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How are target markets selected?
The selection of target markets is the second major phase of the STP process, as shown in the diagram below. (Where STP stands for segmentation, targeting and positioning.)
As shown, firms initially segment the market and, as part of this process, construct segment profiles for each segment. Included in a segment profile is a detailed description of the segment, along with various size and profit measures. Using this information in conjunction with the firm’s strategy, resources and goals organization appropriate target markets can then be selected.
The selection of a target market is a very important decision for a firm as it then requires significant effort and commitment to implement an appropriate and targeted marketing mix. Target market selection is a key part of marketing strategy and typically involves significant analysis, discussion and review throughout the firm.
There is a separate section in this study guide that outlines an example of target market selection, but as a quick introduction, some of the factors that are organization would consider are as follows:
Segment Size
- What to Consider:
The size of the segment is assessed in terms of the number of potential customers, total revenue potential, and geographic scope. This includes evaluating total market demand, potential purchasing power of customers, and any relevant demographic or behavioral characteristics that indicate scale.- Example Questions:
- How many customers are in this segment?
- What is the average revenue per customer?
- Are there geographic limitations or expansions possible?
- Example Questions:
- Why it Matters:
Larger segments often offer higher revenue potential, enabling firms to achieve economies of scale in production, distribution, and marketing. However, niche segments can also be lucrative if the firm can position itself as the dominant player, particularly in markets where specialized needs are unmet. For example, a small luxury brand might target a niche of high-net-worth individuals instead of competing in a crowded mass-market.
Segment Growth Rate
- What to Consider:
Evaluate the segment’s growth trajectory using historical and projected data. Consider external factors such as economic conditions, technological advancements, or changing consumer trends that may influence growth.- Example Questions:
- Is the segment growing, stable, or shrinking?
- What is the projected growth rate over the next 5–10 years?
- Are there external factors (e.g., regulation, innovation) accelerating or inhibiting growth?
- Example Questions:
- Why it Matters:
Growth rates indicate the segment’s potential for long-term viability. Rapidly growing segments often attract new entrants and provide opportunities for primary demand growth, where firms can gain market share by addressing unmet needs or leveraging first-mover advantages. For instance, the rise of plant-based diets has made the alternative protein market highly attractive.
Profit Margins
- What to Consider:
Determine the profitability of the segment by analyzing price sensitivity, frequency of purchases, and competitive pricing pressures. Segments with high-profit margins typically allow firms to invest more in quality, innovation, and customer service.- Example Questions:
- What is the average profit margin for this segment?
- How price-sensitive are customers in this segment?
- Can the firm sustain its operations and growth objectives within this margin structure?
- Example Questions:
- Why it Matters:
High-profit margins justify the costs associated with market entry, including marketing and distribution investments. Conversely, low-margin segments may require significant scale to achieve profitability, which can strain smaller firms. For example, budget airlines operate on thin margins but achieve profitability through high volume.
Competitive Environment
- What to Consider:
Analyze the intensity of competition within the segment. Consider the number of competitors, their market share, and their strengths and weaknesses. Look at indirect competition, substitutes, and the potential for market saturation.- Example Questions:
- Are there dominant players with high market share?
- Is the segment fragmented or highly concentrated?
- How strong are barriers to entry, such as brand loyalty or economies of scale?
- Example Questions:
- Why it Matters:
Entering a highly competitive segment with established leaders can be challenging unless the firm offers a strong differentiator. In contrast, fragmented markets may provide opportunities to establish a foothold with fewer direct confrontations. A fragmented coffee market, for instance, allows boutique chains to target niche demographics.
Distribution Channels
- What to Consider:
Assess the availability and cost of distribution and communication channels to reach the target segment effectively. Consider partnerships, e-commerce platforms, or direct sales channels.- Example Questions:
- Are the required distribution networks accessible?
- What investments are needed to establish or improve channel efficiency?
- Does the firm have expertise in utilizing these channels?
- Example Questions:
- Why it Matters:
Efficient distribution reduces costs and accelerates market penetration. Inaccessible or underdeveloped channels may require significant investment, which could reduce the feasibility of entering the segment. For example, firms entering rural markets may need to develop logistics infrastructure.
Role of the Brand
- What to Consider:
Analyze whether the firm’s existing brand equity can be leveraged in the target segment. Consider the need for a new brand if the segment’s needs or image differ significantly.- Example Questions:
- Does the current brand resonate with this segment?
- Would entering this segment dilute the brand’s core identity?
- How costly would it be to establish a new brand?
- Example Questions:
- Why it Matters:
Brand extensions save time and resources compared to creating a new brand. However, if the segment’s perception conflicts with the firm’s existing positioning, brand dilution may occur. For instance, a premium brand entering a budget segment risks losing its upscale appeal.
Strategic Fit with the Firm’s Goals
- What to Consider:
Examine how the target segment aligns with the firm’s mission, vision, and long-term objectives. Evaluate compatibility with current product offerings and future innovation plans.- Example Questions:
- Does this segment align with the company’s strategic direction?
- Can this market sustain growth aligned with corporate goals?
- Will the segment help reinforce the company’s competitive strengths?
- Example Questions:
- Why it Matters:
Strategic alignment ensures that resources are invested in markets that enhance the firm’s core value proposition. For example, a company with sustainability at its core may avoid segments with environmentally harmful practices.
Firm Resources and Capabilities
- What to Consider:
Assess whether the firm has sufficient financial, technological, and human resources to serve the segment effectively. Consider scalability and operational challenges.- Example Questions:
- Can the firm allocate enough budget for product development and marketing?
- Are the necessary technical capabilities and expertise in place?
- Does the firm have the operational scale required for this segment?
- Example Questions:
- Why it Matters:
Limited resources can hinder success in high-demand or resource-intensive segments. Targeting markets aligned with the firm’s existing strengths often increases the likelihood of success. A start-up might focus on a single niche rather than stretching itself too thin across multiple segments.
Importance of Target Market Selection
The selection of a target market is a critical strategic decision because it determines the allocation of resources and the design of the marketing mix. The process involves:
- Extensive Analysis: Firms assess market data, competitive dynamics, and internal resources.
- Strategic Alignment: Target markets must align with the company’s broader mission and vision.
- Commitment of Resources: A chosen target market requires dedicated marketing campaigns, product development, and operational adjustments.
Summary Video on Target Market Selection
FAQ’s
- What is a target market, and why is it important?
A target market is a specific group of consumers a firm aims to serve with its products or services. It is important because it allows the firm to focus its marketing efforts and resources on a well-defined group, improving efficiency, effectiveness, and customer satisfaction. - What is the role of segmentation in target market selection?
Segmentation involves dividing the broader market into smaller, more homogeneous groups based on shared characteristics. It helps firms identify distinct segments, enabling a more tailored and effective marketing approach. - How do firms evaluate segment size?
Firms assess the size of a segment by considering the number of potential customers, revenue potential, and market share opportunities. This helps determine if the segment is large enough to justify the investment required to serve it. - Why is segment growth rate significant in target market selection?
The growth rate indicates future opportunities within a segment. A rapidly growing segment provides the potential for new customer acquisition and market expansion, whereas a declining segment may not justify long-term investment. - What is the impact of profit margins on target market evaluation?
Profit margins affect a firm’s return on investment. High-margin segments are more attractive because they allow for greater profitability and more flexibility in marketing and operational strategies. - How do firms assess the competitive environment of a segment?
Firms evaluate the number and strength of competitors, market concentration, and barriers to entry. Markets with fragmented competition are often more appealing than those dominated by strong leaders, as they offer better opportunities for new entrants. - What is meant by distribution channel accessibility, and why does it matter?
Distribution channel accessibility refers to how easily a firm can reach customers in the target segment through existing or new channels. Accessible channels reduce costs and accelerate time to market, making the segment more attractive. - How does a firm’s strategic direction influence target market selection?
Target markets must align with the firm’s mission, vision, and growth objectives. Strategic alignment ensures that the chosen market supports the company’s long-term plans and enhances its competitive position. - Why is it essential to evaluate firm resources and capabilities before selecting a target market?
Entering a new segment requires financial, technical, and human resources. Firms must ensure they have the capacity to serve the market effectively. Targeting a segment without adequate resources can lead to poor performance and wasted investment. - What are some tools or models used to evaluate target markets?
Common tools include SWOT analysis, Porter’s Five Forces model, and market attractiveness matrices. These help firms systematically analyze factors like competition, profitability, and growth potential to make informed decisions.