Size Counts

by Tim Smith, PhD, 15 September 2004

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The US is home to 294 million individuals living in 105 million households and working at 21 million businesses plus a number of government agencies. 70% of the businesses are sole proprietorships leaving under 6 million companies with more than one employee. Simply comparing the potential market size of the entire consumer base versus the business base suggests that consumer markets can have 10 times more customers than the largest business market. While size is only part of the story, size does affect every aspect of marketing.

Target Definition Produces Greater Focus
Consumer marketers can adequately define their target market according to demographic and psychographic profiles for most purposes. Their location, age, gender, and lifestyle will indicate whether a prospect is likely to purchase or not. For a consumer branded product, market segments defined along these lines will often include tens of millions of potential customers. Even a small retailer serving households within a limited radius of their store locations will be able to define their target market to include several thousand potential customers.

Target markets in business markets are defined in very different terms. The three strongest indicators that define which businesses are in the target market are industry, size, and location, where location is a distant third. (Size is usually measured by revenue or employees.) Moving beyond industry and size, business markets can be further segmented according business orientation, management structure, and other competitive factors.

Business market segments defined along these lines rarely approach the million customer size. They often have a potential customer base defined in the thousands, hundreds, tens, and even singled digits of customers.

For example, the automotive industry has only two major US manufacturers and a handful of foreign manufacturers with operations in the US. (Chrysler is owned by a German based corporation and currently many purchasing decisions are now made in Germany.) Likewise, the commercial aircraft industry has two major global manufacturers, Boeing and Airbus, plus a handful of smaller competitors or firms that produce commercial aircraft in tandem with military or personal aircraft. Similar industry structures can be found in concrete production, earth moving machinery, locomotives, and rail car management.

When we put the major large machine manufacturers aside and consider other business markets, we can find larger market segments. Markets like the utilities segment contain roughly 80 large firms and 2500 smaller organizations. Car dealerships count 25,000 among their kind, dentists include 100,000 independently run outfits, and small businesses with one to 500 employees number 5 million.

Different Approach to Managing the Marketing Mix
Marketing to 10 to 100,000 businesses is not the same as marketing to a few thousand households in the neighborhood or a million to hundreds of million individuals across the nation. Advertising and sales channels will be far more targeted when addressing a focused audience of 10,000 businesses versus 10 million individuals. Likewise, the required market research to create and position an offering for a focused business segment will be vastly different from that of a targeted consumer segment. Even price management takes different forms when focused on a small market versus a large one.

The effective marketing strategies and tactics for targeting a group of a few hundred businesses are not the same as those for targeting a few million individuals. In consumer markets, there are multiple media outlets that allow a company to reach their audience. Even a sporting equipment manufacturer can choose between advertising in 60 different sports oriented magazines. This creates flexibility in the media budget and allows for blitzkrieg like advertising in multiple outlets simultaneously for new product launches. In well defined business markets, the media outlets that address the target market can usually be counted on one hand, therefore creating instant awareness through a large media campaign is a questionable strategy. Not only are the options reduced, but expanding the options to include more tangential media may not produce a positive return on the marketing dollar.

In conducting market research, consumer marketers are able to reliably execute surveys that include over 1000 different individuals on a regular basis. Getting 1000 survey responses from similar executives in a business market that includes less 100 different businesses fails the logic test. As such, the techniques and direction of market research for business markets is different from that of consumer markets. While survey data may help business marketers collect facts about their target market, other techniques will be required to create a fuller understanding of customer needs.

Focus, Flexibility, Uncertainty
The smaller size of business markets implies that serving them profitably requires greater focus than serving consumer markets. Mass approaches to dealing with business customers are unlikely to produce sufficient returns on marketing expenditures to warrant investment. Here, individualized approaches are more effective. Concurrently, the greater focus required to effectively create customers and capture profitable revenues influences the flexibility that marketers have. Rather than having thousands of options for interacting with customers, business marketers have to work within the constraints of relying upon a handful of targeted approaches to customer interaction. And, while consumer marketers can easily test campaigns on focus groups, business marketers will have fewer opportunities for test-running a campaign. As such, they work with greater uncertainty. When managers must rely heavily upon their intuition, context created from experience is king.

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Author
Tim Smith, PhD is Editor of The Wiglaf Journal, Principal of Wiglaf LLC, and Adjunct Professor at DePaul Graduate School of Business.

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