Business-to-business markets are characterized in several ways that makes them very different to their consumer cousins. Below I summarize the main differences between consumer and business-to-business markets, and set out the implications for market segmentation:
1) B2B markets have a more complex decision-making unit: In most households, even the most complex and expensive of purchases are confined to the small family unit, while the purchase of items such as food, clothes and cigarettes usually involves just one person. Other than low-value, low-risk items such as paperclips, the decision-making unit in businesses is far more complicated. The purchase of a piece of plant equipment may involve technical experts, purchasing experts, board members, production managers and health and safety experts, each of these participants having their own set of (not always evident) priorities.
Segmenting a target audience that is at once multifaceted, complex, oblique and ephemeral is an extremely demanding task. Do we segment the companies in which these decision makers work, or do we segment the decision makers themselves? Do we identify one key decision maker per company and segment the key decision makers. In short, who exactly is the target audience and who should we be segmenting?
2) B2B buyers are more “rational”: The view that b2b buyers are more rational than consumer buyers is perhaps controversial, but I believe true. Would the consumer who spends $3,000 on a leather jacket that is less warm and durable than the $300 jacket next-door make a similar decision in the workplace? Consumers tend to buy what they want; b2b buyers generally buy what they need.
It perhaps therefore follows that segmenting a business audience based on needs should be easier than segmenting a consumer audience. In business-to-business markets it is critical to identify the drivers of customer needs. These often boil down to relatively simple identifiers such as company size, volume purchased or job function. These identifiers often enable needs and therefore segments to be quite accurately predicted.
3) B2B products are often more complex: Just as the decision-making unit is often complex in business-to-business markets, so too are b2b products themselves. Even complex consumer purchases such as cars and stereos tend to be chosen based on simple criteria. Conversely, even the simplest of b2b products might have to be integrated into a larger system, making the involvement of a qualified expert necessary. Whereas consumer products are usually standardized, b2b purchases are frequently tailored. This raises the question as to whether segmentation is possible in such markets – if every customer has complex and completely different needs, it could be argued that we have a separate segment for every single customer. In most business-to-business markets, a small number of key customers are so important that they “rise above” the segmentation and are regarded as segments, with a dedicated account manager. Beneath these key customers, however, lies an array of companies that have similar and modest enough requirements to be grouped into segments.
4) B2B target audiences are smaller than consumer target audiences: Almost all business-to-business markets exhibit a customer distribution that confirms the Pareto Principle or 80:20 rule. A small number of customers dominate the sales ledger. Nor are we talking thousands and millions of customers. It is not unusual, even in the largest business-to-business companies, to have 100 or fewer customers that really make a difference to sales. One implication is that b2b markets generally have fewer needs-based segments than consumer segments – the volume of data is such that achieving enough granularity for more than 3 or 4 segments is often impossible.
5) Personal relationships are more important in b2b markets: A small customer base that buys regularly from the business-to-business supplier is relatively easy to talk to. Sales and technical representatives visit the customers. People are on first-name terms. Personal relationships and trust develop. It is not unusual for a business-to-business supplier to have customers that have been loyal and committed for many years.
There are several market segmentation implications here. First, while the degree of relationship focus may vary from one segmentation to another, most segments in most b2b markets demand a level of personal service. This raises an issue at the core of b2b segmentation – everyone may want a personal relationship, but who is willing to pay for it? This is where the supplier must make firm choices, deciding to offer a relationship only to those who will pay the appropriate premium for it. On a practical level, it also means that market research must be conducted to provide a full understanding of exactly what “relationship” comprises. To a premium segment, it may consist of regular face-to-face visits, whilst to a price-conscious segment a quarterly phone call may be adequate.
6) B2B buyers are longer-term buyers: Whilst consumers do buy items such as houses and cars which are long-term purchases, these incidences are relatively rare. Long-term purchases – or at least purchases which are expected to be repeated over a long period of time – are more common in business-to-business markets, where capital machinery, components and continually used consumables are prevalent. In addition, the long-term products and services required by businesses are more likely to require service back-up from the supplier than is the case in consumer markets. A computer network, a new item of machinery, a photocopier or a fleet of vehicles usually require far more extensive aftersales service than a house or the single vehicle purchased by a consumer. Businesses’ repeat purchases (machine parts, office consumables, for example) will also require ongoing expertise and services in terms of delivery, implementation/installation advice, etc. that are less likely to be demanded by consumers.
In one sense this makes life easier in terms of b2b segmentation. Segments tend to be less subject to whim or rapid change, meaning that once an accurate segmentation has been established, it evolves relatively slowly and is therefore a durable strategic tool. The risk of this, and something which is evident in many industrial companies, is that business-to-business marketers can be complacent and pay inadequate attention to the changing needs and characteristics of customers over time. This can have grave consequences in terms of the profitability of a segment, as customers are faced with out-of-date messages or benefits that they are not paying for.
7) B2B markets drive innovation less than consumer markets: B2B companies that innovate usually do so as a response to an innovation that has happened further upstream. In contrast with FMCG companies, they have the comparative luxury of responding to trends rather than having to predict or even drive them. In other words, B2B companies have the time to continually re-evaluate their segments and CVPs and respond promptly to the evolving needs of their clients.
8) B2B markets have fewer behavioural and needs-based segments: The small number of segments typical to b2b markets is a key distinguishing factor of business-to-business markets. Studies of over 2,500 business-to-business studies show that B2B markets typically have far fewer behavioural or needs-based segments than is the case with consumer markets. Whereas it is not uncommon for an FMCG market to boast 10, 12 or more segments, the average business-to-business study typically produces 3 or 4.
Part of the reason for this is the smaller target audience in business-to-business markets. In a consumer market with tens of thousands of potential customers, it is practical and economical to divide the market into 10 or 12 distinguishable segments, even if several of the segments are only separated by small nuances of behaviour or need. This is patently not the case when the target audience consists of a couple of hundred business buyers.
The main reason for the smaller number of segments, however, is simply that a business audience’s behaviour or needs vary less than that of a (less rational) consumer audience. Whims, insecurities, indulgences and so on are far less likely to come to the buyer’s mind when the purchase is for a place of work rather than for oneself or a close family member. And the numerous colleagues that get involved in a B2B buying decision, and the workplace norms established over time, filter out many of the extremes of behaviour that may otherwise manifest themselves if the decision were left to one person with no accountability to others.
