Understanding customers and markets

Accounting Ahead | Original study resource | accountingahead.com.au

Understanding customers and markets

MODULE 2 | 2.5 | STUDENT COMPANION

A market is an industry's organisations together with their buyers. Market segmentation divides it into

groups of buyers whose characteristics, needs and behaviour are alike. Industry segments group the

products on offer; market segments group the buyers.

Five tests of a good segment

Homogeneous

Members are alike in attitudes,

behaviour and finances

Heterogeneous

Clearly different from the other

segments

Substantial

Large enough, or valuable enough, to

justify the effort

Identifiable

You can tell who belongs and who

doesn't

Responsive

Members react in a similar way to what

you offer

Small can still be substantial: superyacht buyers are few, but each sale is worth a fortune

Five ways to segment a market

Cragline's climbers

Imagined: combine variables to find

meaningful segments

Demographic

Age, income, family. Families booking

birthday parties

Psychographic

Lifestyle, personality.

Adventure-seekers

Behavioural

Usage and loyalty. Members climbing

weekly

Distribution

Buying channel. One-off sessions

booked online

Geographic

Location. Suburbs within 20 minutes of

a gym

GLOBAL STRATEGY AND LEADERSHIP | M2 | 2.5 | STUDENT COMPANION

1

Accounting Ahead | Original study resource | accountingahead.com.au

Analysing a segment: seven questions

Question What to look for

Who are the buyers? Characteristics, wants, needs, attitudes and behaviour; are they distinct?

How many are there? Total sales or market share

What are they worth? Contribution margin and profitability

How fast could it grow? Growth potential

How do they shop? Online or in store; regularly or occasionally

Do they stay loyal? To the organisation, or to a product

Can we serve them? Products, services and capabilities

Worked example: two Cragline segments (imagined)

Same contribution, very different segments. Casual visitors also feed tomorrow's membership, so the segments

are linked.

Casual visitors Committed members

Volume 1,500 visits a month 400 members

Price $30 a visit $90 a month

Variable cost $10 a visit $15 a member a month

Contribution a month 1,500 x $20 = $30,000 400 x $75 = $30,000

Reliability and loyalty Rises and falls with holidays and

weather

Paid monthly; loyal; bring friends

GLOBAL STRATEGY AND LEADERSHIP | M2 | 2.5 | STUDENT COMPANION

2

Accounting Ahead | Original study resource | accountingahead.com.au

From segments to target markets

1. Segment

Divide the market

into meaningful

groups

2. Analyse

Buyers, size, value,

growth, habits,

loyalty

3. Check fit

Do our products and

capabilities suit it?

4. Choose

Select one or more

target markets

5. Design

Build the offer and

value proposition

Target many segments

Spreads risk and fixed costs, but needs a wider range of

capabilities

Target one segment

Builds deep expertise and loyalty, but exposed if that segment

shrinks

Start from what customers want, not from what the organisation happens to make

Case note: Toyota creates Lexus

By the 1980s Toyota had a strong reputation in the United States for reliable, affordable cars, but wealthy buyers

seeking prestige bought German luxury brands. In 1983 Toyota began a secret project to build a car that could

beat the world's best. Rather than sell it as a Toyota, it launched a new brand, Lexus, on 1 September 1989,

with separate dealerships and a strong focus on quality and customer service. The flagship LS 400 was priced at

about US$35,000, well below comparable German models, and by 1991 Lexus was outselling Mercedes-Benz

and BMW as America's best-selling luxury import. Toyota identified a distinct, substantial segment, recognised

that its existing brand and dealers could not serve it, and built a new offer and channel for that target market.

Sources: Toyota press release, 15 May 1989; Lexus Europe newsroom; Lexus USA newsroom, 'The History of Lexus'.

GLOBAL STRATEGY AND LEADERSHIP | M2 | 2.5 | STUDENT COMPANION

3

Accounting Ahead | Original study resource | accountingahead.com.au

Practice questions

MODULE 2 | 2.5 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Test the proposed segments

Imagine PulsePath, a fitness app planning its marketing. Test each proposed segment against the five criteria.

Proposed segment Which tests does it pass or fail?

(a) People who like exercise

(b) New mothers wanting short home workouts in the

year after giving birth

(c) People born in March

(d) Office workers aged 25 to 40 in capital cities who

want 20-minute lunchtime workouts

(e) Elite marathon runners living in Hobart

Question 2 - Segmenting a pet insurance market

Imagine Pawsure, a new Australian pet insurer. Choose at least three segmentation variables that would be

useful, explain why, and describe three segments they would produce.

GLOBAL STRATEGY AND LEADERSHIP | M2 | 2.5 | STUDENT COMPANION

4

Accounting Ahead | Original study resource | accountingahead.com.au

Question 3 - Choose a target market

Imagine Smokestack Roasters, which sells coffee beans through its online store. Calculate each segment's

yearly contribution, then recommend a target market and justify it.

Segment Customers or orders Price Margin Growth Loyalty and notes

A - Home espresso

fans

2,000 subscribers, 1 kg

a month

$50/kg 45% 8% a year High; subscriptions

B - Offices 60 offices, 8 kg a month

each

$40/kg 35% 2% a year Medium; want

machine servicing

C - Gift buyers 3,000 orders a year $45/order 40% 5% a year Low; peaks before

Christmas

GLOBAL STRATEGY AND LEADERSHIP | M2 | 2.5 | STUDENT COMPANION

5

Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 2 | 2.5 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - PulsePath segments

Segment Assessment

(a) Like exercise Fails homogeneous and identifiable: far too broad to design an offer around

(b) New mothers Passes: alike in needs, distinct, substantial, identifiable, likely to respond to short

home workouts

(c) Born in March Fails responsive and homogeneous: birth month doesn't change what people want

(d) Office workers Passes: clear needs (time), distinct, large and reachable

(e) Hobart marathon runners Fails substantial: too few to justify a dedicated effort, unless very high value

Question 2 - Pawsure

Demographic (owner age and income): young renters versus established families versus retirees differ in

budget and cover needs.

Behavioural (pet type and vet usage): owners of young dogs, older cats or pedigree breeds have very

different claims patterns.

Psychographic (attitude to risk): some owners want comprehensive cover for peace of mind; others want

accident-only cover at the lowest price.

Distribution: online direct buyers versus those who buy at the vet clinic.

Possible segments: budget-conscious young owners of new puppies (accident and illness at low price);

devoted owners of older pets (comprehensive cover, high value); multi-pet families (bundled discounts).

Question 3 - Smokestack Roasters

Segment Yearly contribution Comment

A - Espresso fans 2,000 x 12 x $50 x 45% = $540,000 Largest, growing fastest, loyal: best target

B - Offices 60 x 8 x 12 x $40 x 35% = $80,640 Needs machine servicing Smokestack

lacks: a capability gap

C - Gift buyers 3,000 x $45 x 40% = $54,000 Seasonal and low loyalty, but cheap to

serve online

Recommendation: target home espresso fans as the primary market, with subscriptions and education to

deepen loyalty; serve gift buyers as a seasonal secondary segment; avoid offices unless Smokestack builds or

partners for machine servicing.

GLOBAL STRATEGY AND LEADERSHIP | M2 | 2.5 | WORKED ANSWERS

6