LRC Simulation Series: Lesson Five

Welcome back to the LRC Simulation Series! In this fifth and final chapter, we apply what we’ve learned so far to different segments that may exist in the market. How do your changes affect relationships with each segment? What is the outcome for profits and revenue?

Watch the video below to learn more:

Transcript:

Welcome to Lesson Five. Here we will highlight the difficulty, complexity and opportunity that market segments can provide.

 

To this point, we have assumed that all customers have similar wants and needs.  We have portrayed “traditional” customers as placing a heavy emphasis on quality of product.

 

Now consider a different segment of customers; one comprised of “bargain hunters” who emphasize low price while still desiring decent product quality.

 

Let’s also introduce competition. The simulation can include competition at a level up to “very strong.” 

 

We can start with a result in an environment of no competition then introduce very strong competition and set appropriate benchmark levels, shown as a subscript. Note in this example that our ratings exceed those of our best competitor in each of the four categories. 

 

We then can make parameter adjustments to variables such as Raw Materials cost, Sell Price, Overhead and Quality Control to produce similar results. 

 

Let’s return to the traditional segment for a moment and observe the following results.

 

Note that Benchmark values are identical for each choice and the loyalty profiles are similar among the choices with Choice #2 projecting optimal revenue and profit.

 

Let’s now apply these choices to the “Bargain-hunter” segment. Predict which of the following options provides the most favorable loyalty profile.  Keep in mind that the values reflect levels of approval, so for Price, a higher level would reflect a lower price.

 

Start with High in Product and Service, but slightly below Benchmark in Price and Delivery. 

 

Now, lower in Service. 

 

Very low also in Price and Delivery. 

 

Still lower in Delivery.

 

Whereas for the Traditional segment Choice #2 offered the highest combination of loyalty, revenue & profit for the Bargain-hunter segment Choice #1—with ratings of Product = 7 (very high), Price = 5, Service = 6 and Delivery = 5 projects the strongest loyalty profile.

 

The profile is far stronger for the first two choices than for the last two. 

 

Moreover, among the first two choices note how the “somewhat high” ratings of 5 for Price and for Delivery are slightly below those for the benchmark competitor and far below benchmark for the last two. 

 

Closer inspection shows only a small difference between Choice #3 and Choice #4 which features still-lower ratings for Delivery.

 

These results therefore support the original assertion that for the Bargain-hunter segment Price is a strong driver.

 

When comparing results to those for the Traditional segment, note also that the first two choices in the bargain-hunter segment suggest a somewhat weaker loyalty profile while the last two choices are much weaker. 

 

What about revenue and profit? Recall the results for the Traditional segment. How do results for Bargain-hunters compare to those for Traditionals?  Option 1. 

 

Option 2. 

 

Option 3. 

 

Option 4.

 

For the first two choices comparatively disappointing results. 

 

For the last two disaster. 

 

Price is a strong driver for Bargain-hunters, who will not react well to high prices.

 

The takeaway for this lesson is that various types of customers may differ in how they respond to your company’s offerings. Perhaps bargain-hunters comprise only a small segment of your customer base. Perhaps some of your customers are not a good “fit” for your business.

 

Regardless, given the complexity of market segments in a dynamic, competitive environment, you must allocate your resources wisely.

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