Industrial Market Segmentation - Two-Stage Market Segmentation (Wind & Cardozo Model)

Two-Stage Market Segmentation (Wind & Cardozo Model)

Yoram Wind and Richard Cardozo (1974) suggested industrial market segmentation based on broad two-step classifications of macro-segmentation and micro-segmentation. This model is one of the most common methods applied in industrial markets today. It is sometimes extended into more complex models to include multi-step and three- and four-dimensional models.

Macro-segmentation centres on the characteristics of the buying organisation, thus dividing the market by:

• Company / organization size: one of the most practical and easily identifiable criteria, it can also be good rough indicator of the potential business for a company. However, it needs to be combined with other factors to draw a realistic picture.

• Geographic location is equally as feasible as company size. It tells a company a lot about culture and communication requirements. For example a company would adopt a different bidding strategy with an Asian customer than with an American customer. Geographic location also relates to culture, language and business attitudes. For example, Middle Eastern, European, North American, South American and Asian companies will all have different sets of business standards and communication requirements.

• SIC code (standard industry classification), which originated in the US, can be a good indicator for application-based segmentation. However it is based only on relatively standard and basic industries, and product or service classifications such as sheet metal production, springs manufacturing, construction machinery, legal services, cinema’s etc. Many industries that use a number of different technologies or have innovative products are classified under the ‘other’ category, which does not bring much benefit if these form the customer base. Examples are access control equipment, thermal spray coatings and uninterruptible power supply systems, non of which have been classified under the SIC.

• Purchasing situation, i.e. new task, modified re-buy or straight re-buy. This is another relatively theoretical and unused criteria in real life. As a result of increased competition and globalisation in most established industries, companies tend to find focus in a small number of markets, get to know the market well and establish long-term relationship with customers. The general belief is, it is cheaper to keep an existing customer than to find a new one. When this happens, the purchase criteria are more based on relationship, trust, technology and overall cost of purchase, which dilutes the importance of this criteria.

• Decision-making stage. This criterion can only apply to newcomers. In cases of long-term relationship, which is usually the objective of most industrial businesses, the qualified supplier is normally aware of the purchase requirement, i.e. they always get into the bidding process right at the beginning. Sheth and Sharma are quoted to have suggested “with increasing turbulence in the marketplace, it is clear that firms have to move away from transaction-oriented marketing strategies and move towards relationship-oriented marketing for enhanced performance”. (Freytag & Clarke, 2001)

• Benefit segmentation: The product’s economic value to the customer (Hutt & Speh, 2001), which is one of the more helpful criteria in some industries. It “recognises that customers buy the same products for different reasons, and place different values on particular product features. (Webster, 1991) For example, the access control industry markets the same products for two different value sets: Banks, factories and airports install them for security reasons, i.e. to protect their assets against. However, sports stadiums, concert arenas and the London Underground installs similar equipment in order to generate revenue and/or cut costs by eliminating manual ticket-handling.

• Type of institution, (Webster, 2003) e.g. banks would require designer furniture for their customers while government departments would suffice with functional and durable sets. Hospitals would require higher hygiene criteria while buying office equipment than utilities. And airport terminals would need different degrees of access control and security monitoring than shopping centres.

However, type of buying institution and the decision-making stage can only work on paper. As institutional buyers cut procurement costs, they are forced to reduce the number of suppliers, with whom they develop long-term relationships. This makes the buying institution already a highly experienced one and the suppliers are normally involved at the beginning of the decision-making process. This eliminates the need to apply these two items as segmentation criteria.

• Customers’ business potential assuming supply can be guaranteed and prices are acceptable by a particular segment. For example, ‘global accounts’ would buy high quantities and are prepared to sign long-term agreements; ‘key accounts’ medium-sized regional customers that can be the source of 30% of a company’s revenue as long as competitive offering is in place for them; ‘direct accounts’ form many thousands of small companies that buy mainly ob price but in return are willing to forego service.

• Purchasing strategies, e.g. global vs. local decision-making structure, decision-making power of purchasing officers vs. engineers or technical specifiers.

• Supply Chain Position: A customer’ business model affects where and how they buy. If he pursues a cost leadership strategy, then the company is more likely to be committed to high-volume manufacturing, thus requiring high-volume purchasing. To the supplier, this means constant price pressure and precise delivery but relatively long-term business security, e.g. in the commodities markets. But if the company follows a differentiation strategy, then it is bound to offer customised products and services to its customers. This would necessitate specialised high-quality products from the supplier, which are often purchased in low volumes, which mostly eliminates stark price competition, emphasises on functionality and requires relationship-based marketing mix. (Sudharshan, 1998)

Micro-segmentation on the other hand requires a higher degree of knowledge. While macro-segmentation put the business into broad categories, helping a general product strategy, micro-segmentation is essential for the implementation of the concept. “Micro-segments are homogenous groups of buyers within the macro-segments” (Webster, 2003). Macro-segmentation without micro-segmentation cannot provide the expected benefits to the organisation. Micro-segmentation focuses on factors that matter in the daily business; this is where “the rubber hits the road”. The most common criteria include the characteristics of the decision-making units within each macro-segment, (Hutt & Speh, 2001) e.g.:

• Buying decision criteria (product quality, delivery, technical support, price, supply continuity). “The marketer might divide the market based on supplier profiles that appear to be preferred by decision-makers, e.g. high quality – prompt delivery – premium price vs. standard quality – less-prompt delivery – low price”. (Hutt & Speh, 2001)

• Purchasing strategy, which falls into two categories, according to Hutt and Speh: First, there are companies who contact familiar suppliers (some have vendor lists) and place the order with the first supplier that fulfils the buying criteria. These tend to include more OEM’s than public sector buyers. Second, organisations that consider a larger number of familiar and unfamiliar suppliers, solicit bids, examine all proposals and place the order with the best offer. Experience has shown that considering this criterion as part of the segmentation principles can be highly beneficial, as the supplier can avoid unnecessary costs by, for example not spending time and resources unless officially approved in the buyer’s vendor list.

• Structure of the decision-making unit can be one of the most effective criteria. Knowing the decision-making process has been shown to make the difference between winning and losing a contract. If this is the case, the supplier can develop a suitable relationship with the person / people that has / have real decision-making power. For example, the medical equipment market can be segmented on the basis of the type of institution and the responsibilities of the decision makers, according to Hutt and Speh. A company that sells protective coatings for human implants would adapt a totally different communication strategy for doctors than hip-joint manufacturers.

• Perceived importance of the product to the customer’s business (e.g. automotive transmission, or peripheral equipment, e.g. manufacturing tool)

• Attitudes towards the supplier: Personal characteristics of buyers (age, education, job title and decision style) play a major role in forming the customers purchasing attitude as whole. Is the decision-maker a partner, supporter, neutral, adversarial or an opponent? Industrial power systems are best “sold” to engineering executive than purchasing managers; industrial coatings are sold almost exclusively to engineers; matrix and raw materials are sold normally to purchasing managers or even via web auctions.

The above criteria can be highly beneficial depending on the type of business. However, they may be feasible to measure only in high-capital, high-expense businesses such as corporate banking or aircraft business due to high cost associated with compiling the desired data. “There are serious concerns in practice regarding the cost and difficulty of collecting measurements of these micro-segmentation characteristics and using them”. (Sudharshan, 1998)

The prerequisite to implementing a full-scale macro- and micro-segmentation concept is the company’s size and the organisational set-up. A company needs to have beyond the certain number of customers for a segmentation model to work. Smaller companies would not need a formal segmentation model as they know their customers in person, so they can apply Hunter’s n=1 model.

Ironically, Webster states that “the strategic implications of micro-segmentation lie primarily in promotional strategy. ….. Decisions influenced by micro-segments include selecting individuals for the sales call, design of sales presentations and selecting the advertising media” (Webster, 2003). However, promotion should not be seen in isolation, as it cannot facilitate log-lasting success, unless supported on all the relevant functions such as product, price and place. One only needs to consider that purchasing criteria (part of micro-segmentation) includes factors such as product quality, price and delivery, which are directly relevant to product, price and place.