Determining which comes first, the product or the market is challenging even for companies with an established brand and existing products consistently generating revenue. It’s exponentially more difficult for startups to separate the two which is why it may be a relief to hear that the two are actually inseparable.
Startups are born in a variety of ways but two of the most common are these.
- When a recurring or consistent need is identified. The founders decide to build a solution and sell it to people with that need. The emphasis is more on the needs of the market but is still ultimately inseparable from the product.
- When founders develop something “really cool.” It is often for their own specific use, and realize somewhere along the way that if they can identify a group of people with the same need, they could sell it. Sometimes that requires some adaptations to make it more appealing. In this case, the process starts with the product and evolves to identifying a target market, again making them inseparable.
In the case of the chicken and the egg, both need each other. The same is true of the product and target market. One can’t thrive without the other – at least not as successfully.
If startups don’t know who their customers (i.e., their market) are, how can they determine their needs? And if they don’t know their needs, how can they determine what products to sell them? Alternatively, if they don’t know what products to sell, how can they determine who might want to buy them?
Investing the time to identify and understand their target market drives financial success for startups.
How to Define Your Target Market?
Here are some ideas on how startups can define their markets:
- By consumer type. Startups that are planning to sell to consumers and businesses might find it helpful to distinguish their markets as B2C and B2B. Businesses can be further defined by size – small, medium, enterprise, global, etc.
- By geography. Startups that are planning to sell only in one or more geographic regions (they could be cities, states or countries), and then later expand to other regions, might find it helpful to define their markets as names of those regions.
- By distribution or sales channel. Startups that are planning to sell some products using in-house sales, and some products using a reseller or distributor or wholesaler, might find it helpful to define markets as names of those channels.
- By marketing technique. Startups that are planning to make customers aware of products using a variety of techniques such as website, direct mail, telesales, pay-per-click web advertising, and so on, might find it helpful to define markets by the names of those techniques.
- By demographic. Startups might find it helpful to define markets as children, double income no kids (aka DINKs), single income no kids (SINKs), zero income no kids (OINKs), retired, and so on.
- By size of purchase. Startups may find it helpful to define markets as small purchasers, medium purchasers, and large purchasers.
- By category of user. In some businesses, a product may produce multiple income streams from multiple classes of users. For example, a company with a product that helps high school athletes find the perfect college to attend might find it useful to define its markets as students, parents, coaches, and college recruiters.
There is no limit to how many ways markets can be defined. As a guideline for the sake of planning and to avoid unnecessary complexity, startups are best served by defining something as a unique market only if
(a) Pricing will be different than for other markets,
(b) Different products will be sold to this market than to other markets,
(c) A different commission structure will be used for this market than for other markets,
(d) Entry into this market will be in a different timeframe than other markets, or
(e) It makes sense to track the financial performance of this market independently from other markets.
The bottom line is there is nothing magical about defining a market. Startups can define it any way that makes good business sense. .
Is it better to define a market broadly or targeted?
To answer this question, let’s look at an example. Let’s say a startup has an innovative, but exclusive, approach to wedding photography.
- It could define its market to be the number of marriages in the United States every year, which is 2,000,000+. As a starting point, that might be okay, but where a lot of startups tend to come unstuck is in assuming that “we only need to capture 1% of that business and we’ll achieve our financial goals!”One percent of anything sounds so easily achievable but depending on the product, price, competition, and many other factors, it may be totally unreasonable. Broad market identification tends to lead to a false sense of security.
- Another possibility is to define its market as the number of actual wedding ceremonies in the United States that spend over $50,000 for the event. Now the target market is smaller but with a much higher likelihood of being the audience that will purchase from the startup.Although market penetration numbers are going to be higher, the resulting financial projections will be far more believable.
- Yet another possibility is for the startup to plan to grow its business regionally. Let’s say it is physically located in Denver. It can define its first market to be the number of actual wedding ceremonies in the greater Denver metropolitan area that spend over $50,000.Now penetration numbers could be even higher as the result of a more targeted marketing effort. Then it defines its second market to be Colorado, and then the third to be the Rocky Mountain region, always targeting the high-end only.
Bottom Line Advice
The narrower and more targeted the market is, the more focused the marketing message can be, resulting in a greater quantity of qualified leads and a higher conversion rate. This also allows startups to have a lower customer acquisition cost. All of that means a higher probability of being financially successful.
About the Author
Dr. Al Davis has published 100+ articles in journals, conferences and trade press. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He was a founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003. He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting and optimizing their business strategies. Click on the following to see a short video on Offtoa:
- “Chicken 12” by AivisV (Creative Commons), downloaded fromhttp://orig09.deviantart.net/cc30/f/2015/160/6/6/chicken___12_by_aivisv-d8wnl5d.jpg
- “Close up of chicken egg” by Marcelo (public domain image/Creative Commons)