Narrow the Niche and Improve Profits
We have all heard that focusing on a target market is necessary for achieving success. Targeting allows us to deliver the marketing message to the people who are most likely to be interested in the benefits our products deliver.
The challenge in choosing the best target markets comes from two directions. First the target market needs to be narrow enough to allow us to efficiently market, to get the most bang for our buck. At the same time, it needs to be large enough to have sufficient sales potential to support the company.
Defining a company's target market is frequently done by identifying one or two characteristics that most customers have in common. For instance, if you sell garden tools, it's easy to define the target market as everybody with a garden.
However, it's usually not that simple, because even a market such as "every gardener" is too broad to develop specific, targeted marketing messages.
For example, in the case of garden tools, people who live in apartments and don't have traditional gardens can use those tools, too. You can also define submarkets based on the size of the garden, length of growing season, amount of time the customer has been gardening, and so forth.
There are many different ways to segment a market. However, determining just
which niche should make up a target market is difficult. The problem is that some niches are more valuable than others, contributing more to the bottom line.
One method of segmentation is to rank groups of customers by the amount purchased, the frequency of purchasing, and the recency of the order. When you perform this type of analysis, called recency, frequency, and monetary
(RFM) analysis, you know that everyone being ranked has been a customer at one time or another. Some have been good customers, while others have not been so good. In fact some customers have been downright bad, because acquiring such customers costs more than the lifetime profit they'll generate.
There are many other ways to
segment a market, such as geography, demographics, and lifestyle patterns. These indicators can frequently be correlated to buying patterns, but they don't actually explain why customers buy.
Why Do They Buy?
For the reasons customers buy, you have to look at how your products create satisfaction by meeting the customers' needs.
Customers buy a particular product for many reasons. Some are looking for certain features. Others rely on word of mouth to reduce the risk of making a bad decision.
Still others base their purchase decisions on their overall perception of the company or product. These customers purchase products from a market leader to feel assured of having made a good decision. In this case the brand's market share may be just as important to the customer as the product's features.
This means that the market leader receives more revenue than its competitors just for being the market leader. The extra revenue reduces the cost of sales and improves profits, which help the leader remain a leader.
Leading the Market
In today's highly competitive environment the question is: "How do we become a market leader?"
Many companies, in an attempt to appeal to a large audience -- thinking that doing so will increase revenue and profits -- dilute their marketing message. Such a company becomes merely one of many in the market, not the market leader. The larger audience frequently includes unprofitable or inappropriate customers, consequently decreasing profitability rather than increasing it.
The first step is to re-evaluate every market niche that makes up the company's overall market; the intent is to identify the market segments that are profitable and those that aren't.
The next step is to reduce marketing efforts to the unprofitable segments and focus attention on the remaining niches.
Selecting a narrower target market allows a company to focus marketing communications on specific customer needs. As a result prospective customers have more confidence that the company understands their needs; that confidence in turn leads to a closer relationship and increased loyalty.
And since loyal customers are more profitable than new customers, narrowing the niches served increases revenue and profits.
Cliff Allen is the co-author of the book One-to-One Web Marketing; 2nd Ed., published by John Wiley & Sons, and has consulted with companies on strategic marketing for 20 years.