Why a Smaller Target Market Means Bigger Success

I’m Steve Davis and I’d like to talk about finding your target market. Most startups fail, about 90 to 95% of all startups fail. It really boils down to most companies don’t have a business model that’s either workable or scalable. A key component of any business model is who are your target audience, who is your target market. And so that is key. The target market is really the center of your universe, it is the center of your solar system, and your sun.

Finding Your Target Market

If you choose the wrong target market, everything else you do is going to be wrong. Your marketing is going to be wrong, the sales distribution channels you pick are going to be wrong. The pricing is going to be wrong. Your structure, your infrastructure, customer support, it’s all going to be wrong, so you’re going to lose a lot of time, effort, and money in addressing the wrong markets. And you’re probably going to wind up being a statistic in the failed companies that are by the wayside.

Customers Differ from You

One thing to understand is you are not your customer, nothing could be further from the truth. Just because you started the firm, you think that everybody else is going to be just like you. Your motivations for starting the firm and you seeing an idea is not necessarily the same motivations that a typical buyer is going to have. You need to understand that, and understand what the buyer profile is going to be, and the buyer persona – what’s going to drive them.

Segment the Market

The other problem that companies have is they focus on too big of a market. They focus on the whole universe. Business schools simply will say you might want to pick best market with the biggest market segment that you can go after. In many cases, that’s wrong – the bigger market segments typically have the most competitors in it. What you want to do is take that big market and segment it. I don’t care what market you’re looking at, you can segment it a thousand different ways. You want to pick your target market as your beachhead, it’s your beachhead into the marketplace. You want to pick the beachhead, just like they did on D-Day, that’s going to give them their best chance for success. You want to get into the market, you want to hit the beach, you want to consolidate it, get a cash flow going, get positive cash flow going, and then branch out to other market segments after that’s done and not before.

Examine the Competition and Growth Rates

So size is not the best criteria to evaluate a market segment. You want to look at a number of things. You want to look at the competition, the amount of competition, you want to look at the size and growth of the market, some segments could be small but growing very fast while others could be very large and could be in negative growth stages.

Evaluate Regulations and Ease of Entry

You also want to look at regulations, each segment may have their own set of regulations you want to go after. You might want to choose the market segment that has the least regulations, so you can get up and running and keep the government off your back while you’re growing your business. You want to see the ease of market entry – some segments are easier to enter than others. Don’t go international right off the bat, make sure that your home market is working first before you think about going internationally. What resources? Some market segments are going to require a lot more resources to address – from personnel, money, marketing effort, sales effort – than others, so depending on how well you’re capitalized, how well you have personnel to address it, may preclude you from going after certain market segments.

Consider Acquisition Costs and Lifetime Value

You want to look at customer acquisition costs. They’re going to change from segment to segment. Some are going to cost you more; some are going to cost you less. You want to look at customer lifetime value. Some segments you’re going to get much more revenue per customer than others. You may have more or less customer support costs.

Passionate Customers Become Brand Ambassadors

All of this you need to look at wait and figure out what is going to work for your business as you move ahead. So pick your beachhead, solidify, get your cash flow going, and if you’re working on it, and you have two different market segments you’re thinking about, and everything being equal, you want to pick the one that’s going to have passionate customers, because passionate customers become brand ambassadors. They’ll go on to the rooftops of their apartments or their businesses and yell out to the whole world that ‘I need these products’. That’s why passionate customers can be a major advantage for you in developing any market segment.

About Steve Davis

Stephen Davis, Principal and Founder of The CXO Advisory Group provides interim COO and VP Sales and Marketing services focused on improving the performance and profitability of emerging and established companies. Steve has worked with companies in North America, Europe and Asia to assist them in establishing US market operations, strategic alliances, joint ventures, business development and sales management. He has assisted clients with due diligence and preparation for venture financing.