Tag Archives: target market

Which Comes First: The Product or Target Market?

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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.

  1. 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.
  2. 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.

  1. 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.
  2. 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.
  3. 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

Alan DavisDr. 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:

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Four Ways to Validate Your Great Startup Idea

You have a great idea for a start-up company.

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Validate your idea by answering four simple questions:

  • Is the market right?
  • Is the industry right?
  • Will it make money?
  • Will it need money?

Let’s explore these one at a time.

1. Is the market right?

Determining if the market is right means demonstrating that enough people exist who will purchase the product or solution you have developed, you can find them, and you can turn them into customers. For this you need to understand the size of your market and the characteristics of the buyers that personify your market.

Size of market

How large is your target market? You want your potential market (called the total available market, or TAM) to be quite large. But you want your initial target vertical market to be relatively small. By being focused, you can align your product features and marketing messaging with the unique pains/needs of this unique market.

And then you can claim you “penetrated 25% of your target market” instead of having to claim that you “penetrated .02% of your target market.” Sure sounds better to future investors!

You can measure the size of both your TAM and your initial target vertical market in terms of:

  • Number of customers
  • Dollars spent on products like yours
  • Units sold

Targeting Customers

NeedleHow easily can you find potential customers? Will they find you? Or will you find them? In either case, how? It is very easy to say “oh, we’ll just use Google AdWords and we’ll get tens of thousands of visitors every day.”

It is much harder to actually attract qualified leads. If you plan on finding the leads, how will you reach them and engage with them until they become customers?

Converting Customers

Catheter Solution 2Converting customers is not only influenced by the severity of pain your product is addressing. It is also influenced by how you position your solution and your messaging. Your target market must be able to identify with what pain your product resolves. The three bullets shown above demonstrate how one company, Adapta Medical, has honed their message to align perfectly with their target markets, C6-C7 quadriplegics and hospitals.

I like to use the words “clear and compelling” to describe the right message, i.e., when a lead hears or reads the message, they can relate immediately to the pain they are feeling and see clearly how your product will alleviate that pain.

2. Is the industry right?

If you want to do a thorough analysis of whether the industry is “right,” check out Porter’s Five Forces. But as a start, make sure you have a thorough understanding of your competitors, your potential partners, and your differentiators.

Competition

Few things turn off investors more than hearing entrepreneurs claim that they have no competitors. Every new company has competitors. If you really are the first to do something, then how are your target customers surviving currently? Here are some examples:

  • You’re “first” to provide on-line retail sales of gourmet food. Your indirect competitors include storefront retailers and catalog retailers of gourmet food. And your future competitors include on-line retailers of non-gourmet food (because they have all the logistics in place to add SKUs for gourmet food and thus become direct competitors).
  • You’re first to provide regular helicopter service from Denver to Colorado’s ski resorts. Your competitors include airlines, van shuttle services, rental car companies, and so on, all of which satisfy your target market with this capability using different means.

The way to determine if a company is a competitor is to imagine being a potential customer. If the customer could make a list of companies (including yours) and evaluate the pros and cons of each alternative (including price, convenience, safety, etc.), then those companies are competitors.

Partners

Look upstream and downstream on your supply chain. Who will you need to work with? Have you established those relationships yet? How easily will it be to establish? Can they control you (e.g., with price changes)? Or can you control them?

Differentiators

Think again about that list of competitors that a potential customer could create. What makes you special? Nobody cares about what you think makes you special! What will a potential customer think make you special when compared with the alternatives?

3. Will it make money?

In his February 20 article, Martin Zwilling explained how critical it is for you to use a financial model to determine if your company will be financially successful given the assumptions you currently believe to be true. I couldn’t agree with him more.

After creating such financial models for many dozens of startups, I would add that it takes many precious hours to create and debug such a model.

I would recommend that you use an online tool that has already considered and built in all the elements you must consider to be successful. Such tools allow you to enter your key assumptions one time, and they create your entire financial model. Then when any of your assumptions change, you just have to change one number, and your new financials are instantly created for you.


 

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Martin provides 5 great examples of such “assumption changes” that are typical:

  • What if customers don’t want to pay the price for your product that you though they would?
  • What if the market size ends up being different than you expected?
  • What if your sales growth is different than expected?
  • What if your investors offer you an investment amount different than your expected?
  • What if your customer acquisition cost changes?

In reality, there are hundreds of such assumptions that could change.

4. Will it need money?

Another benefit of assumptions-based financial modeling is the automatic creation of monthly pro forma cash flow statements. You can easily scan the bottom row of these statements to determine exactly how much investment money you will need and when.

In summary

To prepare yourself for investors, you should thoroughly validate your business before you enter the shark tank. This article summarizes the key elements of such a validation. To summarize, here is the checklist:

☐ Is your total available market large enough?

☐ Is your initial target vertical market focused enough?

☐ Is it easy to find leads?

☐ Is it easy to convert leads into customers?

☐ Do you know your competition?

☐ Have you lined up your business partners (suppliers and distributors)?

☐ Are your differentiators unique and compelling?

☐ Will your startup make money?

☐ When your assumptions change, can you instantly see the financial effects?

☐ How much money do you need?

ABOUT THE AUTHOR:

Alan DavisDr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was 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.

ABOUT OFFTOA

Offtoa is a subscription-based SaaS that leads you, the entrepreneur, through a series of questions and transforms the assumptions you provide into a complete set of pro forma financial statements, including even a capitalization table and expected internal rates of return for the investors. Armed with this intelligence, you and your team are able to demonstrate to investors that you know your finances, understand your market, and have a winning proposition.

If you decide to subscribe to Offtoa because you read this blog, send me an email at adavis@offtoa.com and I’ll email you a coupon good for 50% off your first month’s subscription. This offer good only until May 31, 2015.

Needle in a Haystack photo by James Lumb (Creative Commons).

 

How Entrepreneurs Select a Target Market

A start-up could target a broad or focused market:

  • Broad. The terms broad and focused are of course relative terms. However, in general, large companies tend to aim for either broad or focused mar­kets, while start-ups tend to aim for either (a) small vertical mar­kets, or (b) well-defined, narrow segments of broader markets. Both are gen­e­rally considered to be focused. Porter [POR80] was one of the first to document differences between broad and focused markets in business strategy.
  • Focused. A focused market is one in which members have very specific (and similar) buying characteristics, well-defined and well-understood needs, and can be easily identified. Fundamental to success of most start-ups is the demonstration of successful penetration in one target market. This requires you to have proper alignment between the distinct pains felt by members of this focused market, the pains addressed by your products or services, and the messages conveyed by your marketing materials. Once accomplished, brand recognition begins in the market and confidence grows among inves­­tors. With both of these, the company can take more dramatic steps toward adjacent and perhaps larger target markets. Because of limited resources and need to demonstrate success quickly, start-ups usually aim for a focused market as their initial target. Porter [POR80] de­scribes the general approach as focused. Miles and Snow’s [MIL78] identifies some companies as pros­pectors; these are the ones constantly on the lookout for previously unidentified market segments and ways to target their unique needs; they are also focused. Meanwhile, when attacking competitors using Ries and Trout’s [RIE93] guer­rilla or flanking strategies, companies are also focusing on narrow market oppor­tunities that are not being adequately defended by competition.

The above extracted from my latest book, Will Your New Start Up Make Money? Buy your copy in Kindle or paperback formats at http://www.amazon.com/Will-Your-Start-Make-Money-ebook/dp/B00JOOZQNE.