On the other side of the table: Understanding Customer Segmentation, A Parallel to Kraljic’s Matrix.
As a procurement professional well-versed in Kraljic’s matrix for supplier segmentation, you might be curious about whether sales teams on the supplier side employ similar models to segment their customers in a B2B context. The answer is yes, sales theory provides a variety of models for customer segmentation, and there are notable commonalities between segmenting suppliers and customers. In this blog post, we will delve into the theories behind customer segmentation in B2B sales, explore popular models, and draw parallels to supplier segmentation using Kraljic’s matrix.
Customer segmentation
Kraljic’s Matrix: A Brief Overview
Kraljic’s matrix is a strategic tool used in procurement to segment suppliers based on two key dimensions: profit impact and supply risk. This results in four quadrants:
- Leverage Items: High profit impact, low supply risk.
- Strategic Items: High profit impact, high supply risk.
- Non-Critical Items: Low profit impact, low supply risk.
- Bottleneck Items: Low profit impact, high supply risk.
This matrix helps procurement teams develop appropriate sourcing strategies, from competitive bidding for leverage items to strategic partnerships for strategic items.
If you want to learn more about Kraljic, Learn How to Source provide two courses:
Get to know Kraljic and his matrix. After completing the course you will have an understanding of who Peter Kraljic is and the history of his Matrix, how to use Kraljic’s Matrix and in which procurement processes you apply Kraljic’s Matrix.
Kraljic and Portfolio analyses by Paul Rogers. Kraljic Portfolio management connect the four quadrants (Leverage, Non critical, Strategic and Bottleneck) in Kraljic´s matrix to 8 relevant sourcing strategies.
Customer Segmentation in B2B Sales: Theories and Models
Just as procurement teams use Kraljic’s matrix to optimize supplier management, sales teams use customer segmentation to tailor their strategies and maximize value from their customer base. Customer segmentation in B2B involves dividing a customer base into distinct groups that share similar characteristics. This enables more targeted and effective marketing, sales, and service strategies.
Here are some common models and theories in B2B customer segmentation:
1. Firmographic Segmentation
Firmographic segmentation is analogous to demographic segmentation but applies to companies rather than individuals. It includes factors such as industry, company size, revenue, and location. This segmentation helps in understanding the unique needs of different business segments.
2. Geographic Segmentation
Geographic segmentation involves segmenting customers based on their location. This can be as broad as countries and regions or as specific as cities and neighborhoods. Geographic factors often influence purchasing behavior, making this a useful segmentation approach for localized marketing efforts.
3. Behavioral Segmentation
Behavioral segmentation focuses on customer behavior, such as purchasing patterns, usage rates, brand loyalty, and product interaction. By analyzing how customers behave, sales teams can identify high-value customers and tailor their strategies accordingly.
4. Needs-Based Segmentation
Needs-based segmentation identifies customer segments based on their specific needs and preferences. This approach requires in-depth market research and customer feedback to understand what drives purchasing decisions in different segments.
5. Value-Based Segmentation
Value-based segmentation divides customers based on the economic value they bring to the business. This involves analyzing customer profitability and lifetime value. High-value customers may receive personalized attention and premium services, while lower-value customers might be targeted with more automated solutions.
Parallels Between Supplier and Customer Segmentation
Now, let’s explore the commonalities between segmenting suppliers using Kraljic’s matrix and segmenting customers in B2B sales.
1. Strategic Focus
Both Kraljic’s matrix and customer segmentation aim to optimize the allocation of resources. In Kraljic’s matrix, procurement teams focus on strategically important suppliers, while in customer segmentation, sales teams prioritize high-value customers. The goal in both cases is to maximize the return on investment by concentrating efforts where they will have the greatest impact.
2. Risk Management
Managing risk is a key component of both supplier and customer segmentation. Kraljic’s matrix helps procurement teams mitigate supply risk by identifying strategic and bottleneck items. Similarly, customer segmentation allows sales teams to manage business risk by diversifying their customer base and reducing dependence on a few key customers.
3. Tailored Strategies
Both segmentation methods involve developing tailored strategies for different segments. In Kraljic’s matrix, procurement strategies range from competitive bidding to strategic partnerships. In customer segmentation, sales strategies vary from mass marketing to personalized account management. The customization of strategies ensures that each segment is managed in the most effective way.
4. Data-Driven Decisions
Effective segmentation relies on data analysis. Kraljic’s matrix uses data on profit impact and supply risk, while customer segmentation uses demographic, geographic, psychographic, behavioral, and firmographic data. Both approaches leverage data to make informed decisions and improve business outcomes.
5. Value Maximization
Ultimately, both supplier and customer segmentation aim to maximize value. Kraljic’s matrix seeks to maximize the value derived from supplier relationships, while customer segmentation aims to maximize the value generated from customer relationships. By identifying and focusing on key segments, businesses can enhance profitability and growth.
Understanding Customer Segmentation Models in B2B Sales
To further illustrate the parallels and provide practical insights, here are some popular customer segmentation models used in B2B sales:
1. RFM Analysis (Recency, Frequency, Monetary)
RFM analysis is a behavioral segmentation model that evaluates customers based on three criteria:
- Recency: How recently a customer made a purchase.
- Frequency: How often a customer makes a purchase.
- Monetary: How much money a customer spends.
This model helps identify loyal customers, high spenders, and potential churn risks.
2. Customer Lifetime Value (CLV) Segmentation
CLV segmentation assesses the total value a customer is expected to bring over their entire relationship with the business. This approach helps prioritize high-CLV customers for retention and upselling efforts.
3. Churn Prediction Models
Churn prediction models use machine learning algorithms to identify customers at risk of leaving. By analyzing past behavior and identifying warning signs, sales teams can proactively address churn and improve retention rates.
4. Needs-Based Segmentation
Needs-based segmentation identifies customer segments based on their specific needs and preferences. This approach requires in-depth market research and customer feedback to understand what drives purchasing decisions in different segments.
5. ABC Analysis
ABC analysis segments customers based on their contribution to total sales revenue:
- A Customers: Top 20% of customers generating 80% of revenue.
- B Customers: Next 30% of customers contributing 15% of revenue.
- C Customers: Remaining 50% of customers contributing 5% of revenue.
This model helps prioritize high-revenue customers for strategic sales efforts.
Summary: Understanding Customer Segmentation in B2B Sales.
Customer segmentation in B2B sales and supplier segmentation using Kraljic’s matrix share many commonalities, primarily in their strategic focus, risk management, tailored strategies, data-driven decisions, and value maximization. By understanding these parallels, procurement and sales teams can collaborate more effectively and align their strategies to drive business success.
Effective segmentation is crucial for both procurement and sales. It allows businesses to focus their resources on the most impactful areas, manage risks, and develop customized strategies that enhance relationships and maximize value. Whether you’re segmenting suppliers or customers, the key is to leverage data, understand your segments deeply, and continuously adapt your strategies based on changing market dynamics.
By integrating these segmentation practices, businesses can enhance their strategic approach and achieve greater efficiency and effectiveness in both procurement and sales operations.
For further reading and in-depth understanding, students and professionals can refer to the mentioned textbooks and explore additional academic journals and articles on B2B marketing and customer segmentation.
At Stockholm University, the course on B2B Marketing and Sales covers comprehensive topics and uses specific textbooks that are relevant to marketing theory and B2B customer segmentation. The course includes an in-depth understanding of relationship management, decision-making processes, supply chain considerations, and e-commerce. Textbook is “Business Marketing Management: B2B” by Michael D. Hutt and Thomas W. Speh which explores highlights the similarities, and emphasizing the differences, between consumer goods and B2B marketing. This proven textbook focuses on market analysis, organizational buying behavior, relationship management, and the ensuing adjustments required in the marketing strategy elements used to reach organizational customers. Its managerial approach ties chapter concepts directly to real-world decision making
For more detailed information on the course and its syllabus, you can visit the Stockholm University website or go directly to (Stockholms universitet (B2B Marketing and Sales)).
This blogpost is partly based on the summary of Understanding Customer Segmentation in B2B Sales available on link created by the ViB Editorial Team.
Note: Illustration to the blogpost “Understanding Customer Segmentation” was created by Chat-GPT on May 18, 2024.