 Firm’s location on the buying situation continuum

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Example of Business Market
Segmentation

►The first variable: business description, splits the potential market into food service,
manufacturing, and supermarkets.
►Then, for each broad group, a different variable has been injected. (food service was then
further split by business description (restaurant/café or pizza outlet) and then by operating
practice (whether or not they are a franchised operation).
►Manufacturers are further defined by whether they use pizza sauce as a key ingredient (say
for frozen pizza) or may use this style of sauce in other products (frozen or microwavable pasta
for example).
►And finally supermarkets were further defined by whether or not they already sell a private
label pizza sauce through their stores.
 Table 4.1 - Selected Macro-level Bases of
Segmentation
Variables Illustrative Breakdowns

Characteristics of Buying Organizations

Size (the scale of operations of the Small, medium, large; based on sales or
organization) 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

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 Table 4.1 - Selected Macro-level Bases of
Segmentation (continued)

Variables Illustrative Breakdowns

Product/Service Application

NAICS category North American Varies by product or service

Industry Classification System (how
products are created)
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 process Early stages, late stages

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 Table 4.2 - Selected Micro-level Bases of
Segmentation

Variables Illustrative Breakdowns

Key criteria Quality, delivery, supplier reputation

Purchasing strategies Single source … multiple sources

Structure of decision-making unit Major decision participants (for

example, purchasing manager and
plant manager)

Importance of purchase High importance … low importance

Organizational innovativeness Innovator … follower

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 Table 4.2 - Selected Micro-level 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

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 Key Criteria

Prompt and
Product Technical
reliable
quality support
delivery

Supply Supplier
Price
continuity profiles

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 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

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 Customer Segments
Innovation-focused customers

• Committed to being the first in the market with new

products and technologies

Customers in fast-growing markets

• Constantly under pressure from competitors in fast-

growth markets

Customers in highly competitive markets

• Have mature products in highly competitive markets

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 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

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 Group Discussion
 FedEx believes that its future growth will come from
business to business e-commerce transactions
where customers demand quick and reliable delivery
service.
 Outline a segmentation plan that the firm might use
to become the market leader in this rapidly
expanding area.

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 Group Discussion
 Sara Lee Corporation derives more than $1.5 billion
of sales each year from the institutional market
(hospitals, schools, restaurants).
 Explain how a firm such as Sara Lee or General Mills
might apply the concept of market segmentation to
the institutional market.

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 Estimating Demand
 WHY DO WE ESTIMATE DEMAND?

 Estimating demand within selected markets is vital

to marketing management
 Forecasting demand represents probable sales and
takes into account:
 Potential business
 Level and type of marketing effort demanded

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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
 Used to:
 Distribute inventory within the supply chain
 Manage stock at each level
 Schedule resources at all levels
 Accurate forecasts go
hand-in-hand with good business
practices throughout the supply
chain

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 Methods of Forecasting Demand
 Qualitative techniques - Called management judgment
or subjective techniques
 Include:
 executive judgment method
 the sales force composite method
 and the Delphi method
 Quantitative techniques - Called systematic or objective
forecasting
 Includes:
 time series
 causal methodologies

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 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

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 Qualitative Method: Executive
Judgment (continued)
 Difficult to asses the accuracy of the method
 Produces accurate forecasts when:
 They are made frequently and repetitively
 Environment is stable
 Linkage between decision, action, and feedback is
short

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 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

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 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
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 Qualitative Method: Delphi Method
 Opinions of a panel of experts (anonymous)
 Process involved in answering a questionnaire
 Written opinions about the likelihood of some future event
are sought (sales volumes, competitive reaction,
technological breakthroughs)
 Responses to the first questionnaire are used to produce a
second one
 Based on new info from group members, members are
asked to re estimate
 Rounds continue until consensus
 Number of experts varies from 6-hundreds
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 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

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 Quantitative Methods: Time Series

 Uses historical data ordered chronologically to

project the trend and growth rate of sales
 Past patterns can be applied to the future
 Well suited for short range forecasting

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 Quantitative: Causal Analysis
 Identifies factors that have affected past sales and
implements them in a mathematical model
 Forecast is derived by mathematical formula
 Reliable for intermediate forecasts

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 For Next Week
 Prepare For Ch 5 weekly Quiz#2
 Project proposal due – one page max outlining:
 what you want to explore with your chosen company.
 What do you think is the issue/s you would like to work
on for the chosen company?
 What will you be re-inventing?
 Who will you be speaking to get information?
 How else will you gather information?

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 GROUP TIME
 I will walk around to hear your company ideas

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