The first step in selecting a target market is to study the industry in which your firm intends to compete and determine the different potential target markets in that industry. This process is called market segmentation. Market segmentation is important because a new business generally has only enough resources to target one market segment, at least initially.^[1] Markets can be segmented in many ways, such as by geography (city, state, country), demographic variables (age, gender, family income), psychographic variables (personality, lifestyle, values), and benefits sought (quality, ease of use, prestige). Sometimes a business segments its market on more than one dimension to drill down to a specific market segment that the business thinks it is uniquely capable of serving. For example, GreatCall, the company that makes Jitterbug, a cell phone designed specifically for older people, segmented the cell phone market by age and by benefits sought. The Jitterbug, which targets older users, features large buttons, easy-to-read text, and a cushion that cups around the ear to improve sound quality. Similarly, PopCap games, an electronics games company, segmented its industry by gender and benefits sought. It targets women and makes electronic games that are casual and relaxing. This is an entirely different segment from the segment targeted by Electronic Arts, the largest company in the electronic games industry. Electronic Arts targets young males and produces games that are flashy and action-packed.

Market segmentation is important because a new business generally has only enough resources to target one market segment, at least initially.

To test whether you have segmented your market successfully, the requirements for successful market segmentation are as follows:

Despite the importance of market segmentation, it is a process that new businesses often overlook. Overlooking this activity can result in a business that hasn’t carefully studied the possibilities in the industry it plans to enter before selecting its target market. One opportunity that new businesses have is to segment their markets in new ways. Before Great Call and PopCap Games came along, no one had segmented the cell phone market by age and benefits sought or segmented the electronic games industry by gender and type of game. Both of these companies now have growing businesses, largely because they are servicing distinct and growing segments within their broader industries.

Once a firm has determined the different markets that exist within an industry, the next step is to select a target market. Typically, a new business doesn’t target an entire segment of a market, because many market segments are too large to target successfully. Instead, most businesses target a smaller niche or vertical market within the segment (as discussed in Truth 8, “A make-it or break-it issue: Selecting an idea that can be sold into a niche market”). For example, one segment of the fitness industry is fitness centers that sell monthly memberships. (Another segment would be companies that sell exercise equipment to be used in the home.) Within the segment that sells monthly membership are several smaller niche markets that are targeted by different companies. For example, Curves targets women, Cuts targets men, My Gym is just for children, and Club 50 targets people 50 years old and older.

In most cases, the secret to appealing to a smaller niche market is to understand the market and meet its needs better than those needs can be met by businesses targeting an entire market segment. This is the secret behind the phenomenal success of Curves, which grew from one fitness center for women in 1992 to over 10,000 today.^[2] By focusing on a clearly defined target market, a business can become an expert in that market and then provide customers with high levels of value and service. This advantage is one of the reasons that Philip Kotler, a world-renowned marketing expert, says, “There are riches in niches.”^[3]

By focusing on a clearly defined target market, a business can become an expert in that market and then be able to provide customers with high levels of value and service.