IMPLEMENTATION PHASES: SEGMENTATION

Transcription

1 IMPLEMENTATION PHASES: SEGMENTATION One of the key initial activities in Market Management is the definition of a segmentation model that describes buying behavior in the marketplace. In complex business to business markets this often presents a difficult challenge. THE FOUNDATION It is our view that business consumers acquire products and services to satisfy needs. In the most general terms, needs are internal conditions that motivate behavior. For purposes of segmentation, the behavior of interest is the motivation to buy a particular offering. Needs are internal. While external factors such as market conditions may impose limitations to the satisfaction of a need, or may facilitate the satisfaction of needs, the need itself begins in the mind of the buyer. Understanding buyers needs and constraints is a very powerful approach to market segmentation. The concept of needs based segmentation has its roots in packaged goods research. Today, packaged goods companies have developed a science around identifying groups of customers with similar needs and developing or extending products to satisfy those needs. For the packaged goods companies, adoption of needs based segmentation was a revolutionary advance over demographics based segmentation. Business to business segmentation research has not yet experienced this revolution. Most business to business segmentation, even in sophisticated, information rich, high tech companies, is based on what we call firmographics. Firmographics are descriptors of the firm (e.g. industry, usage, computing platforms, etc.). Business decision making is generally more complex than consumer decision making, involving several levels of management and thus, several levels of needs to serve. For example, senior managers generally have needs that are related to shaping business strategy. Operational managers have needs that relate to policies and procedures. Functional and technology managers have needs that focus on functional operations and solution features. The complex nature of the business decision making unit has inhibited the development of a more scientific, needs based approach to market segmentation. The nature of the approach to business segmentation presented below allows it to be applied to a variety of decision making structures. Thus, the same approach can be used for both simple and complex decision making units. Needs Based Segmentation (NBS) offers several advantages over other approaches. At the core of these is the competitive advantage gained from meeting customer needs accurately and in a timely fashion. Needs Based Segmentation has other important benefits. It focuses efforts on selective investments with the highest rate of return. It promotes efficient marketing and selling by targeting potential customers that are compatible with offerings. And it addresses the needs across multiple members in complex decision units.

2 THE SEGMENTATION HIERARCHY During the segmentation phase of the implementation, the firm s marketplace is defined and divided into groups of buyer segments. A hierarchy of segments is established at the strategic, operational and buyer levels. The segments provide the basis for the creation and management of organizational units (strategic segmentation), for go to market strategies and solution requirements (operational Tactical Segmentation Operational Segmentation Strategic Segmentation Business Portfolio Go-to-Market/Solution Portfolio Prioritization/Targeting segmentation) and for sales and marketing deployment (tactical segmentation). STRATEGIC SEGMENTS In many firms the strategic portfolio of segments (businesses) is based on firmographic groupings such as industry, size, geography, or some other high level characteristic of customers and prospects. For example, one firmographics based segment might be defined as, large IT Operations, located in North America, Financial Services Industry. Another firmographics based segment might be defined as, small IT Operations and XSPs. From a Market Management perspective the firmographic groupings approach, while it may have some value, is limited in its ability to predict or describe buyer behavior. Other firms may choose a supply oriented approach, modeling their businesses along product or solution lines. This approach ensures focus on developing solutions, usually followed by seeking markets into which to sell the solutions.. Very often this approach results in overlapping distribution (i.e. marketing and sales) systems. Unfortunately, few firms in high technology go much further than one of these two approaches. A better approach is to identify or define a set of macro level needs based segments that are aggregates of lower level needs based segments. We will say more about the lower level needs based segments later in this section. An example of macro level segmentation might be to define a segment as those firms that exhibit a significant emphasis on external IT users. This high external IT macro segment might be further characterized as having a set of needs for extremely high availability, very rapid response time, customer care oriented service level management, high integration of IT and business processes, a focus on external users in designing a high quality end user experience and a low focus on the cost of IT, and a view of IT as an investment in competitive advantage. Segmentation at the macro segment level has been found to be very enduring. Macro sets of needs change only when a firm is re establishing its purpose for business (i.e. its mission, vision and values). This type of change happens rarely.

3 OPERATIONAL SEGMENTS At the operational level, the use of needs based segmentation becomes very powerful. Needs based segments at this level define the spectrum of needs of all involved in decisions. The key to success is separating the overt structure of a decision making unit into a scheme of needs that addresses the many levels of the decision making unit. Usually a three or four level needs model is adequate to describe the needs set of the members of any decision making unit. A generalized needs model can be built around the roles typically occupied by members of decision making units. It is applicable to most decision making units, whether all the roles are filled by one individual or by several. Using our example from the strategic segmentation discussion above, analysis would most likely find groupings of needs within the high external IT macro segment. That is, we would identify groups of buyers that consistently weight the various elements of the overall needs set differently. Some might address the macro need for servicing external users by emphasizing service level management and business integration. Others might place a stronger emphasis on the technical factors involved in servicing external users. Some members of the macro segment might place strong emphasis on all of the underlying needs. Segmentation at the operational level is, in general, fairly enduring. However, since they generally are characterizations of how firms satisfy their macro level needs, these segments may change as different strategies are adopted to meet macro needs. TACTICAL SEGMENTS Tactical segmentation involves the targeting or prioritization of subsets within operational segments. We label it as targeting or prioritization because generally, at this level, all of the members of the operational segments are available and reasonable as targets. For a variety of reasons, (e.g. product penetration, business/budget status, ease of access, and relationship) a specific offer, at a specific time, will be accepted better by some subsets of the operational segments than by others. In needs based segmentation, the factors that cause differential acceptance by subsets of the operational segments are viewed as constraints or facilitators superimposed on the needs sets. Members of an operational segment have the same set of needs as defined by the needs based operational segmentation. However, due to the influence of factors external to needs, the potential for satisfying their needs is either facilitated or constrained. The tactical segments comprise the most fluid part of the segmentation schema. They change as technology, economics, and business results change.

4 NEEDS BASED SEGMENTATION BEST PRACTICES A set of criteria for best practices for segmentation efforts, that are most effectively addressed by a needs based approach, can be defined as: Needs Based Segmentation (NBS) defines segments as groups of buyers who exhibit homogeneous needs within segments and heterogeneous needs between segments. Needs Based Segmentation identifies segments in a manner that provide insight into the key questions about buying. Who will buy? What they will buy? Why they will buy? Where or how they want to buy? It drives what we call rich segmentation (i.e. the segments describe behavior). Firmographic segmentation (e.g. industry) typically only provides a weak generalization of behavior (e.g. all banks are assumed to behave the same way). Needs Based Segmentation defines segments that are actionable. Segments are addressable and measurable and the actions that need to be taken to capture share are clear. The Needs Based Segmentation approach is durable. Micro trends and short term motivators do not overly influence it. The segmentation schema, with periodic tuning, should be useable for several years. Conversely, when applied in a cyclical fashion NBS is adaptive. Needs Based Segmentation provides significant insight into emerging markets by focusing at the level of the individual needs in the decision making unit. Needs Based Segmentation discards traditional assumptions about how a market works and provides new insights into why a market works. Needs Based Segmentation provides segmentation that has face validity. It makes sense. One of the more difficult efforts associated with a segmentation project can be gaining buy in within organizations. With Needs Based Segmentation, core team members typically have a solid belief in the segmentations that they create, and Needs Based Segmentation segments tend to make sense to those not directly involved in the study process. Needs Based Segmentation is by nature multidimensional. It can capture the complexity in the market. Needs Based Segmentation is the only approach we know of that is effective in situations with complex decision making units. It is based on a broad understanding of the decision making unit and measuring, at multiple levels, the decision making unit s response to various needs. Furthermore, Needs Based Segmentation takes firmographics into account by including internal factors (e.g. availability of capital, installed technology, etc.) and external factors (e.g. economic, regulatory, etc.) that enable or constrain the realization of needs.

5 NEEDS BASED SEGMENTATION FRAMEWORK The basic premise underlying Needs Based Segmentation is that needs, as we have defined them, in the context of constraints or facilitators, drive purchasing behavior. This concept is extended in our framework to include the following principles: When businesses buy products and services, there are multiple levels of needs which can be fit into a model hierarchy (i.e. strategic, operational, functional, and feature). Often multiple levels within an organization influence the purchasing decision either directly or indirectly. In some cases this is simplified by small decision units or small in scope decisions. However, even in the case of a single decision maker, a hierarchy of needs must be satisfied. During a complex purchasing process, it is likely that several levels of an organization will seek to satisfy needs that reflect their responsibilities. The presence and perceived importance of a need is influenced by conditions that either facilitate or inhibit the satisfaction of the need. This is the reason why customers with similar needs can exhibit different purchasing patterns. The differences are due to the interaction of conditions that are external to needs with the needs. Some of these facilitators or inhibitors arise from firmographics. The Needs Based Segmentation framework must provide an understanding of this interaction and take it into account. The Needs Based Segmentation methodology and process presented in this paper, addresses both needs and the firmographics that represent facilitators and inhibitors of needs. In any market there are groups of customers, each possessing similar yet distinct configurations of needs that they strive to optimize when purchasing. Furthermore, these needs are identifiable and measurable through rigorous research. Factor analysis and partitioning techniques (e.g. cluster analysis) can be used to categorize customers into needs segments. While the targeting (i.e. identification) of members of needs segments is sometimes problematic, sufficient attention to measuring relevant firmographics can provide a means for interactive identification of segment members and a reasonably accurate, practical method for classification. This is a critical part of the Needs Based Segmentation methodology. Experience indicates that interactive classification must be simple or it is not used. It should require fewer than five questions. Be intrinsically understandable. And, have face validity. The pre classification methodology cannot rely on so many factors as to make it costly or difficult. In addition, the pre classification methodology must predict segment membership within accuracy bounds that are probabilistically reasonable for its primary use in marketing communications and sales. For example, an 80+% probability of predicting the correct segment membership might be considered acceptable. Experience shows that the best approach to deriving these targeting algorithms is to develop a multidimensional, at least three characteristics, firmographics based segmentation model, in conjunction with the Needs Based Segmentation.

6 IMPLEMENTATION OF A NEEDS BASED SEGMENTATION PROJECT SEGMENTATION PROJECT PHASE I RESEARCH PROJECT DEFINITION AND SCOPE This phase includes the definition of the objectives, scope, boundaries, project plan and results expected from the segmentation research. Typically, planning sessions are conducted to develop this stage. The primary activity, beyond establishing the research implementation scope, is to gain solid commitments for the research project and its subsequent results. The approach used for defining the project is sometimes called backwards planning. That is, beginning the planning process with the end in mind. The decisions, planning, models, tools and conclusions derived from the project will define the activities that need to be accomplished during the project. Focus on the desired end results helps to ensure that the project products will meet the company s needs. This approach follows a prescribed sequence: The approach begins by confirming the decisions to be made during the project. Then tools are selected that will used to synthesize or model the intelligence gathered into forms aid in decision making. For example, one of the most common models used in Market Management work is a General Electric type of portfolio model. Others may include models in support of packaging, pricing or channel structure. Next is defined how knowledge will be gained from the intelligence developed by the research activity. This step is the most often forgotten, or skipped, step in the effective use of research information. To make decisions, with or without supportive models, decision makers must first agree on the facts. Only then can they effectively decide what to do about the facts. Failure to complete this step produces too many unproductive discussions about what the facts are and too few discussions about what to do about them. This step in the learning process, which we call certitude, is usually best served by group forums where everyone involved absorbs the intelligence gathered and then restates and enhances it. Finally the research mechanics are defined. These include determining the required intelligence, the information it will be based on and the data that will be needed to derive it. These steps define the core of the research phase. SEGMENTATION PROJECT PHASE II SEGMENTATION RESEARCH Phase II is largely the research portion of the implementation. For a complex Market Management project a combination of secondary research, qualitative primary work, and quantitative primary research is recommended. The secondary research provides background and contextual information. The qualitative primary work grounds the research in terms of the perceptions of the actual buyers and helps to shape the quantitative research. The quantitative primary research provides actionable information.

7 A Market Management project typically produces intermediate deliverables during this phase. They include a qualitative research report, a summary presentation of the quantitative research, a top line report and an in depth report. The results of this phase provide a preliminary definition of segments or definitions of alternative classification schemes, segment descriptions, and profiles of individual segment needs and firmographics. The segmentation research phase has five stages: 1. Secondary research 2. Qualitative research 3. Quantitative research 4. Analysis and reporting 5. Agreement on segmentation Stage 1, Secondary Research Frequently a broad secondary research stage is conducted that reviews available research on the topic and uses that intelligence to shape the qualitative phase. In this stage, competitive models for Market Management and segmentation are documented and preliminary hypotheses regarding needs are formulated. Stage 2, Qualitative Research The qualitative research stage of the project is used to define the decision making units involved, document the needs structure (i.e. domains across the decision making units), and develop a working list of needs across the domains. The qualitative research is typically based on in depth interviews (e.g. in person, one on one interviews) or focus groups. In depth interviews are preferred for Needs Based Segmentation research. This method facilitates intentionally selecting individuals that will broaden our understanding and provide deep insights into needs. Because of the group dynamics of focus groups, their data tends to diminish the impact of individual differences and often obscures important concepts. Stage 2 is most often done in a stepwise fashion. An initial set of interviews is conducted to ensure that a plausible needs hierarchy is defined. This is followed by two sets of interviews depending on the construction of relevant decision making units a set of multiple interviews in individual firms, and a set of group interviews addressing the entire decision making unit in individual firms. The qualitative research stage concludes with a brief report to the team and a team planning meeting to develop certitude in the results, and further shape the ensuing stages of the project. Stage 3, Quantitative Research The needs statements developed in Stage 2, together with a set of meaningful firmographics, are tested using a large sample of appropriate respondents. Survey based research methods are frequently employed. Recent improvements in Internet based data collection have led to significant advances in timeliness and cost reductions in Needs Based Segmentation survey research. Needs Based Segmentation data collection requires that the survey participant consider several options in context when rating the importance of needs. This requirement makes telephone based data collection cumbersome, if not impossible for most projects.

8 As a consequence, in person interviews or self administered questionnaires are generally employed. Each method has advantages and disadvantages. Large scale inperson interviewing tends to be very costly, time consuming and requires considerable effort to execute the sampling scheme well. Self administered surveys are difficult to control and frequently suffer from low response rates. Internet based data collection significantly reduces these problems. Stage 4, Analysis and Reporting At the end of the data collection stages one validates the data, and perform dependence, and interdependence analyses to extract the best information possible from the data. The results of the initial analyses are presented to the team for review. Based on that review, additional analyses are performed and their results presented. A comprehensive series of dependence analyses (e.g. expansion of the concept of tabulations) and interdependence analysis (i.e. analyses of patterns within responses) should be performed. The analytical methods available include regression of predictive relationships and partitioning (e.g. clustering response segmentation). Typically the deliverables of a research phase include data summaries, top line reports, detailed research reports and presentations. Stage 5, Agreement on Segmentation At the completion of the research portion of this phase it is not an unusual result to have several alternatives segmentation schemes. Each of these alternatives will have merits and flaws. Choice of the best segmentation scheme will depend, in large part, on the uses to which the segmentation will be put. At this point in the process it is very important to gain and grow consensus. Experience indicates that the theoretically best segmentation may gain acceptance or a close alternative may better fit the needs of the decision makers. Segmentation alternatives are presented in group forums of managers and executives and consensus is sought. SUMMARY: SEGMENTATION PHASE IMPLEMENTATION OBJECTIVES There are generally five basic objectives of the Segmentation Phase: 1. To develop comprehensive and accurate lists of enduring needs that are important to buyers and take into consideration requirements across the decision making unit 2. To derive segmentation based on appropriate analyses (e.g. factor analysis/clustering) of needs statements in the context of firmographics 3. To derive intelligence that describes the segments, as defined by modeling and planning needs, in terms that may include size, growth, competitive intensity, packaging, etc. 4. To anchor the segmentation in reality by providing useful firmographics for targeting and measurability purposes. Tie existing measurements and structures to the segmentation (e.g. industry, business size, geography, etc.). Targeting can be defined at two levels. First, a simple and very accurate model based on a small set of questions, for real time classification is provided. This targeting can be used by any interactive contact (phone, inperson, marketing communications). Second, a targeting method is

9 developed to provide, via firmographics, reliable pre classification prior to contact. 5. To develop information required to develop the segment portfolio, evaluate segments in the portfolio, and provide a basis for solution and go to market planning.