Section - 3.2Segmenting in Mature Markets

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Segmentation

Transcript of Section - 3.2Segmenting in Mature Markets

  • V. Kasturi Rangan, Rowland T. Moriarty, & Gordon S. Swartz

    Segmenting Customers in MatureIndustrial Markets

    In mature industrial markets, segmenting customers on size, industry, or product benefits alone is rarelysufficient. Customer behavior in terms of tradeoffs between price and service is an important additionalcriterion. The authors offer a framework for such buying-behavior-oriented microsegmentation of indus-trial customers. They apply the framework to segment the national accounts of a targe industrial companyand show how the results of a segmentation study can be used to redirect the firm's resources andcustomer segments.

    THE goal of segmentation is to identify distinctcustomer groups that have homogeneous needs(Wind 1978). Tailoring the marketing mix for partic-ular segments leads to better planning and more ef-fective use of marketing resources (Kotler 1988; Ma-hajan and Jain 1978). Coles and Culley (1986), forexample, illustrate how DuPont segmented its marketfor Kevlar, an aramid fiber that is lighter yet strongerthan steel. The company focused the unique needs ofcustomers in three different segments.

    Potential fishing boat owners: Kevlar's lightness prom-ised fuel savings, increased speed, and the ability to carrymore fish weight.

    Aircraft designers: Kevlar has a high strength-to-weightratio.

    Industrial plant managers: Kevlar could replace the as-bestos used for packing pumps.

    V. Kasturi Rangan is Professor, Harvard Business School. Rowland T.Moriarty is Chairman of Cubex Corporation, Boston, MA. Gordon S,Swartz is a doctoral candidate, Harvard Business School. The authorsthank Russ Flaum of Signode Corporation for his assistance and co-operation in conducting this study, Carol Smith for providing computerprogramming and statistical assistance, and Tom Bonoma, Erich Joach-imsthaler, Tom Kinnear, Ben Shapiro, Fred Webster, and three anony-mous JM reviewers for their comments and suggestions on previousversions of the article.

    Though such market segmentation designs basedon product benefits are widely recognized as the stateof the art and superior to traditional segmentationschemes based on industry type or customer size (Car-dozo 1980; Moriarty and Reibstein 1986), sustaininga segnientation strategy based on benefits alone is oftendifficult as the product market matures. Eventually,competitors are able to offer equivalent products andmany buyers may therefore be unwilling to pay a pricepremium. This situation is especially common for in-dustrial raw materials and supplies that are difficult todifferentiate by functions and features alone. Steadilyand deliberately, as the product market turns a com-modity (Kotler 1988; Shapiro ct al. 1987), price andservice become important buying criteria for somecustomers. By further segmentation of each benefitsegment, the heterogeneity in a macrosegment be-comes apparent.

    We develop a buy ing-behavior-based frameworksuitable for microsegmenting customers in mature in-dustrial markets. Though the concept of buy ing-be-havior-based segmentation has been recognized for twodecades (Webster and Wind 1972), few applicationsof the approach have been reported in the industrialmarketing literature. We describe how our buying be-havior framework was applied to segment further the

    72 / Journal of Marketing, October 1992Journal of MarketingVol. 56 (October 1992), 72-82

  • national account customers of a large industrial com-pany. In addition, we demonstrate how segmentationanalysis can be used proactively to influence cus-tomers' movements to segments that are mutuallybeneficial to the seller and buyer. In contrast, pre-vious application worit (de Kluyver and Whitlark 1986;Doyle and Saunders 1985; Moriarty and Reibstein 1986)attempted to uncover existing segments as a way toposition products strategically. In our approach the as-sumption is that at a microsegment level, firms caninfluence and shape the buying behaviors of their po-tential customers by tactically altering marketing mixvariables such as price and service.

    ' The Conceptual FrameworkResearch on industrial market segmentation (see Cheronand Kleinschmidte 1985 and Plank 1985 for a com-prehensive review) offers several bases for segment-ing customers (Frank, Massy, and Wind 1972), in-cluding:

    demographic descriptors such as geography, standard in-dustrial classification code, and account size (HIavacekand Ames 1986).

    pnxiuct end-use or application (Wind and Cardozo 1974), buying situation (Robinson, Faris, and Wind 1967), customer benefits (Choffray and Lilien 1978; Haley 1968), customer buying behavior (Bonoma, Zaltman, and John-

    ston 1977; Webster and Wind 1972), and customer decision-making style (Wilson 1971).It has been suggested that firms would benefit most

    by the successive application of two or more such seg-mentation schemes in a nested fashion (Bonoma andShapiro 1983), similar to the microsegmentation prin-ciple advocated by Webster (1984). Interestingly,however, none of the segmentation schemes cited herecapture the underlying dynamics of a maturing mar-ket.

    Product life cycle (PLC) theory contends that pricestend to drop as the product market matures (Curry andRiesz 1988; Day 1981; Simon 1979; Younger 1986).Two underlying forces cause that trend. One is cus-tomer leaming during the PLC. As the product ma-tures, many customers who have become totally fa-miliar with the product's characteristics, functions, andfeatures no longer require the same intensity of prod-uct information that was once provided by its supplier(Day 1986; Schmalensee 1982). As a result, they areunwilling to pay for the cost of such services. Thesecond force is the result of competitive action, whichin a mature market makes equivalent products avail-able to customers at similar or lower prices (Day 1986).

    Because of this market dynamic, customers in ma-ture markets can be aligned along the two dimensionsof price and cost-to-serve (see Figure 1; Forbis andMehta 1981; Shapiro et al. 1987). The reason is that

    FIGURE 1Potential Buying Behavior Segments

    HIGH

    PRICE

    LOW

    PowerAxis

    LOW HIGHCost-lo-Serve

    customers who demand a tow price will be offered a"no frills" product accompanied by minimal service,and customers who value an augmented product willpay a higher price (Levitt 1980) and receive the fullcomplement of services (Porter 1980). Price differ-entials due to prcxluct quality differences are small be-cause cotnpetitors are able to offer more or less equiv-alent products. Hence, any major price variations aredue to differences among services provided. Cus-tomers who receive the "core" product pay less be-cause it costs less to serve them than to serve thosewho demand and value the full service.

    The preceding reasoning is consistent with eco-nomic theory. Dortman and Steiner (1954) showed thatwhen higher service implies higher direct costs, a firmcould maximize its profits by charging a price thatequates its marginal revenues to marginal costs. Tellisand Wemerfelt (1987) showed empirically how the priceversus service-quality reiationship would hold in mar-kets characterized by a high level of product infor-mation availability, which is certainly the case in ma-ture markets.

    In keeping with this rationale, firms operating inmature environments expect to align their customersalong the equity axis in Figure 1. The lower left quad-rant (C) represents a core, no-frills product withoutmuch service and the upper right quadrant (B) rep-resents an augmented product accompanied by inten-sive value-added services. In both cases, the price-service offering is equitable to the seller and the buyer.The "core product" customer pays a lower price andthe "value added" customer pays a higher price. Thisrationale, however, is based on the seller's expecta-tions of how customers would behave in a maturemarket.

    An altemative is given by the power axis in Figure

    Segmenting Customers in Mature Industrial Markets / 7 3

  • 1. Customers see only the price dimension of the ma-trix in Figure 1. They do not know the seller's cost-to-serve. Because of market maturity, however, sev-eral sellers usually can offer similar products, and manycustomers therefore may attempt to shop for price.Guaranteed purchase volumes and large order sizesare typically offered as the bait. As a result, cus-tomers may not necessarily align themselves along theequity axis as sellers exjrect, but prefer to operate inquadrants C and D in Figure I, depending on theirknowledge of competitive offerings and their ownmarket power (Scherer 1980). In the health care in-dustry, for example, multihospital buying groups havesuccessfully leveraged their power to seek priceconcessions from their suppliers (In Vivo 1985).

    In short, all locations above the equity axis indi-cate that the seller is able to extract more than the fullvalue of the services it renders, because customersperceive the firm's product offering as superior tocompetitive offerings or substitutes. Positions belowthe equity axis indicate that the firm is unable to ex-tract the full value of the services it renders with itsproduct. Along the equity axis itself, the exchange isfair and equitable. We now describe how this frame-work can be used to analyze a company's customersegments in mature industrial markets.

    DatabaseThe main purpose of our study was to validate thebuying behavior framework depicted in Figure 1 anddemonstrate its use for managerial action. We there-fore sought a research site where the product-marketenvironment was in the mature phase of its PLC,characterized by price pressures and the availabilityof equivalent competitive products. This criterion ruledout capital goods because suppliers in such marketshave demonstrated their ability to maintain prcxluctdifferentiation, through functions and feat