What Market Should You Target?
The two most common mistakes that businesses make is that they pick a market that is too big and they don’t have the means to market or compete in that territory, or they pick a market that is too small to be profitable. There are 3 distinct types of markets that you can enter when launching or expanding a business. Selecting your market will be a key component to your strategy, and what we will go over here. The niche market, as of late, seems to be the most popular, particularly for start-ups, so I will spend more time breaking down what you need to know about niches before selecting your market.
A mass market is one where everyone has the need essentially. For example, food, beverages, clothing, housing, and potentially cell phones, etc. It’s an unsegmented market. For mass markets, you have to have the distribution capabilities and network to match that scale. Generally, you should have a marketing budget to afford a mass-marketing strategy which leverages mediums such as television ads. Some people argue that we no longer have mass markets in this age of customization and personalization. But the reality is, they still exist, but segmenting and targeting are becoming more popular due to the successes that companies have had in gaining market share this way. Also, companies that are aspiring to be cost-leaders or give the lowest prices for the highest value will typically appeal to a mass market due to the fact that they need to build economies of scale with mass to make that strategy viable.
A broad market is a very large market that has a broad appeal category but isn’t necessarily needed by almost everyone. The segmentation occurs either 1 to 2 levels down. So, for example, in the mass beverage market, there is a broad market for beer. There doesn’t appear to be a strict definition out there of what these markets are, but I think it’s fair to say that a broad market would be if there is an appeal to the majority of people. So, in a room of 100 people, 90 of them would drink beer. If you segment out 1 level down to say ale or lager, you are now targeting a niche. Another example would be within the mass market of clothing, either the men’s or women’s segment could be considered a broad market since both are roughly half of the population. One could even say children’s clothing is a broad market because all children need clothing are a significant demographic within the narrow scope of adults vs children, despite being less than half of the population. But once you segment 1 level further you start to enter into niche territory, so for example, boys clothing.
A niche market is a multi-segmented market that goes 3 levels down or more as given in the examples above. Now, when starting a business in a market where there is a lot of competition, it can be daunting and slow to gain market share. Thus, many startups opt to target niches first in order to capture a segment at a time. But there are a few things any entrepreneur or executive must know when deciding on your market strategy.
What You Need to Know About Niche Markets
- A niche market is not a competitive advantage, but rather a differentiator. The difference is it’s much easier for someone to copy a differentiator than a competitive advantage. One doesn’t replace the other, so even though you may choose to open up a bar that serves only ales, remember that anyone can do that, so your niche is not your competitive advantage, it’s just an aspect of your strategy.
- A niche market must be big enough so that your company has enough customers to sustain profitability and growth. There is such a thing as over-segmenting and where cashflows will turn from positive to negative. Sticking with our ale bar company, let’s say you the owner decide to further differentiate yourself by only offering organic ale or pale ale say, you might not get enough customers through your doors to cover your costs. Unless your niche is part of a broader product portfolio, it might very well be too small to be profitable.
- A niche market that has more geographic concentration is going to be better than one that is widely dispersed. When customers are close and social with one another, the ability for your customers to connect and relate with one another is going to build a tighter loyal network for your company than one that isn’t. It’s much harder for “word-of-mouth,” an indirect, yet effective method of marketing to occur that smaller companies tend to rely on for sales.
Consider the wideness of the appeal of your product or service before selecting your market and deciding how far to segment. This being said, you might have a product that has mass appeal, but entering the market is too competitive, so in that case, it might make sense in an early stage company, to target niche first before broadening your market as you grow. In addition to your stage of growth, you should also consider your budget and if it is enough to capture a particular segment. If not, then consider segmenting 1 level further.