MARKET SEGMENTATION VARIABLES AND WHAT THEY REPRESENT FOR THE ACCOUNTING SERVICE.

MARKET SEGMENTATION VARIABLES AND WHAT THEY REPRESENT FOR THE ACCOUNTING SERVICE.

Roberto Dias Duarte

Advisor for Omie, Fortes Tecnologia, Darwin Capital and Latourrette Consulting (Portugal)

ABSTRACT

As in any area, accounting firms have found themselves in a very competitive arena to capture and keep their clients close. Many offices fail to filter or group their clients according to their differences and similarities, while other offices barely know how to put this project into action, bringing implications, such as mistaken investment in users who add little to the organization’s progress and revenue. The market segmentation is a simple Marketing strategy, which appears as a viable and enriching option for the teams to have better control and knowledge about their consumers, offering objectively what is most interesting to them; this strategy allows the teams to evaluate if the instruments, resources and technologies present are enough to serve them with quality. This study makes observations about which characteristics allow companies to distribute their customers in niches, besides exemplifying which variable tends to be more innovative and interesting for the invoicing of companies.

Keywords: Market Segmentation; Accounting Service; Marketing.

INTRODUCTION

The market is a wide field, formed by several entities and institutions with different desires and goals, always aiming to achieve the satisfaction of the largest possible number of customers. Dealing with such a large sphere can be laborious and ineffective for the routine and processes of some companies, after all when proposing to interact with so many profiles, there is the possibility of accepting the provision of services to customers who add little in the development of the company or even wear it out. Within the strategies that intend the success of the companies, the market segmentation allows to recognize what each consumer represents to the organization, besides identifying if the client-company relationship is healthy, contributing to the satisfaction of the former and the evolution of the latter.

Market Segmentation is an existing concept within Strategic Marketing that allows more competitiveness to companies by knowing exactly what to offer and to whom, based on their similarities. (BARBOSA, DIAS & WALCHHUTTER, 2015). Contrary to what many think, segmenting the market is not only about selecting which clients will be served, but mainly about avoiding proposals that are outside the interests of these possible partners.

The Services sector – in which the accounting branch is included – is one of those that suffer most from competitiveness, facing difficulties to consolidate itself in the big market, in this way, it is common and wise that the entrepreneurs involved in this sector seek and draw more precise strategies that guarantee good statistics and growth. Each segment demands different knowledge, needs and strategies.

In what concerns to Accounting, Dias e Santos (2013 apud PINTO, 2017) consider and testify how marketing can influence the quality of services provided and customer satisfaction, generating consequences desired by any professional in the sector, such as attracting new consumers, portfolio valuation, retention, loyalty and solidification of a professional image that makes the company differentiated in the market; influencing the growth of revenues.

THE IMPORTANCE OF IDENTIFYING CUSTOMERS AND SEGMENTING THE MARKET

            If we needed to summarize the market segmentation in a few words, we could say that this is a way to recognize who are the clients of a company. Augusto & Junior (2015) cites Kotler (2003) to reinforce the dependence that organizations have for their consumers; besides valuing their influence on the maintenance of assets, resources and projects in the day to day of the institution. Observing who or what each client represents not only imposes the feeling of consideration and value to these consumers, but also demonstrates that the company has followed the evolution of transferring the focus of the product or service to those who are more interested.

Customers do not want treatment as simple consumers, so they need to be properly identified and their needs ascertained and met. Companies should view customers as financial assets to be managed with a view to maximizing their results, as occurs with any other resource. […] Today, offering quality products, fair price are not competitive differentials since the competition is very fierce, and what makes the difference between suppliers available in the market is precisely the competence in understanding the factors that decide the value and satisfaction for the customer (AUGUSTO & JUNIOR, 2015, p. 03 and 04)

            Realizing how much clients want to be seen on important paper, it is observed that putting them at the forefront when discussing and developing strategies is a crucial task. This care with clients happens from the search for their opinions, their interests, behaviors and the ways in which they relate to the organizations with which they negotiate or seek goods and services. Each of these characteristics, when taken seriously, allow the construction of a solid relationship, which opens room for partnerships and alliances based on trust developed between consumer and supplier.

            This entire process of investigating and profiling clients is likely to come up against one obstacle: the diversity of profiles and interests of each consumer or group. Kotler and Keller (2012 apud Augusto & Junior, 2015) point out as a market rule the existence of these profile variations, which can become a challenge for companies if they do not dedicate themselves to establishing niches based on common characteristics of these publics. On this subject, the following observation can be used as a reference:

The world is made up of billions of buyers, with their own groups of needs and behaviors. Segmentation aims to combine groups of buyers with the same groups of needs and behaviors. The basic objective of segmentation is to concentrate marketing efforts on certain targets, which the company understands as favorable to be exploited commercially, as a result of its ability to adequately meet the demand of the focuses. Each segment should be composed of groups of consumers that present the minimum of differences among themselves and the maximum of differences in relation to the other segments. (AUGUSTO & JUNIOR, 2015, p. 10)

            Regardless of how differentiated a client’s profile may be, it is possible to limit them into groups or “segments” according to concrete and/or abstract characteristics such as their location, purchasing power, purchasing practices and even the extent of their assets.

IMPORTANT VARIABLES FOR MARKET SEGMENTATION

            As already presented, market segmentation is a strategy to adapt companies to the wishes and interests of customers available in the market, selecting the best ways and courses to achieve each desire of these consumers. This brings advantages both to the organizations, mainly by allowing a deeper vision of themselves in comparison to other companies that are in competition in the market; being able to probe which seem to be providers of goods and services is more attractive to society, as well as bringing customers, who will possibly feel more security, to know which institutions may or may not satisfy what they expect.

            Porter (1985) contributes to the literature by defining that each segment attracts from the market, a different planning and strategy, which should lead companies to fix two questions before carrying out any approach: A) where is it worth competing – are all segments worth the investment and competitiveness? What “returns” are guaranteed when investing in such niches? B) Do the strategies outlined demarcate each segment sustainably? – Does the outlined planning leave each niche well defined, or do they get confused, influencing the approach of another group? –. Complementing these questions, Wilkie (1990) discusses that segmentation produces “true paths”, meeting three criteria: 1) group identity – the groups that are formed must present homogeneous characteristics; 2) systematic behaviors – they must share similar or at least expected reactions, based on the planned strategies; 3) be a potential – it must strengthen the notion of efficiency of the Marketing team and the organization, that is, it must show results that validate and satisfy the investment dedicated by the organizations.

            Observing these questions and these criteria, many analysts begin to wonder, then, what would be the formula for segmenting the market or what examples of profile can be used to distribute customers in solid niches. Wilkie (1990) suggests that distinct characteristics can manifest themselves and be useful to define segments; such as personal characteristics of the consumer, benefits sought by them, behavioral characteristics and many others.

            Ferreira (2000) believes that there is no “secret or magic formula” for an analyst or a team to segment the market; it is necessary to analyze the good or service that is offered:

Marketing professionals must find the best way to segment the market and how to visualize its structure. The ways to segment, will depend a lot on the type of product marketed and the demands of the market. There are countless ways to segment a given market, especially if the company is considering combining several forms. (FERREIRA, 2000, p. 06)

            Considering that most of the Accounting Service is consumed by other companies, it is necessary to highlight variables that include criteria that enhance the role of these clients in their own markets. In this survey, three modalities are used, in which these clients could be classified, being them Geographic Variables, Demographic Variables and the third, a little more objective than the other two: Variables according to Annual Revenue per Client.

            For the accounting industry, the geographic variables are useful to “answer questions pertinent to the location of the most valuable clients or which distribution and promotion strategies are more effective in each area” (KOTLER; KELLER, 2012 apud BOFF, 2017), in addition, they group characteristics according to the territorial extension of these clients; that is, if the scope of their transactions, negotiations have a greater or lesser scope than the municipality, for example. 

            Geographical segmentation is the minimum criterion that can be expected for the resolution of market niches, since the reach of the client’s actions, their coverage, concentration – region or area where most of their actions are concentrated – and other factors, are easy to achieve, however, using only this variable makes the strategies and approaches a little poor, depriving the company of developing the competitive advantages it so much expects.

There are scholars who criticize the use of the geographic segmentation base claiming that satellite transmissions, global communication networks and the Internet itself have broken down all geographic barriers […] To further increase the effectiveness of geographic segmentation, an alternative to be considered is to combine data from geographic variables with demographic variables to complement and better support segmentation decisions (BOFF, 2017, p. 60)

            Like the geographic variables, the demographic variables introduced by Boff (2017) are more affective when paired with other modalities rather than isolated. Demographic characteristics embody values, “lifestyle” and characteristics that may or may not influence or justify the reality or development of the company. In terms of example, one can mention the age or life cycle of the consumer organization – if it is a young or old company in the market, what are its innovation capacities and what values have been built in its activity -; the profile attended by the company (to which gender, age group, income belongs to the exploited public); buying patterns, among other examples.

            As for purchasing standards, in 2017 Gary Boomer presented a table that represents the levels of services offered by accounting firms, with the intention of provoking account    ants to reflect on the type of service being purchased by their clients. Boomer was aware that the specialty of accounting professionals is and always will be varied, that different types of planning and investments are necessary to be able to offer some services to their clients, but the objective of the chart was to show that some consumers have the potential to acquire larger services and at some point, organizations must be ready to innovate and be available to offer them.

Figure 1 – Boomer’s representation (2017) regarding the service levels available in accounting offices

Boomer's representation (2017) regarding the service levels available in accounting offices
Boomer’s representation (2017) regarding the service levels available in accounting offices

Source: Dias Duarte, 2017. Available at https://www.robertodiasduarte.com.br/ciencia-comprova-escritorio-contabil-segmentacao/

            The definition of these levels shows how important and enriching market segmentation can be for Marketing teams. It was through this sketch that many offices could realize that they were stuck at the technical level. Moreover, the higher the level of services, obviously, a higher revenue is expected for companies’ billings – both payable and receivable.

            For companies that intend to remain competitive and attractive to the market, innovation is without a shadow of a doubt a characteristic that defines great differentials. According to Moore, as consumers see value in a service or well new, sales tend to progress, to become significant, but to achieve this process, both company and consumer need to be innovative, however, there is a much greater number of resistant than innovators; as an example of this, the author illustrates a “cycle of adoption of innovation” (Figure 2), where we see the presence of 5 groups or group profiles and how they behave through innovation.

Figure 2 – Moore’s Innovation Adoption Cycle.

Technology Adoption Life Cycle Crossing The Chasm - Aceleração contábil

Source: Dias Duarte, 2017. Available at https://www.robertodiasduarte.com.br/ciencia-comprova-escritorio-contabil-segmentacao/

At first glance, it seems difficult to interpret what each of the five groups represents on the scale of “interest and adoption to innovation”, especially when observing the presence of these spaces, named failures and abysses, however Moore brings an interpretation for each item

Innovators: they don’t usually resist innovations; they are usually willing to take risks with novelties, because they trust that technology and new studies will emerge to make the market more productive, more challenging and profitable.

Visionaries (Early Adopters): in addition to being confident and willing to innovate, they observe what competitive advantages can be provided by adopting new technologies or approaches.

Pragmatics (Early majority): they are innovators who only decide to invest after observing the results or the implications that the adoption by other companies had. Among the five, it is one of the most interesting to be conquered, because they are producers attentive only to what is productive to them. They are investors that focus only on what with great chances of efficacy for their reality.

Conservatives: Viewed as conservative, they embrace innovations manifesting a certain skepticism or only when most of the competitive market has already adopted it. They commonly prefer gradual approaches or approaches that have little effect on the company’s solid routine.

Skeptics: They are those who usually show aversion and opposition to adopting innovations and changes. Some of them only adopt novelties when there is an imposition or no other way to maintain the “traditionalism” of their tasks.  

Failures and Abyss: these gaps represent obstacles or any other reason that deprives companies of adopting innovations; from unwillingness to know the applicability of new technologies or the time they dedicate specializing and transmitting knowledge so that the rest of the team can adapt and start using them more safely.

 This curve proposed and discussed by Moore reinforces within the demographic variables not only the purchasing power, but the reasons that strengthen such occasion, as well as the purchase interest. Purchasing power is extremely linked to the asset revenue of each organization, as well as the revenue dedicated to various services. Considering that the amount of each company can vary, according to the good or service it offers to society, we can use it as a new parameter, which as well as the geographic and demographic variables, allows to distribute the market in segments, according to their numbers.

ANNUAL REVENUE PER CLIENT: AN INNOVATIVE VARIABLE FOR ACCOUNTING MARKET SEGMENTATION

            The annual revenue per    customer or, as internationally known, ARPA (acronym for Average Revenue per Account) is a metric that evaluates possible profitability, according to the revenue manifested by each customer account in a given period, preferably per year. This variable is usually used to analyze customer-companies that provide subscription services, such as banks, telecommunication companies and more recently, some streaming services, which operate for their customers, under some type of contract. Although ARPA is not yet recognized as a standardized metric by GAAP (General Accounting Principles) and IFRS (International Standards for Accounting Reports), it has become present in the discussions and statements of many companies, always fostered by significant data relevant to maintaining the competitiveness of related companies.

            Christopher Janz (2017) created an illustration at the same time curious and interesting to demonstrate how the market segmentation through ARPA would fit. Based on the interest of many accountants in being part of a company, whose accounting service is 100 million dollars, Janz distributes the clients as follows: on the x-axis is the number of clients needed to reach 100 million, considering the annual revenue of each client, expressed by the y-axis.

Figure 3 – Logarithmic Reasoning between clients and ARPA.

Logarithmic Reasoning between clients and ARPA.
Logarithmic Reasoning between clients and ARPA.

SOURCE: Dias Duarte, 2017. Available at: https://www.robertodiasduarte.com.br/8-maneiras-construir-servico-contabil-de-100-milhoes/

            The representations given by Janz in the illustration of his scale exemplify for many accountants and Marketing teams how to segment the market and classify their customers. It is often necessary to assess whether the company to which the service is offered is really relevant and if it brings great contributions to the billing and development of the organization, because the revenue that this consumer brings to the organization can influence the energy needed to attract and win new customers. Considering the animals chosen to illustrate the intersections of the axes and their meanings, the following can be listed:

Microbes: 100 million users, consumers or buyers are required to pay as little as possible (represented on the axes by $1). It is possibly the most difficult and laborious way to reach such a large goal, since due to the low price, companies struggle with greater competitiveness;

Flies: to reach the mentioned ceiling value, at least 10 million active consumers are needed investing around $10 in the good or service offered by the company. In times of virtual technology and information, the most “active” ways to reach these numbers are with services crucially essential or stimulate a need for traffic/consumption large, as an example of this second, can be mentioned the platforms for conveying information, news, communication and multimedia. Instagram and WhatsApp could be listed as part of these services, especially the second, as soon as it entered the market and had a symbolic annual fee for maintaining the services;

Rats: it is necessary to invest in one million consumers available to pay around $100 per year in the acquisition of some service. As for the previous group, to reach this number of customers and keep them, the service offered must be agile, intense, useful and important in the long term. Within the possible essential services for this niche, some email domains can be exemplified, which are of great importance for some companies, as well as services and applications available for companies and individuals, such as Evernote and Dropbox.

Rabbits: 100 thousand clients that can invest up to $1000 per year, is what segmented companies in the “rabbit” group need to reach an accounting service of 100 million. From this niche it is already possible to observe a higher level of difficulty. Even being the highest frequency in the virtual branch, most companies have difficulty in finding and maintaining this portfolio, both because of the competitiveness – since the higher the annual revenue of the client, the more attractive it is for service providers – and because of the eagerness of this client to invest as little as possible without affecting their productivity.

Deer: Deer are considered the most present niches in the accounting service, but to reach this customer profile, many companies end up not realizing that they are giving up on attracting new customers or are simply losing sales and negotiation strength; This happens when organizations stop investing in digital, online or franchise strategies to hunt or serve a larger number of “deer”, after all, it is not so simple to have 10 thousand customers who can generate $ 10 thousand per year, because just as it happens in the previous niche – rabbits – there is also the risk of keeping the customer in the portfolio, for the same reasons.

Elephants: the animal chosen to represent this niche already indicates that the size of these companies is overwhelming. Commonly, they are organizations whose share of revenue quoted by suppliers – $100,000 per year – is much lower than that invested by such customers with the annual salary of their staff.

Brontosaurus and Whales: the last animals represented in the axis scale proposed by Janz exemplify the possibility of reaching a high accounting service – the $100 million – from a small group of clients, whose revenue has an annual volume, also high. In general, these last niches are used to reinforce how it is possible to fragment more and more the market and the portfolio of customers, so that more detailed strategies can be devised, especially for companies that have already reached or intend to reach the big one, while still innovating.

            To better clarify what these animals represent for the accounting market, we can make an allegory, comparing the offices to the hunters. The hunter who ventures into a region, aware of which animals are present and which one wants to hunt, will save energy and resources in his hunt; if his goal is to hunt deer, he will not need to invest in rabbit traps, which will have no use for the animal he intends to hunt. With this example, it is more than clear that for each niche, there is a specific business model.

CONCLUSION

            Voluntary or not, most accounting firms in Brazil already carry out segmentations to serve their clients. Geographical segmentation is possibly the most common approach among professionals, due to the simplicity of data that is needed, but it is clear that as the market evolves, it is only variable and insufficient for the Marketing teams to carry out more striking prospections and strategies in the middle of the market.

For the growing competitiveness that exists in the services market, objectivity is the least expected for accounting offices to be more productive and profitable. Segmenting the market, regardless of the variable used to do it, will show companies how much they need to innovate and even, perhaps, professionalize their teams, to reach with better quality the public and the goals set.

The average annual revenue tends to be a promising variable for many offices, because based on the number of customers affiliated to these companies, it is possible to plan, according to the question “what is the ARPA that my company seeks?”; once this question is answered, partners, managers and their teams will be able to position themselves better, adopting innovations and new technologies for the development of their companies.

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