Define a Target Market for Your Small Business

Identify a profitable target market or niche for your business.

By , J.D. ● University of New Mexico School of Law

For your business to succeed, it must have enough customers to buy the product or service offered. Before you launch your new business, take time to evaluate your potential customer base. Figure out whom you expect to be your most likely customers -- in other words, your target customers. Then tailor your marketing efforts, as well as your products and services, to those customers.

Why Is Defining Target Customers Important?

Having a clear vision of your expected customer base will increase your business' chances of success. By defining your target customers you can:

  • better determine if there are enough potential customers for your business (in other words, whether there is enough demand for your products or services)
  • tweak your business idea to better meet the needs of your potential customer base
  • tailor your products and services to better meet your customers' needs and desires
  • target your marketing efforts to reach your most promising prospects, and
  • craft your marketing messages appropriately -- using the right tone, language, and attitude to appeal to your best prospects.

Defining a target market will not limit your business. New entrepreneurs sometimes resist defining a target customer base, thinking it might limit the business or reduce the number of potential customers. This is a misconception. Identifying target customers does not prevent your business from accepting customers that don't fit the target profile. If such a customer seeks your product or service, you will still be available.

Defining a target market will increase cost efficiency. Defining a target customer base increases your cost efficiency. Unless you have unlimited marketing resources, it's much more effective to focus your marketing efforts on potential customers who you have determined are likely to buy your product or service -- rather than wasting time and money courting the vast world of prospects who merely could become customers.

How to Define Your Target Market

In a nutshell, defining your target customers means identifying the specific characteristics of the people or businesses who you believe are most likely to buy your product or service. These characteristics are sometimes called a demographic profile. Common characteristics used to classify customers include:

  • age
  • gender
  • income level
  • buying habits
  • occupation or industry
  • marital status
  • family status (children or no children)
  • geographic location
  • ethnic group
  • political affiliations or leanings, and
  • hobbies and interests.

Create a customer profile. Use these criteria to draw a profile of your most promising potential customers -- those who have a real need or desire for your products or services. A maternity store specializing in professional wear, for example, may identify its target customers as 25- to 40-year-old pregnant, married women in the legal, financial, and real estate industries, within a ten-mile radius of the store. A bike shop with a focus on single-track mountain biking gear might define its target customers as 18- to 25-year-old single males living within two miles of the local university.

Be specific. Deciding how narrowly to define your target customer is more of an art than a science, but in general, you should err on the side of being specific. Business owners often make the mistake of defining their customer base too broadly, making it very difficult to engage in effective marketing efforts. Remember: A solid definition of your target customer serves as a foundation for all your marketing activities. The more carefully you've defined your target market, the more likely your marketing efforts -- even simple, low-cost methods -- will bear fruit.

When Target Customers Are Other Businesses

Some businesses focus on selling to other businesses rather than to individuals. Selling products or services to other businesses (sometimes called B2B, for "business to business") can be lucrative because businesses usually buy in larger quantities than individuals. For example, a soap manufacturer might sell 50 bars of soap to individual customers via its website in a given month, but could sell 500 bars in just one sale to a hotel.

If your business is targeting other businesses, you should still define your target customer, using characteristics such as:

  • industry size
  • number of employees
  • amount of annual sales, and
  • geographic location.

Defining a Market Niche

The term "niche" refers to a relatively narrow or specialized market; for example, a maternity clothing boutique specializing in corporate/professional wear or a law firm that specializes in immigration cases. In a crowded marketplace, a niche serves the critical function of distinguishing you from your competitors.

Focusing on a niche can be an effective and profitable strategy for small businesses because it is often too difficult and costly to try to cater to very broad audiences. Instead of trying to appeal to everyone, a small business often does better by developing a specialty in an area that is not being fully served by other businesses and exploiting that niche with cost-effective marketing strategies. Think of a niche as a hook that will help you reel in the potential customers that you have identified as the most profitable and likely prospects for your business.

Niches are usually defined as either operational or customer focused.

Operational niche. With this approach, the business focuses on specialized products or services that will inherently appeal to a narrow customer segment.

Customer niche. This approach focuses on one or more specific -- and profitable -- customer bases. Instead of emphasizing customized products or services, the business focuses on tailoring its marketing efforts to specific audiences.

Both approaches are effective, and businesses commonly use a little of each. For example, a day spa may define a customer niche of tour group companies and travel agents and actively market to them. At the same time, it may make small operational tweaks to cater to this customer niche, such as offering a free shuttle service to local hotels or including maps of local tourist attractions in its lobby area.

Niches are by definition narrow, but not so narrow that they don't contain enough customers to sustain the business. The key to defining a profitable niche is to find an area where there is an unmet demand, and to fill that need with your products or services.

Defining Markets and Niches: An Ongoing Process

In order for your business to succeed, use a circular process when defining your target customers and learning about your market. Here's how it works:

Typically, you start by identifying your best customer prospects based on your observations and intuition about your market (remember, your market includes not only customers, but also your competition and industry). Next, you do research to learn more about your market, such as what your target customers' buying habits are, what your competition is doing, or whether there are important industry trends. (To learn how to do this, see Nolo's article Doing Market Research.)

Based on this research, take another look at how you define your target customer and your overall business idea. If necessary, given the new information, make changes to your target market or niche in order to make the most of an unmet demand in the market.

This cycle shouldn't end when your business gets going. Learning about your market and adjusting your business plan accordingly is an ongoing process -- indeed, it is the heart of successfully running a business. Smart business owners constantly monitor market conditions and make adjustments to their businesses in order to stay profitable.

To learn more about defining target markets and niches, and using those profiles to help your business succeed, get The Small Business Start-Up Kit: A Step-by-Step Legal Guide, by Peri H. Pakroo (Nolo).

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