4.01 – Gauging Your Target Market
The most important step in creating a successful business is developing a product or service that customers want and will buy. This is known as a powerful offering. The first step in creating a powerful offering is selecting the right market. Picking the proper combination of industry attractiveness, niche attractiveness, and customer attractiveness creates the best market for your product.
By combining these factors, you can gauge the overall market potential. This combination will be referred to as market attractiveness from this point forward. Market attractiveness is crucial for your business. It’s challenging to imagine a strong business that sells to unsuitable customers in a poor industry and a small niche market.
Gauging Your Target Market
You should find a profitable and sufficiently large market segment. However, to build a successful and durable business, you need to find a large market that’s unserved or underserved. Identifying this underserved market is paramount.
Anyone can find huge markets to attack. Selling coffee, for instance, is tempting because the market is large and growing. However, several large and successful companies already own pieces of this market. In general, attacking an established competitor in the same market segment isn’t wise. Traditionally, the first mover or incumbent wins.
If you want to go after the coffee market, you need to find a viable market segment that’s unserved or underserved by Starbucks and similar companies. You can break down any target market into four pieces to make things easier:
Industry Attractiveness
Evaluate how attractive the industry itself is. For instance, software companies tend to be more profitable than construction companies. Research by Professor Scott A. Shane, presented in his book The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By (Yale University Press), shows that some industries are more viable and profitable than others. Of course, other areas of the business model also affect overall profitability.
Niche Attractiveness
Determine how attractive the niche within the industry is. Typically, packaged software developers are more profitable than custom software developers. You want to pick a niche that offers the best potential profitability.
Customer Segment Attractiveness
Consider how attractive the customer segment is. The high-end customer targeted by Starbucks is more profitable than the customer targeted by McDonald’s. An attractive customer doesn’t have to be wealthy. An attractive customer is one who can make your business model work best. For example, many profitable business models target the unbanked (people without checking accounts).
Niche Size and Opportunity
Assess whether the niche is big enough to provide a good opportunity for you to enter it and sell enough products or services at a price point that will allow you to create a viable business. Prosthetic limbs for pet dogs may seem like a great idea, but can you sell enough of them at a high enough price to make a profit?
Additional Tips for Gauging Your Target Market
Conduct Market Research
Thorough market research can provide valuable insights into your target market’s needs, preferences, and buying behaviour. Use surveys, focus groups, and data analysis to gather information that will help you make informed decisions.
Analyse Competitors
Study your competitors to understand their strengths and weaknesses. Identify gaps in the market that you can fill with your unique offering. This analysis will help you position your business effectively.
Validate Your Idea
Before fully committing to your business idea, validate it with a small-scale launch or a pilot programme. This will help you gather feedback, test your assumptions, and make necessary adjustments.
Understand Customer Pain Points
Identify the specific pain points and challenges your target customers face. Tailor your offering to address these issues effectively, creating a compelling value proposition.
Stay Flexible
Be prepared to adapt your business model as you learn more about your target market. Flexibility allows you to respond to changes in market conditions and customer preferences, ensuring long-term success.
By carefully gauging your target market and considering these additional tips, you can create a powerful offering that resonates with customers and sets your business up for success.
