Contents
How are target markets evaluated?
The selection of target markets involves the examination of various aspects and measures of a market segment in comparison to the firm’s goals and resources. Typically the firm assesses whether this particular target market logically fits with the firm’s strategic direction, whether it is the best use of its resources (opportunity cost), and to what degree with a firm be able to successfully compete in the segment.
Target market selection is a very important decision for an organization as it is an integral part of their marketing strategy. As consequence, firms will typically adopt a fairly analytical approach to target market selection and will usually use to set criteria to evaluate and assess each market.
The target market selection process
As can be seen in the following model of the full STP (segmentation, targeting and positioning) process, the selection of target markets occurs after a number of important steps. Firstly the organization defines the product/market that they are interested in, they then group consumers into different market segments using a variety of segmentation bases/variables. After the segments have been validated, segment profiles are developed. Then, using the information in the segment profile the target potential target markets are evaluated and selected, most likely by using an established model or other set of minimum requirements.
Evaluation Criteria for Target Markets
Firms often use a structured set of criteria to assess potential target markets. These criteria typically include:
- Market Size and Growth Potential
The segment should offer sufficient size and growth opportunities to justify the investment.
Example: A tech company targeting Gen Z might focus on their increasing adoption of wearable devices, a rapidly growing market. - Segment Profitability
Profit margins, price sensitivity, and purchasing frequency within the segment are evaluated to determine financial viability.
Example: A premium skincare brand may target older professionals who value quality over price, ensuring higher profit margins. - Strategic Fit
The segment must align with the organization’s core values, mission, and strategic direction. This alignment ensures consistency in brand messaging and operational priorities.
Example: A company committed to sustainability may prioritize segments that value eco-friendly products. - Competitive Environment
Firms analyze the intensity of competition within the segment and assess whether their unique strengths provide a competitive advantage.
Example: A boutique coffee chain might target niche urban neighborhoods where global chains are less dominant. - Accessibility and Reachability
The target market should be accessible through existing marketing channels and communication strategies.
Example: A luxury car brand might leverage targeted digital campaigns on platforms frequented by high-income professionals. - Actionability and Resources
The firm must have the capability to develop tailored products, services, and marketing efforts to effectively serve the segment.
Example: A small start-up may focus on a single niche market due to resource constraints. - Compatibility with the Marketing Mix
The chosen segment should respond positively to the firm’s marketing mix, including product design, pricing, promotional strategies, and distribution channels.
Example: A fast-food chain targeting health-conscious consumers may emphasize low-calorie menu options and transparent nutritional information.
Main evaluation criteria for target markets (TABLE)
The following table outlines the main factors that are considered when evaluating potential target markets. It is likely that many organizations will have slight variations to these factors, but the table provides a good generic guide to the key issues.
| Assessment Factor | What to consider? | What the firm is seeking |
|---|---|---|
| Financial Issues | ||
| Segment size | What is the size of the segment (mainly in terms of unit and revenue sales)? And is this substantial enough for the firm to consider entering? | Each firm is likely to have minimum size requirements for a market segment to be considered financially viable. Obviously larger firms have higher requirements. |
| Segment growth rate | At what rate is the segment growing (or perhaps declining)? What is its future outlook? | Segments with strong growth rates are more attractive as firms can gain market share from primary demand (as opposed to needing to win business from established competitors). |
| Profit margins | Is this a high profit margin segment or one that is price competitive? | Pursuing new target markets typically requires significant marketing investment, so target markets with higher profit margins are always more attractive. |
| Structural Attractiveness | ||
| Competitors | How dominant are the established competitors? What degree of competitive rivalry exists? Are there significant indirect competitors (or close substitute products)? | Generally firms do not want to compete in markets where there are dominant market leaders, as they tend to be quite aggressive to new competitors. Therefore, target markets with a fragmented competition position are often preferred. Obviously the lower the level of competitive rivalry the better with limited in direct competition.
Note: Porter’s five forces model could be used to assist this style of analysis. |
| Distribution channels | How easy would it be to gain access to the appropriate distribution channels? What level of new investment would be required in this regard? | Strong relationships between the current firms in the distribution channel would be of concern. The ability to establish suitable channel relationships needs to be evident. |
| Strategic Direction | ||
| Strategy | How well does the proposed target market fit with the firm’s strategic direction and growth goals? | As part of the firm’s mission and strategy statement, a clear direction of the future of the organization is generally understood and planned out. Therefore, the target market needs to contribute to the firm’s strategic future. |
| Goals | What does the firm have high or low growth expectations | The firms with higher growth goals are more likely to adopt a multiple target market strategy and will, therefore, be more willing to enter new markets. |
| Marketing Expertise | ||
| Resources | Does the firm have the financial position and staff resources to successfully enter in this segment? | Firms seek target markets where they can enter with a comfortable level of investment, in terms of: financial investment, staff time, and the potential disruption to the balance of their business. |
| Capability | Does the firm have the capability to develop appropriate products in a supportive marketing mix | Firms will naturally seek target markets where they can leverage their existing skills, capabilities, and technologies.
Target markets that require the firm to develop new expertise are generally best avoided. |
| Role of brand | Would the firm be required to create a new brand, or could an existing brand be leveraged into the new target market, or is brand relatively unimportant? | Establishing a new brand requires time and money, so that requirement reduces the attractiveness of a segment. As does the risk to a brand of leveraging in into a lower status segment, such as when targeting budget conscious consumers. |
| Opportunity Cost | ||
| Growth options | What is a range of other opportunities available for growth to the firm | Market development (new target markets) is simply one growth. An organization could also consider market penetration, product development, and even diversification or acquisition. Therefore, given the growth choices available, is the new target market the best option at this time? |
FAQs
- What is the purpose of evaluating target markets?
The purpose is to ensure that a chosen market segment aligns with the firm’s strategic direction, offers growth potential, and justifies the investment of resources while ensuring the firm can compete effectively. - Why is the evaluation of market size important in selecting a target market?
Market size determines if the segment has enough potential customers and revenue to justify the firm’s investment. Larger firms usually require bigger segments to achieve financial viability. - How does segment growth rate affect target market evaluation?
A segment with a strong growth rate is more attractive because it offers opportunities to gain market share through primary demand, rather than competing directly with established rivals. - What role does profitability play in target market selection?
Firms prioritize segments with higher profit margins as they provide better returns on investment. High-profit segments justify the significant marketing and operational costs associated with targeting. - How does competition influence target market evaluation?
Firms assess the level of competition to ensure they can successfully enter and sustain operations. Markets with fragmented competitors are preferred over those dominated by strong market leaders. - Why is strategic fit critical when evaluating target markets?
Strategic fit ensures the target market aligns with the firm’s mission, vision, and long-term goals. Targeting markets inconsistent with the firm’s strategy can dilute brand identity and impact operational focus. - What does ‘accessibility’ mean in the context of target markets?
Accessibility refers to the firm’s ability to reach the target market through existing distribution and marketing channels. A market that’s difficult to reach may require significant investment, making it less attractive. - What is the significance of resources in evaluating target markets?
Firms must assess whether they have the financial, human, and technical resources to develop products and marketing efforts tailored to the chosen segment. Without adequate resources, targeting success is unlikely. - How do opportunity costs factor into target market selection?
Opportunity cost evaluates whether focusing on one target market might limit the firm from pursuing other growth opportunities, such as new products or alternative market segments. - What are the main criteria used to evaluate target markets?
Key criteria include market size, growth rate, profitability, competitive environment, strategic fit, accessibility, firm resources, and alignment with the marketing mix. Each factor ensures the segment supports sustainable business growth.