Industrial Classification

Identifying Potential Business Customers

Market segmentation involves identifying the particular groups of people / organizations that benefit from your product and then selling to them.

Identifying your customer begins with formulating a value proposition. You have to be able to answer this question: “To whom is this proposition of value? ” When trying to answer this question, it helps to simplify matters by breaking the market down into components. The role of the marketing team is to understand everything there is to know about given target groups, ensuring that needs are being identified and filled.

There are three broad categories of customers who could buy your product: individuals, channels (intermediaries), and organizations. Each of these categories can be further broken down into smaller segments. This is called market segmentation – picking out the particular groups of people or organizations that benefit from your product, so you can better sell to them. Organizations can be segmented by:

• Industry
• Size
• Function
• Level
• Type of individuals within the organization

Many segmentation schemes are combinations of the above list. For example, let’s say a venture developing an innovative digital storage product decides to sell only to organizations, not individuals. It segments its potential market by size of organization, size of data storage requirements, and need for speed of retrieval. This would occur during the periods of market analysis and customer research in the product development cycle. That leads, for example, to a focus on large financial institutions and large medical centers. Within those targeted organizations, the importance and cost of the purchase dictates that the venture focuses on selling only to “C-level” executives, such as the CIO or CFO. Finally, as the technology is very new, the venture team chooses to target the executives who are technology enthusiasts—people who love new technology for its own sake and are often willing to look at it in its preliminary form.

Product Innovation Approach: In the product development cycle, the market analysis and consumer research phases are used to identify customers.

Industry classifications can assist in determining market segmentation. The North American Industry Classification System (NAICS) is used by business and government to classify business establishments according to its primary type of economic activity (process of production) in Canada, Mexico, and the United States. Thus, if a company identifies a potential customer but is uncertain what industry that customer belongs to, using the industrial classification from the NAICS can provide more detailed information on the specific business activities of that potential customer.

Having decided on a specific market, the salesperson should try to limit his prospecting to remain within that market. The ideal customer who will buy as soon as the salesperson talks to him is probably nonexistent. Nonetheless, the closer a salesperson’s prospect matches that ideal customer, the fewer sales objections will be placed in his way. It therefore makes sense to ensure that his prospects at least resemble the specification as accurately as they can. This means identifying the potential of a prospect at the very outset.

In particular, the salesperson should know the requirements that a potential customer has set for his future, his priorities, and in all probability, his financial resources. Failing to analyze a prospect is the main reason for a great deal of wasted prospecting time spent on a customer who should have been promptly discarded after due research. Good prospecting does not necessarily dismiss those whose business appears to be static, but it is certainly improves the ability to select and concentrate one’s efforts where one is more likely to secure immediate success.

Estimating the Addressable Market

Total addressable market (TAM) is a term that is typically used to reference the revenue opportunity available for a product or service.

Total Addressable Market

Total addressable market (TAM), also called total available market, is a term that is typically used to reference the revenue opportunity available for a product or service. The market consists of all prospective customers for a given product, service, or idea. Customers can be purchasers who intend to resell the product or end users who intend to use or consume the product.

Estimating TAM

TAM helps to prioritize business opportunities by serving as a quick metric of the underlying potential of a given opportunity. Few organizations track market share even though it is an important metric. Though absolute sales might grow in an expanding market, a firm’s share of the market can decrease which would bode ill for future sales when the market starts to drop. Where such market share is tracked, there may be a number of aspects that will be followed:

• Overall market share
• Share of a target segment
• Relative share in relation to the market leaders
• Annual fluctuation rate of market share
• An estimation of how much of the market you can gain if there were no competitors
• An estimation of the market size that could theoretically be served with a specific product or service

Competitor Profiling: The folio plot visualizes the relative market share of a portfolio of products versus the growth of their market. The circles differ in size by their sales volume.

TAM can be defined as a global total (even if a specific company could not reach some of it) or, more commonly, as a market that one specific company could serve (within realistic expansion scenarios). This focuses strategic marketing and sales efforts and addresses actual customer needs. Including competition and distribution issues then frames the strategy within realistic boundaries and allows a company to gauge served market share ( SAM ), the percentage of the market that is already being served, either by that company or all providers. The North American Industry Classification (NAICS) categorizes businesses and collects data within specific economic activities, thus assisting in measuring the SAM.

The market can be categorized into separate groups called segments. Any discrete variable is a segmentation. For instance, customers might be segmented by gender (“male” or “female”) or attitudes (“progressive” or “conservative”). Numeric variables may be used to create segments, such as age (“over 30” or “under 30”) or income (“The 99%” or “The 1%”).

Market Segmentation

Segments can be obtained by any number of approaches. Minimally, an existing discrete variable may be chosen as a segmentation, also called “a priori” segmentation. At the other extreme, a research project may be commissioned to collect data on many attributes that would then be used to conduct statistical analysis to derive a segmentation, also called “post-hoc” segmentation.

Qualitative knowledge of the market based on experience may also be used to identify divisions that are likely to be useful. When a producer appeals to a market or market segment, the producer must take into account the distinction between the end user or consumer and the purchaser or decision maker. This is especially true in B2B models. The market may be individuals or organizations that are able to purchase the organization’s product. Each entity in the delivery chain will have different needs, so a complete market needs analysis must include all potential segments and all entities within each segment.

Categories of Business Products

Business-to-business (B2B) transactions involve many classifications of business products.

Business-to-business ( B2B ) describes commerce transactions between businesses, such as between a manufacturer and a wholesaler or a wholesaler and a retailer. B2B transactions involve many classifications of business products, including the following:

• Raw Materials: A raw material is the basic material from which a product is manufactured or made. Agriculture and mining businesses are concerned with the production of raw materials, such as plants or minerals. Additional examples include latex, iron ore, logs, and crude oil.

Collecting Raw Materials: Latex is a raw material that’s collected from rubber trees and used to manufacture other products.

• Component Parts: Manufacturers produce products, from raw materials to component parts, which they then sell at a profit. Companies that make physical goods, such as cars or pipes, are considered manufacturers.
• Equipment: Equipment includes products used in production activities and operational activities. Equipment includes large buildings that serve as places of business for other companies. Real estate businesses generate profit from the selling, renting, and development such of properties.
• Processed Materials: These products are created from raw materials and are used in the production of another product. Examples include food preservatives and industrial glue.
• Business Services: Service businesses offer intangible goods or services and typically generate a profit by charging for labor or other services provided to government, other businesses, or consumers. Organizations including house decorators, repair services, consulting firms, restaurants, financial businesses, janitorial services, and even entertainers are types of service businesses. ( )
• Supplies: These products facilitate both production and operations, but are not part of the final product. Examples include paper, pens, and cleaning agents. These items can be purchased from retailers and distributors and delivered by transportation businesses.

There are many other divisions and subdivisions of businesses. The authoritative list of business types for North America is generally considered to be the North American Industry Classification System (NAICS; pronounced “nakes”). The equivalent European Union list is the Statistical Classification of Economic Activities in the European Community (NACE).