|
About the Author
The President of ChannelCorp, Bruce Stuart is a Certified Management
Consultant with experience in the computer hardware, software and telecommunications
markets of more than 40 countries. He has authored in excess of 300
articles and eight books on the subjects of building channel partner
business value and improving vendor channel strategy. He is a world
renowned executive educator and strategic management consultant.
ChannelCorp Workshops
ChannelCorp provides Executive Education to vendor and channel partner
management. Public workshops take place in Asia, North America and Europe.
In-house workshops take place throughout the world. For more information,
go to the Workshops section of www.ChannelCorp.com.
 -
Download this article as a PDF
file
3.1 Target Markets and Channel Segmentation
What are the target markets for the products and services that vendors
attempt to market and sell through indirect channels? Billions of dollars
have been spent on channel strategies doomed by the absence of clear
answers to this very basic question of channel strategy. Many hours
have been spent debating whose job it is to define the target markets.
The answer is clear . . . it is the vendor’s job to define the
target markets that the vendor wishes their channel partners to market
and sell to.
The purpose of this chapter is to outline the key target market and
channel segmentation issues related to developing channel strategies
for computer hardware, software and telecommunications products and
services. The chapter is divided into seven sections:
what are the questions?
basic channel segmentation notions
segmentation approach options
market/channel segmentation
segment viability
segmentation variables
channel segmentation and new products
What are the questions
Before any time or money is spent on developing channel strategy or
channel programs, vendor management must answer a core set of questions
regarding markets, customers and end users. The questions act as a “fire
test” for the channel strategy. Managers and organizations without
these answers expose themselves to high levels of unwarranted business
risk. The questions include:
what are the target markets for the product or service?
within the target markets, who are the actual customers or customer
organizations for the products or services?
within the actual customer organizations, who are the actual end users
of the products or services?
from which channel does the customer want to purchase the product or
service that is being marketed and sold?
from which channel does the end user want to purchase the services that
they require to make the product productive?
from which channel does the end user wish to receive delivery of the
services that they require to make the product productive?
The experience with providing target markets for channel partners is
very clear. Channel partners will be profitable much faster if the vendors
can define profitable target markets for their products and services.
Basic channel segmentation
The definition of specific target markets for channel partners leads
to a process of channel segmentation. In segmented channels, differentiated
channel strategies are created for different segments of the market.
Different products or services, targeted at different market segments,
are marketed and sold through different channels. Behind the concept
of channel segmentation are some basic strategic notions. They are:
sell the product/service where the customer wants to buy it - don’t
make customers chase your products/services. Don’t make them wonder
if they are buying in the wrong place or you risk high levels of “cognitive
dissonance” and potential customer satisfaction problems.
allow end users to consume services how and where they want to consume
the services - let end users have options regarding alternative channels
for the supply of services that they will need to consume.
sell the service where customers bought the product - don’t force
your customers to break any bonds of loyalty that exist in order to
consume a “complete product”.
for new products/services - understand where customers expect to purchase
the new products and services and make them available through those
channels.
for new services - understand how end users expect to consume the services
and make them available through those channels.
The essence of a segmented channel strategy is simple: give the customer
and end user what they want, where they want it, how they want it.
Segmentation approach options
Channel strategies are extensions of either an “undifferentiated”
or “segmented” approach to market segmentation.
The undifferentiated or mass market approach ("one size fits all”)
assumes that all customers and end users in a market will respond to
the same marketing programs and channel strategies in the same way.
The approach further assumes that the process of segmentation (splitting
of a large, heterogeneous market into smaller homogeneous market segments),
although potentially possible, would not yield benefits in excess of
its costs.
There are two segmented approaches: concentrated and differentiated.
The concentrated approach assumes a focus on only one market segment
("all the wood behind the arrow”). The essence of this approach
is to concentrate marketing and channel strategies tightly around one
market segment to enable the vendor to better deploy their resources
against opportunities.
The differentiated approach ("different strokes for different folks”)
is a multiple execution of the concentrated approach. The approach assumes
that various customers in a defined market will respond differently
to different marketing and channel strategies. The approach further
assumes that the market can be split into multiple segments that will
respond in similar fashions. The final premise of the differentiated
approach is that the benefits of multiple segment market and channel
strategies outweigh the costs.
The three approaches are diagrammed in Figure 1
segmentation approach options
Source: ChannelCorp Management Consultants Inc.
Market/channel segmentation
The process of market and channel segmentation requires an analytical
approach to looking at current and potential markets for products and
services. There are many methods of segmentation. The following steps
include the key aspects of most approaches.
1 Identify macro markets - macro markets,
potentially as broad as industry groupings, company size groupings,
or geographic location must be identified.
2 Identify basis of segmentation - many basis
exist for segmentation of macro markets. In general, most segmentation
basis fall into one of the following categories of attributes:
buying organization characteristics
buying center characteristics
decision making unit criteria
purchase behavior
characteristics of people/organizations
use situation
buyers’ needs/preferences
3 Identify segments within macro markets -
using the chosen basis for segmentation, segments are identified that
possess the key criteria for segment viability.
4 Profile buyers in selected segments - based on
the segments that have been selected for exploitation, buyers and buying
organizations within the segment are profiled and specifically identified.
When possible, lead lists are generated.
5 Opportunity analysis of segments - based on
segment profiles, purchase extrapolations, cost per order dollar (CPOD)
projections and segment size projections, segment opportunity projections
and analysis are compiled.
6 Decide on target segments - based on the segment
opportunity analysis and the vendor’s ability to execute channel
strategy, decisions are made regarding which market segments are to
be targeted.
7 Develop and deliver channel strategy to meet
the needs of the chosen market segments.
The discipline of market/channel segmentation is depicted graphically
in Figure 2.
market/channel segmentation
Source: ChannelCorp Management Consultants Inc.
Segment viability
The key to the success of channel strategies based on market segmentation
is the viability of the segments selected. There are six key characteristics
of a viable market segment:
1 In order to be viable, a market segment must be
identifiable and reachable with existing communication media, channel
structures and channel management techniques.
2 In order to be viable, a market segment must be quantifiable
or measurable.
3 In order to be viable, a market segment must be profitable
for all components of the channel system - vendors, distributors, customer-facing
channel partners.
4 In order to be viable, a market segment must be stable
over time. The component of the channel system that has the longest
payback period must be able to get their invested capital (plus a return)
out of the segment before it disappears.
5 In order to be viable, a market segment has to respond
differently that the overall market to different marketing and channel
programs.
6 In order to be viable, a market segment must be operationally
relevant. Viable segments require viable strategic implications or they
are merely conceptually interesting.
Segmentation variables
Measurement and operationalization are key features of viable market
segments. The key to strong market and channel segmentation is the creative
use of a variety of segmentation variables applied to the same macro
market data. The following questions provide an innovative approach
to thinking about market segments.
Buying organization characteristics
1 What type of organizations are going to be doing
the buying?
- public/private
- federal/state/local
- product/service
- manufacturing/retail/distribution
2 What are the demographics of the organizations that
are going to be doing the buying?
- industry (S.I.C. code)
- number of employees
- sales volume/asset levels/profitability
- geographic location - head office/plants
- public vs. private corporation vs. partnership
- association affiliations
3 What will the products/services be used for in end
use by the purchasing organizations?
4 What is the buying situation?
- new task
- modified repurchase
- straight repurchase
5 How much source loyalty is involved in the purchase?
Are there “in” or “out” suppliers to the organizations
doing the buying?
6 Do the organizations doing the buying employ purchasing
contracts of any kind?
7 Does buyer/seller reciprocity enter the transaction?
Individual decision maker characteristics
1 What are the demographics of the buyer/buyers in
the purchasing organization?
- age
- occupation
- education
- industry organization
- professional affiliation
2 What is the buyer’s role in the purchasing organization?
Specifically, what is the buyer’s position in the organization
structure and within the Decision Making Unit (DMU)?
3 What are the attitudes of the members of the DMU
towards vendors and brands?
4 How much risk are the members of the DMU likely to
take and how much risk do they perceive to be associated with the selling
organization?
5 What are the buying criteria used by the buying organization
and how do they measure reliability, price and product quality?
The following figure provides an illustration of a variety of segmentation
basis for both consumer and industrial markets.
Figure 3 - Segmentation basis
| Variables |
Consumer Markets |
Industrial Markets |
People/organization
characteristics |
Age, gender, race,
income, family size, geographic location, lifestyle |
Industry, size, location,
corporate culture, stage of development, role in value chain |
| Use situation |
Occasion, importance
of purchase, prior experience with product, user
status |
Application, purchase
procedure, new task, modified repurchase, straight repurchase |
| Needs/preferences
of Buyer |
Brand loyalty status,
brand preference, benefits sought, |
Performance requirement,
brand preference, desired features, service requirements |
| Purchase behavior |
Purchase size, purchase
frequency |
Value, purchase frequency |
Source: Cravens, David - Strategic Marketing
Channel segmentation and new products
Many new products and services fail because inadequate attention was
paid to market and channel segmentation. Failure to define precisely
the segment of the market where the new offering is likely to have greatest
value is commonplace. This failure leads to higher costs and longer
adoption times for new products and services. Two problems are common:
product and channel marketing efforts and investments are underestimated,
resulting in CPOD problems or failed campaigns due to resource shortages
the amount of new investment required by customers and the new learning
required by end users is poorly understood, leading to longer adoption
times and slower ROI.
The issues of target markets, market segmentation and channel segmentation
are critical to the successful launch of new products through indirect
channels. Macrosegmentation, where markets are cut by industry (S.I.C.
code), company size and company location are a first step. Horizontal
segmentation, where common end use applications are sought across industries
is a good next step. Vertical segmentation where specific industries
(and specific levels of different industries) are targeted for market
entry is also of great value early on. Micro-segmentation is when homogeneous
groups of buyers are created from the macrosegments using one or more
segmentation variables. Through the application of rigorous segmentation
to new product launches, the probability of profitable vendors and profitable
channel partners increases dramatically
(Figure 4). segment for new products
Source: ChannelCorp Management Consultants Inc.
Chapter summary
The purpose of this chapter has been to outline the key target market
and channel segmentation issues related to the development of indirect
channel strategies. The fundamental question - what are the target markets
for the product or service - began an analysis of the role of segmentation
in the success of channel strategy.
The next chapter examines the relationship between push marketing strategies,
pull marketing strategies, and the role of the indirect channels of
distribution.
-
Download this article as a PDF
file
ChannelCorp Consulting services
ChannelCorp provides strategic consulting in the areas of channel economics,
channel strategy, channel marketing, channel development and channel
management to hardware, software and peripherals vendors around the
world. ChannelCorp is also widely recognized as one of the industry’s
leading authorities in the areas of reseller and solution provider profitability
improvement.
ChannelCorps’s management consulting expertise
is built on a solid foundation of fifteen years of researching and analyzing
the evolving business models and marketing strategies of the vendor
and solution providers worldwide.
Suggested Reading
For more information on the topics covered in this article, you should
consider purchasing The Channels Handbook and/or The Reseller
Management Handbook. For more information, go to the Products
section of www.ChannelCorp.com.
Availability
ChannelCorp can make our copyrighted materials available to your organization
for inclusion in your corporate newsletters and websites.
For information on republication, contact Bruce Stuart
- channelcorp@telus.net
Back to ChannelCorp Intelligence
TOP of PAGE
HOME
|
