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Customer Segmentation by Purchasing Process and Strategy Part One

January 2014 Pricing 1 Comment

INTRODUCTION

You cannot sell on value to everyone.  We realized this hard fact of life after a draining annual negotiation with a major Chinese OEM (let’s name them Firm X).  At the negotiation we were fighting for multiple lines of businesses.  While some lines were historically our business and had consistent good demand, there were some lines where the demand was small but there was promise of future ramp-up.  The problem began when our relatively juvenile competitor (Firm A), rammed into our steady existing business lines by offering a 20% drop to our existing prices.

We tried explaining why our products were superior, why we had a better roadmap, and how we could ensure better supply stability than our competitor.  All our arguments seemed lost in the face of the purchasing agent’s determination to use price as the only parameter for choosing suppliers.  The negotiation ended in the most predictable manner.  On some lines we met our competitor price and protected our sockets.  In other lines we lost either our entire market share or managed to survive as a second source (<50% market share).

Around the same time in a different part of the world, we were having a very similar annual negotiation with Y (a competitor of X).  Even at Y our competitor A was dogging us with fangs out and again attempted to poach our business with the by now familiar 20%-discount strategy.  But Y didn’t seem nearly so impressed as X.  During our negotiation, they did mention the pitch made by A (almost in a passing manner) and went on to discuss with us the alignment of our product roadmap with theirs.  Their concerns hovered around whether they would have sufficient time to market our future products and whether we would keep investing in the product lines that concerned them.  When it came to prices we zeroed down quickly on a mutually acceptable annual reduction and moved on sign the deal.

The experiential difference at X and Y left us tad perplexed, and led us to open up a whole bunch of files that documented our historical negotiations.  After analyzing the data and the meeting notes we did hit on a pattern that, in turn, made us wonder whether there was a segmentation variable that we were missing out on.  Perhaps it made sense to segment our customer base based on purchasing process and strategy.

SEGMENTATION— A SECOND LOOK.

Traditional segmentation emphasizes segmenting customers based on demographic and psychographic variables.  While both these variable types have been extensively researched in a B2C (business-to-consumer) environment, in B2B (business-to-business) markets, the focus has been only on demographic variables.  For some reason experts have refrained to comment much on the psychographic variables that affect buying behavior in a B2B environment.

In a B2B environment, when we talk about psychographics of a customer we are in fact talking about the organizational culture of our customer company.  Culture includes the organization values, visions, norms, working language, systems, symbols, beliefs, and habits.   Very often these are summarized and drafted as the vision and mission statement of a company.  When it comes to procurement, it can be proven that the cultural set up is likely to affect the overall purchasing process and strategy.

In the case of X and Y described above it is important to understand their individual business situations.  Even though they were competitors in their end market, they catered to different segments of customers.  In X’s case, the customers were primarily price-sensitive buyers from APAC who preferred the cheapest product over the best available product.  These customers expected only one form of innovation from their suppliers—keep reducing cost.  This requirement in turn defined the overall culture at firm X, and affected their buying behavior.  On the contrary, firm Y targeted customers who were at the higher end of the spectrum.  These customers expected routine product innovation from their suppliers and were willing to pay a premium for same.

At the end of the day, both X and Y made the right decisions for their individual business models, and are each doing well.  As suppliers to both of them, it is important for us to be able to differentiate between these two types of firms and derive customized strategies based on the differentiation.
To segment customers based on purchasing process and strategy we used the following variables:

  1. Perceived value of product roadmap (low to high)
  2. Perceived value of current-day supply stability (low to high)

Based on these two variables we were able to create the following four customer segments:

  1. Innovation Partners – Customers who see value in both our supply and product roadmap.
  2. Promisers –  Customers who are not buying much currently but are working with us toward multiple future projects. They care more for product roadmap than current-day supply situation.
  3. Procurers – Customers who see value only in supply stability.
  4. Transactional – These customers don’t perceive any differentiated value against any available competitors (neither in terms of roadmap nor supply stability).

Figure 1

SEGMENT IDENTIFICATION

(click table to enlarge)

Table1

In the next edition we will discuss the negotiation strategies useful against each of the segments.



  • Joel

    Was there lots of drama and theatrics when negotiating with Customer X?

About the author

Pravin Vemuri works as a marketing manager at Cypress Semiconductor. He holds a BE in IT from Mumbai University , India and an MBA from Indian Institute of Technology (IIT), Delhi, India. Anirban Sengupta is a Pricing Manager Cypress Semiconductor. Sengupta holds a BE in Electrical Engineering from National Institute of Technology , India and an MBA in Marketing from Symbiosis Centre for Management and Human Resource Development (SCMHRD), Pune, India.

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