The B2B Segmentation Dilemma: Insights Stuck at Marcom

Segmentation has long been an effective tool for B2C marketers to identify and efficiently address the needs of their customers. Financial services and telecom companies have used segmentation to:

So, on the surface one might think that segmentation would similarly enable marketers at B2B companies to extend their influence beyond marcom into areas such as product definition and packaging, pricing, support, and channel partnerships. Further, media accounts would suggest that segmentation is being applied to fundamentally reallocate marketing dollars more effectively and achieve a greater return.

But the reality seems to be quite different.

A review of segmentation projects across a spectrum of B2B companies suggests a relative lack of progress in using segmentation beyond marcom-tuning or sales targeting. We did find a few pockets of positive movement (perhaps not surprisingly) at communications solutions providers, including Avaya and Cisco. But the bigger picture shows a somewhat surprising adherence to the status quo, despite the efforts of marketing teams to break beyond traditional models.

The State of B2B Segmentation Today 
For all the talk about advanced segmentation models based on customer behaviors and attitudes, many B2B companies still rely heavily on “easy” grouping of customers — by product line, geography, industry, and other firmographics. In dynamic markets, these traditional segmentation methods have proven limited in their ability to uncover and capitalize on growth opportunities. Why, then, do B2B marketers exhibit a tendency to continue pushing the rock up the hill in their search for competitive advantage?

The Sisyphean mindset likely persists for many reasons. The biggest contributing factor may very well be the underpinnings of many manufacturing, high tech, and other B2B organizations. These companies go to market in structures built around specific product lines, geographies, industry groupings, or company size, which often constrain marketers to adapt similar world views in the name of operational consistency. Compounding the challenge, product/geo/firmographic structures frequently involve autonomous profit centers that don’t willingly share data or deploy dedicated sales forces that collaborate across territorial lines.

These types of structures make it difficult to identify, target, and serve distinct customer need sets — even if marketing has the insights that could bring in new business. “When business units are named after products, it’s hard to be customer focused,” says Gary Lilien, distinguished research professor of management science and research director for the Institute for the Study of Business Markets at Penn State. “Many B2B companies are not organized to address market needs. They’re organized to manufacture and ship products.

“That’s why good segmentation often requires a reorganization,” Lilien adds. “And that’s what makes segmentation studies easy [for top management] to ignore.”

What Makes Good Segmentation?
There are two critical dimensions to any effective segmentation model. The first requires segments that are relatively homogeneous within, with respect to their needs or how they expect the company to serve them. In other words, they are looking for the same types of solutions and respond similarly when they find them. The second dimension is that each homogeneous set is materially different from every other segment — homogeneous within, yet heterogeneous between. This helps ensure that the marketing company can identify each individual prospect or customer as belonging to one and only one segment.

By this measure, one can conclude that the segments many B2B companies divide their customers into — “small/medium enterprise,” “financial services companies,” “companies in Brazil” — aren’t really segments at all, in terms of customer needs. The marketing team at Avaya came to this conclusion three years ago as it tracked rapid changes in the communications industry that it serves with its business communication solutions.

“The market was moving to a place where the real needs were not well defined using firmographics,” says Nick Panayi, vice president of strategic marketing at Avaya. The communications industry, he explained, has undergone a significant transformation from utility (keeping the phones on) to unified communications platform, spanning everything from the call center to the mobile workforce. “As the market changed, so has the behavior and profile of the decision maker,” says Panayi. “Our understanding of what people were using as decision criteria had drastically shifted. There are more subtleties involved.” 

Nick Panayi, Avaya

One example involved a 15-person consulting firm. Traditionally, Avaya would bucket that company into its small business segment, which by definition meant the customer’s telecom needs were simple: a small office phone system with 15 desk phones. But this consultancy is actually a sophisticated user of unified communications. The consultants are all highly mobile, so they require single-number portability between their office and cellular phones. They need to connect with clients and one another on a moment’s notice. Using traditional segmentation, Avaya would have missed this sophistication — and possibly the opportunity to win this company’s business with the properly targeted solutions.

Using cluster analysis, Avaya re-segmented its customers and prospects around each company’s level of technology adoption. It identified three “tribes”:

The marketing team then analyzed the combinations of factors that defined each tribe, and used this new “DNA” to re-map every customer and prospect in its marketing database. The new segmentation has been effective — at least for the marketing team, specifically with demand generation and regional marketing programs. The segmentation profiles enable marketers to drill down further into behaviors and attitudes, resulting in better micro-targeting and matching of specific customers with specific solutions.

Panayi has seen less traction to date with the sales organization. “The sales organization has an interest, but there’s less immediate actionability there,” he says. The direct salespeople already know their customers quite well, and some believe the tribe segmentation, though informative, is not directly relevant to their day-to-day relationships with their customers. Where segmentation begins to add more value to the sales organization is in helping them identify and more intelligently approach new prospects — an area of focus that Avaya hopes to use more effectively going forward … which brings us to the second reason B2B companies struggle with segmentation: lack of cross-functional alignment.

For many B2B companies, efforts to get more sophisticated about segmentation by re-channeling resources aligned to customer behaviors and attitudes often don’t take root beyond marketing communications. This suggests that any attempts to develop more holistic views of the customer beyond the marketing department are falling on parochially deaf ears.

Consider, by way of example, the technology company that told us they continue to segment customers primarily by type of product purchased, largely because that’s the way business units and sales forces are structured. Yet business units don’t share customer contact information, resulting in multiple salespeople working with multiple decision makers at large customer sites to sell discrete products.

Slowly, the company is evolving its approach — driven by a need to spark revenue growth that was flattened in part by the company’s long-held strategy of selling the same plain-vanilla products to the same customer segments. Marketers are dusting off previously ignored segmentation studies that examine attitudinal segments related to a customer’s service preference (high touch, channel support, or Web-based self-service), vertical industry, or external trends such as outsourcing that may affect its product needs or purchasing behavior.

But still, no talk about evolving the application of segmentation to sales effectiveness or product/service value proposition enhancement, never mind to strategic resource (re)allocation.

Cisco Steps Up
There are a few B2B marketing companies that are having more success in expanding their segmentation efforts beyond programmatic execution. In the past year Cisco has created a new Marketing Advanced Analytics team to accelerate development of data-driven insights for marketing. The team is charged with building new segmentation models to identify previously unknown revenue opportunities and suggest strategies to capitalize on them based on a data warehouse that integrates (or will in the future) previously unconnected data from multiple sources: 

“This gets us closer to a 360-degree view of customers, which lets us think in a more sophisticated manner about how we can market to them,” says Justin Welsh, a Cisco marketing manager. For example, the company now looks at the total addressable market value of each business — the B2B equivalent of share of wallet — and has created an “upside” metric, determined by the difference between the customer’s total estimated purchasing power and the amount they’ve spent with Cisco. They can roll those figures up to the country or regional level, or by vertical, to gauge where the best growth opportunities lie. “It’s a new way for us to think of companies by the market opportunity,” Welsh explains. The new segmentation approach, which also includes propensity-to-buy scores, enables Cisco to prioritize its marketing resources more effectively.

Justin Welsh, Cisco

Cisco is also pushing the data from the warehouse into Salesforce.com, thereby giving salespeople additional insights into potential cross-sell or up-sell opportunities. But management is also leveraging the segmentation approach for other resource allocation activities such as sales coverage (optimal placement of account managers relative to opportunities) and partner coverage (to ensure an optimal mix of partners by geography).

Based on the early successes with the segmentation effort, Cisco’s marketing team has even higher aspirations for its impact. For the past three quarters, the marketing operations team has been meeting regularly with the company’s product development groups to share insights garnered from the new segmentation work. “The development groups have been very receptive,” says Welsh. “It’s a good example of how marketing can help to influence product development.”

Achieving the Big Picture
The key for Cisco and other B2B companies is to understand that segmentation is not project-specific. Its mission is far bigger. Done well, segmentation can be ingrained in the business to more fundamentally realign where money is spent and constantly tuned to improve the payback.

Before undertaking any investment in segmentation, start by developing a few hypotheses of how the various segments might be defined and what the characteristics of each might be. Then try estimating how much money would potentially be spent differently if this hypothetical segmentation held true. If the answer is less than 50% of the total marketing budget, then the vision suggests a very tactical segmentation, not a strategic one.

In the end, segmentation isn’t about getting a snapshot of the market and then sending messages or sales reps to concentrate on one or more of the segments. It’s about understanding the fundamental forces at work in your category that determine buying behaviors, and building value propositions to positively influence them. This is more of a continuous improvement process than a research project.

“Good segmentation never has a final report,” says Lilien. “If you do segmentation as a project — do it and it’s done — you will fail. Segmentation should be viewed as a way of doing business.”