In this topic 7 sections
Markets, customers and the buying decision
A market connects a need with potential buyers and the offers available to them. An industry groups suppliers; a customer market examines demand. Their boundaries need not coincide: different industries can offer alternative ways to meet the same need.
Do not assume the purchaser, user and decision-maker are always the same person. In an organisational purchase, an employee may use the service, a manager may approve it and procurement may negotiate the contract. A useful customer analysis identifies whose requirements influence selection, payment and continued use.
Segmentation, targeting and positioning answer different questions. Segmentation identifies meaningful customer groups. Targeting selects the groups the organisation will prioritise. Positioning defines the place its offer should occupy relative to alternatives. A segment is something to investigate; it is not automatically an attractive target.
- Define the need
- Identify customer differences
- Compare possible segments
- Select a target
- Test the offer and its economics
- Review the evidence
Concept sources: Business Queensland — Customer focus and STP — Concept reference; flow prepared for these notes.
Bases for market segmentation
Market segmentation groups buyers whose relevant needs or behaviour are sufficiently similar to justify a common approach. The most convenient data field is not necessarily the best basis. Start with differences that could change the offer, channel, service level or economics.
| Basis | What it distinguishes | Useful investigation |
|---|---|---|
| Demographic | Life stage, income, household or other population characteristics | Does the characteristic actually explain the purchasing need? |
| Psychographic | Values, motivations, interests and lifestyle | Which priorities influence the customer's choices? |
| Behavioural | Usage, buying occasion, loyalty or benefit sought | Do occasional and frequent users need different arrangements? |
| Geographic | Location, distance or local operating conditions | Does location change access, delivery cost or requirements? |
| Channel or distribution | How customers discover, buy or receive the offer | Do self-service and adviser-assisted customers need different support? |
Concept sources: business.gov.au — Identify your target market — Concept reference; table prepared for these notes.
Variables can be combined. For business customers, also consider organisation size, sector, procurement practices and technical requirements. However, continually subdividing a market creates complexity. A useful segment changes a decision; a finely labelled group with identical needs may add only reporting work.
Geography still matters in digital markets through language, regulation, payment arrangements and service access. Conversely, customers in different countries may share a particular need. Neither “everyone online is one market” nor “every country is completely different” is a sound starting assumption.
When a segment is useful
Customers within a segment should be reasonably similar in the factors being studied, while differences between segments should matter to the decision. This is within-segment similarity and between-segment difference, not a claim that people in a group are identical.
- Recognisable
- There is a workable way to identify the group and estimate its size, rather than relying on an appealing label.
- Meaningfully different
- The group has needs or responses that justify a different offer, message or delivery choice.
- Reachable and serviceable
- The organisation can communicate with the group and deliver what it promises.
- Economically worthwhile
- Expected value justifies acquisition, adaptation and service costs; a small specialised group can qualify.
- Testable over time
- Evidence can show whether the group responds as expected and whether its characteristics are changing.
Concept sources: Business Queensland — Customer focus and target selection and business.gov.au — Target-market research — Concept references; cards prepared for these notes.
Avoid assuming that membership of a demographic group proves an individual's preferences. A customer profile summarises evidence about a segment; an invented persona cannot substitute for that evidence. Treat missing information as a research need, not permission to fill gaps with stereotypes.
Selecting target markets
Segment attractiveness and organisational fit are separate judgements. An expanding segment may still be expensive to reach, vulnerable to substitutes or difficult to serve profitably. A capable organisation may also be targeting a need that is disappearing.
| Assessment | Evidence to compare | Decision implication |
|---|---|---|
| Demand and change | Buyer numbers, purchase frequency, spending and growth assumptions | Distinguish a large headline market from demand available to the proposed offer |
| Competitive pressure | Existing alternatives, loyalty and reasons customers might switch | Identify a credible reason for customers to choose differently |
| Economic potential | Net prices, service costs, retention and cash requirements | Estimate value after the costs of winning and serving the segment |
| Delivery fit | Skills, capacity, channels and required investment | Identify gaps before making commitments |
Concept sources: Business Queensland — Marketing strategy and target priorities and SBA — Market research and competitive analysis — Concept references; table prepared for these notes.
State the time period and unit of measurement. Market revenue, number of customers and units purchased describe different things. Market share requires a consistent numerator and denominator: the firm's sales and total relevant market sales must use the same scope, period and basis.
One business may prioritise a narrow segment; another may serve several with distinct offers. Multiple targets can diversify demand, but also require extra training, inventory and systems. Growth in one segment must not quietly undermine the service promised to another.
Segment profitability and cost to serve
Sales value is an incomplete measure of customer attractiveness. Discounts, returns, onboarding, delivery, technical assistance and credit terms can make equally large accounts produce different results. Analyse costs caused by serving the segment and distinguish them from shared costs that would remain anyway.
The following worked comparison covers one year. Its final row is contribution after the specified segment costs, not total company profit.
| Annual estimate | Standard-order segment | Custom-order segment |
|---|---|---|
| Net sales revenue | $180,000 | $240,000 |
| Variable fulfilment cost | $108,000 | $168,000 |
| Contribution before segment costs | $72,000 | $72,000 |
| Additional support and acquisition costs | $18,000 | $42,000 |
| Contribution after these costs | $54,000 | $30,000 |
Concept sources: BDC — Customer profitability analysis — Concept reference; comparison and all figures prepared for these notes.
The custom segment produces $60,000 more revenue but $24,000 less contribution after the listed costs. This does not automatically justify abandoning it. Investigate price, process, retention and future potential. Shared overhead, investment, capacity constraints and cash timing still need consideration.
Testing needs and building a value proposition
Use existing information to understand the broad market, then investigate the questions that matter to the decision. Interviews can reveal why a customer chooses; transaction records show what happened; observation can uncover difficulties customers do not mention. Seek views from current customers, lost customers and people who never bought.
An expressed preference is not the same as purchase behaviour. A favourable survey response may disappear when a realistic price, inconvenience or switching effort is introduced. Test the proposed offer under conditions close to actual use and record what would count as success or failure.
A customer value proposition connects a chosen customer, an important benefit and a credible economic offer. It should explain a reason to choose, rather than claim to be “high quality” without specifying what that means. Positioning also requires activities capable of delivering the promise.
For a strategic recommendation, explain which segment, why it is attractive, why the organisation can serve it and what evidence could change the choice. This connects customer understanding with the competitor analysis on the next page.
Sources and further reading
The references support the concepts; worked examples illustrate their application.
- Business Queensland — Customer focus and STP — Segmentation, target selection and positioning.
- business.gov.au — Identify your target market — Customer characteristics and buying habits.
- Business Queensland — Writing a marketing strategy — Target priorities and ability to serve.
- SBA — Market research and competitive analysis — Market size, demand and alternatives.
- BDC — Customer profitability analysis — Net revenue and cost to serve.
- business.gov.au — Do market research — Customer interviews, existing data and testing.
- Harvard Business School — Unique value proposition — Connecting customers, needs and relative price.