Market segmentation is to B2B businesses what Arnie is to 80s action films.
You can succeed without them, but why would you? The results are always going to be better.
Think about it. Three core factors needed for a classic 80s action film? Muscles, guns, and one-liners. And who does those three things better than anyone else? That’s right, the muscles from Brussels.
And three core principles of running a business? Having a product that solves a problem, knowing who needs your solution, and differentiating yourself from any competitors.
And how do you smash those three things? By firing a bazooka and wisecracking at the bad guys? Sadly not, or marketing would be more dramatic.
Market segmentation should be your weapon of choice.
Segmentation helps you find and accurately target your customers. It can help you reach them better than the competition. It can steer product development.
In short, it can improve key aspects of your sales and marketing. As Arnie himself nearly said, “Come with me if you want to sell more.”
B2B market segmentation focuses on finding unique audience segments by examining common characteristics. By understanding similar traits, needs and behaviours, marketing can better connect with potential customers. This allows teams to focus on the most important segments.
Without market segmentation, you risk treating everyone as the same. Great if your targets are as different as a replicating Matrix agent, not so good if they are real people.
Don’t bother to segment, and your marketing probably won’t connect well with anyone at all.
As a wise marketeer once said, “What is marketing if not segmentation?”
Extreme market segmentation example
To illustrate just how central a role segmentation can play, pop on your headphones fire up your music streaming app of choice.
There’s a fair chance you are listening to the market leader, Spotify. How did they get ahead of giants like Apple and Amazon when everyone offers the same catalogue of music?
Spotify started with customer segmentation and took it to the extreme. If you group listeners into fans of all the main genres – rock, EDM, classical, rap, RnB, and Mongolian throat singing – you can recommend people’s overlapping music tastes to each other.
But then Spotify took segmentation further. Way further. Their machine learning algorithms now categorise music into 5,000 distinct genres.
Plus, they sort music by mood, style, beats per minute, energy, danceability, and positivity. Each song even has a rating for “liveness”, “acousticnes” and, brilliantly, “speechiness”.
All of this powers their highly advanced recommendation engine. It’s one of their main differentiators, driving personalised suggestions through different weekly playlists. In 2021, Spotify is essentially running the most sophisticated market segmentation anywhere, getting close to one-to-one marketing.
Side note: try connecting your Spotify account to Organize Your Music to have a peek behind the data curtain. Some of the more interesting genres from my library: freak folk, stomp and holler, escape room, wonky.
Luckily you don’t need advanced AI, terabytes of data and hundreds of millions of users. You can start grouping customers in a much simpler way and still see results.
In this guide, we’ll show you the various options to understand the differences in your customer base, and how you can go about building your strategy.
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Why should you segment your customers?
Mailchimp looked at their user data to compare segmented marketing campaigns with non-segmented campaigns. They compared 18 million email recipients and found campaigns sent to defined market segments saw an increase in a number of areas:
Segmented email campaigns saw 14.3% higher open rates.
Click-through rates doubled.
Bounce rates were 4.6% lower.
The number of unsubscribes was 9.4% lower.
But as well as better results from your usual targets, it allows you to identify and hunt the big fish. (People hunt fish right? I don’t fish, but I’m pretty sure that’s what it’s called. “Grab my rods, I’m going huntin’”).
How B2B segmentation differs from B2C
B2B segmentation differs because motivations, processes and considerations differ between B2B and B2C buyers.
B2B markets have multiple decision-makers
In a B2C setting, you could be talking to an individual or a family. In B2B businesses, it is possible to have a network of multiple agents signing off a purchase decision.
B2B products and services are often more complex
Businesses often have a complex mesh of products and systems. The difficulty in embedding or extracting products from this tangled web changes the buying process.
B2B decision-makers go through a more rational process
A family will discuss where to go on their next holiday. They are unlikely to go through a formal process of due diligence, with little Johnny assigned the family’s compliance officer. The complexity of the products and the responsibility to spend budget wisely mean formal processes often exist.
The buying cycle is different
B2C purchases tend to be short term, with a few notable exceptions. B2B purchases tend to be long term, or at least have the possibility to repeat. The difficulty of embedding and extracting means change is not always welcomed.
B2B target audiences are smaller
B2C companies are likely to have thousands and thousands of customers. In the B2B sphere, a small number of clients are likely to make up the majority of revenue.
Personal relationships matter more
B2B sales often involve face-to-face interactions: handshakes and dinners, business cards and expenses. Deciding which prospects and clients should get the full personal service is one of the outcomes of customer segmentation.
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Five types of B2B market segmentation
There are many ways to conduct B2B target market segmentation and no one way that is best.
All of them tend to involve statistical analysis of quantitative data. You can also add qualitative data into the mix: buyer personas fall under the broader category of segmentation and often involve interviews.
Which one of these customer segmentation models is best will depend on the department using it, the data available, the budget, and frankly, which one you can realistically do.
B2B market segmentation using firmographics
Put simply, firmographics are sets of characteristics used to understand and segment organisations. Think of them as the business version of demographics. Where B2C segmentation uses demographics, B2B market segmentation uses firmographics.
Common firmographics include industry, company size and location. Firmographic data is easy and cheap to source, which makes it one of the most popular methods. It also doesn’t change often, if at all.
The disadvantage of firmographic segmentation alone is the lack of detail. But if you start to add to this data and combine it with ideal customer profiles and buyer personas, it’s a great place to start..
Similar businesses often face common problems, even if they also differ in other ways. It’s also easy to sell this segmentation within your own business; everyone will understand it.
I’m going to add in a bonus method of segmenting, the propensity method, here. Essentially, this looks at all of your historical leads, maps whether they became a customer or not, and scores their propensity to convert, based on their firmographics or other criteria. Feel free to read this very scientific explanation.
Firmographics can include:
Customer type (B2B, B2C, B2G)
The final advantage of this model is it can be done for you by clever techy people like us: check out our free market mapping tool which maps and categorises your entire B2B market with ease.
Segmentation based on customer needs
One of the more popular methods is needs-based market segmentation.
This method groups different types of customers according to what they need from a product or service. As it is based on needs and attitudes, it is more subjective than firmographics.
It’s a great method because it allows you to focus on buying motivations. It’s easier to target people who face similar pain points. You can develop campaigns aimed at ‘productivity focused’ or the ‘budget conscious’ more easily than lumping all ‘small businesses’ together.
The problem with this approach is the difficulty in accurately identifying the needs of different prospects. You can interview existing customers and infer prospect motivations from their needs.
Our first two methods looked at who the customer is, and what they need. Behavioral segmentation looks at how they act.
This data can be gathered by looking at:
The channels prospects visit you through
The content prospects interact with
The technology they use (competitors or complimentary)
The way customers interact with your product or solution
The advantage of this approach is behavioral segments provide clear insights on what buyers want. Firmographic data can be added to these insights, from website analytics, CRM data, or first hand research. Marketing strategy is then based on a mix of who the prospect is, what they want, and how they behave.
The problem with this method is the difficulty in mapping behaviour to needs. It also leaves gaps in our knowledge: how and why was a decision made? Is past behaviour an indicator of future behaviour?
Tiering or profitability segmentation
Tier based segmentation looks at the potential value of the lead. This can be done in a number of ways:
Average customer lifetime value
Acquisition channel (different channels might have different cost per lead or lifetime value)
This approach makes it easy to assign resources to the most profitable leads. This method takes account based marketing and applies similar thinking across all accounts.
It’s possible to apply profitability segmentation to only the top targets. You can then segment the remainder in whichever way allows you to target them better.
The disadvantage of this method is that it can be difficult to know what a prospects lifetime value will be, and easy to assume one company will have a similar value to a business with many of the same firmographics.
B2B segmentation based on customer sophistication
Surprisingly, this method does not group based on enjoyment of a fine Cabernet Sauvignon or opera. Rather, it segments companies by looking at their business maturity and acumen.
Like some of the other methods, this grouping method allows you to easily tailor needs-based campaigns.
But it also understands that not all companies will have, or be aware of, the problem. An early stage startup, for example, probably doesn’t need a CRM until their customer base grows.
The issue with this method is again, assumptions, but at this point I think we’ve realised that’s always a risk.
A practical framework to B2B market segmentation
Finally, here’s a practical framework to putting this all in practice.