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Understanding Your Target Market Is Critical for Success

Filed under Marketing Overview. Fact checked on May 24, 2012.

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Do you know who your buyers are? Do you understand why they buy your products or services? If not, now's the time to find out

Do you know precisely who your customers are? More importantly, do you know who are the best customers for your goods or services? Do you know what type of people or businesses they are? If you sell products directly to an end-user, do you have demographic information (e.g., what are their average income ranges, education, typical occupations, geographic location, family makeup, etc.) that identifies your target buyer? What about lifestyle information (e.g., hobbies, interests, recreational/entertainment activities, political beliefs, cultural practices, etc.) for your target buyer?

This type of information can help you in two very important ways. First, it can help you make changes to your product or service itself, to better match your customer's needs. Second, this information can also tell you how to reach your customers through advertising, promotions, etc.

Example


Brand X, a leading athletic shoe manufacturer, knows that its typical customer is also a sports fan. If Brand X can build shoes good enough to be worn by professional athletes, it will have a convincing story about quality to tell. In addition, it can also benefit by using well-known athletes as spokespersons in its advertising, and by placing advertisements in sports magazines where its customers are likely to see them.


At this point you may be thinking, "I'll worry about all this targeted marketing malarky when I become big enough to get an endorsement from Derrick Rose." However, every business can benefit greatly from understanding who their customers are.

Example

Jake operates a small convenience store across from his town's soccer and baseball fields. During the games, there is a concession stand open. But, during the practices--which take place every evening and all day on Saturday--there isn't. Jake decides to offer a "soccer parent" special -- two bottles of water, a sports drink, healthy snacks and a packet of mosquito repellent wipes pre-packaged in a "grab and go" bag. He hires his son to hand out "introductory coupons" to the parents sitting watching practice. The grab-and-go bags are a hit. Not only does he get a steady stream of customers during the games, he finds many of them stop into his store to pick up other items.

Jake was able to increase his business by recognizing a new source of customers and designing an offer that met their needs. How can you refine your understanding of your own customer base? We suggest that you begin by learning more about your current customers, paying particular important to those who are significant users of your goods and services. With this knowledge, you can divide your customer base into segments and develop plans to reach those segments that are likely to be the most profitable for you. This information will help you look for new customers more effectively.

Acquire Demographic and Lifestyle Information About Your Customer

If you sell directly to the end-users of your products, it is absolutely essential that you know who they are (demographic information) and why they buy your product. Demographic information is less essential if you are in wholesale, but the maxim "know your customers" is still paramount.

Demographic Information

Demographic information is tangible, measurable information about individuals or groups of individuals. Common demographic measures include:

  • age
  • gender
  • income level
  • education level
  • racial/ethnic identity
  • marital status
  • size of household
  • number of children
  • occupation
  • geographic location/size of community

This type of information is usually the easiest for the small business owner to acquire. For example, the website ZIPSkinny provides outstanding, free demographic information based upon ZIP codes.

Lifestyle Information

Lifestyle information focuses on those intangible characteristics that make people unique. Demographic information can provide the facts about a person or a group of people. Lifestyle information addresses what meaning the demographic information has to the person. For example, both John and Julian identify as "Italian-American." However, this demographic fact tells you little about whether their Italian heritage matters to them. Lifestyle information, such as Julian's participation in the Italian Lawyer's Association and his frequent trips to Italy points to the importance of his background to him.

The following are broad types of lifestyle information.

  • Psychographics. Psychographics refers to personality and emotionally based behavior that is linked to an individual's purchases. One example would be whether customers are risk-takers or risk-avoiders.

  • Social factors. Lifestyle factors refers to the choice of hobbies, recreational pursuits, entertainment (movies, music, media, literature) vacations, and other non-work time pursuits. In the example given earlier, Jake was able to tap into the suburban, soccer parent lifestyle to draw new customers into his store.

  • Belief and value systems. These include an awareness of religious, political, nationalist, and cultural beliefs and values of your customers.

  • Life stage. While some life-stage information can be gleaned from demographics, a focus on lifestyle variables goes to the experience of people at different ages and in different life roles (e.g., pre-teens, teenagers, or empty-nesters.)

Many times, companies look for correlations between demographic information and lifestyle choices to identify and market to customers. For example, demographic information alone will not identify heavy coffee drinkers or cigarette smokers. However, a researcher can survey heavy coffee drinkers and uncover correlations with demographic "markers" or "predictors. You can see the results of this type of analysis by watching beer ads on television: the ads are clearly targeting a younger, male demographic.

How You Can Learn About Your Customers Effectively

At this point, you might be saying: "Well, that's great for the big guys who have a huge market research budget, but it's of no help to me." A decade ago, you might have been correct. The small business owner was at a considerable disadvantage when it came to customer research. But, then, the internet exploded and the playing field became more level. Now, there are numerous excellent and reliable sources of data available with only a few clicks of your mouse. In addition, you are likely to have an advantage that large company's lack: direct access to your customers. A multi-national corporation must invest hundreds of thousands of dollars to set up focus groups, surveys and customer advisory panels. All you need is a friendly smile and the willingness to ask a few key questions.

When you are your own marketing organization, every customer contact is an opportunity for free market research—the type that a Fortune 500 corporation must spend a fortune to acquire. Questions that should always be at the top of your mind and one the tip of your tongue are

  • "Have you tried [your product] before?"
  • "Why are you buying this?"
  • "What do you like about it?"
  • "How's it going to make your life better/easier?"
  • "Who's going to use it?"

Of course, you don't want to sound like a robot taking a survey or, worse yet, a defense attorney interrogating a witness. So, you'll work the questions into simple conversations. Over time, you will begin to develop a feel for how your customers are and what is driving their purchases.

Secondary Research

Secondary research sounds intimidating, but it just means taking advantage of the work that someone else has done. As noted earlier, the internet provides numerous options to learn more about your customers and potential customers. In addition, local, state, and national trade organizations are often excellent sources of information on the trends that are likely to influence your business.

These agencies can also be valuable sources of information.

  • Civic organizations, such as the Chamber of Commerce, Rotary Club, local banks, etc.
  • Development offices, such as city planning commissions, regional county business redevelopment offices, minority-aid offices, and state business development offices
  • Federal regulatory and information agencies such as the Small Business Association, the Department of Commerce, and any agency that governs or buys from your type of business

The Government Printing Office (GPO) publishes many useful books to help you with research. If they're not in your local library, they can be obtained inexpensively from the GPO at your nearest Federal Building. Look in your white pages under the U.S. Government listings. Examples include:

  • County Business Patterns. Released annually by the Department of Commerce, each state bound separately, these provide figures on employment, payrolls, number of businesses and number of employees in each business class.
  • County and City Data Book. A book by the Census Bureau gives you information on housing, population, income, health, retail and wholesale trade.
  • Segment Your Market to Drive Growth

    Although the universe of all potential buyers may be your "market," dividing the market into sections or "segments" can help you generate more revenue. This segmentation can be based on any number of factors demographic or lifestyle factors. For example, you could segment your customers by age group. Or, you might divide them by family size. Different segments will have different needs and are likely to respond to different advertising or promotions. By thinking in terms of "what does this group of customers need," you can generate solutions that resonate with the target group.

    Most marketers know that "20 percent of buyers consume 80 percent of product volume." If you can identify that key 20 percent and find others like them, you can sell much more product with much less effort. These loyal customers of your product or services can be thought of as a market "niche" that you should attempt to dominate. Niche marketing today means targeting, communicating with, selling, and obtaining feedback on the heaviest users of your business's products or services.

    Large companies have embraced niche marketing, continuing to refine and target their product offerings to different buyer groups. As an example, Nike re-staged a multi-billion dollar company that had plateaued by pursuing a segmentation strategy. Nike designed and marketed athletic shoes for each different sport, often further segmenting with specialized models within each sport (e.g., "Air Jordan" basketball shoes, and additional basketball models called "Force," represented by Charles Barkley and David Robinson, and "Flight," represented by Scottie Pippin).

    While you are unlikely to have the equipment to manufacture specialty athletic shoes or the budget to be able to recruit an NBA superstar as your spokesperson, you can define your best customers and look for ways to entice them, and others like them, into buying your product or services.

    Picking the right segment of the market is important to achieving sufficiently large sales volume and profitability to survive and prosper as a company. Picking the right market segment means one that is

    • measurable in quantitative terms;
    • substantial enough to generate planned sales volume;
    • accessible to your company's distribution methods; and
    • sensitive to planned/affordable marketing.

    It is also important to examine other factors that could affect your company's success:

    • strength of competitors to attract your niche buyers away from your products;
    • similarity of competitive products in the buyers' minds;
    • rate of new product introductions by competitors; and
    • ease of entry/protectability in the market for your niche.

    It is also important to be able to identify and estimate the size of your target market, particularly if you're thinking about a new venture, so that you can tell if the customer base is large enough to support your business or new product idea. Remember that it's not enough that people like your business concept. There must be enough target buyers on a frequent-enough basis to sustain your company sales, spending, and profits from year to year. Selling a product or service that people may need only once in a lifetime may not be a sustainable business, unless a large number of people need it at any given time, or everyone needs it eventually (e.g., funeral services).

    Each total market must be examined in light of:

    • size of the total market
    • size of the market that is interested in your products
    • size of the market that is available for distribution of your products
    • size of the market that already buys competitive products
    • size of the market that your company can serve
    • size of the market that your company can reach with advertising and distribution

    Know What Is Important to Intermediate Buyers

    If your target customers are the end user of your products and services, then demographic and lifestyle factors are essential to understanding them. However, not all businesses sell directly to the ultimate users of the products. If you sell to other businesses, who turn around and resell your products and services, your buyers are predominantly channel buyers. For example, consumer packaged goods such as food, health, and beauty aids and household products may be initially purchased in large amounts by a master distributor, who sells to local/regional distributors. These local distributors often sell to a wholesale buyer representing a chain of stores. Finally, individual store managers decide to buy and stock the product before the consumer ever has a chance to buy the product.

    Channel Buyers Come in Different Flavors

    Channel buyers may be subdivided into the following major market categories: business-to-business, government, and consumer markets.

    Business-to-Business and Government Buyers

    Business-to-business and government buyers are subject to many different influences than buyers of consumer goods. Generally, B2B and government purchasers have the following characteristics:

    • fewer buyers
    • larger business transactions
    • regional concentration of buyers
    • defined sales and broker relationships
    • dependent upon end-user buying patterns and demand
    • an inelastic market, meaning that the demand for goods and services is not significantly affected by a significant change in price

    Business buyers take many factors into account when contemplating buying decisions:

    • macroeconomic trends, nationally and internationally
    • long-term material supply trends and inventory needs
    • delivery rates, timing, and reliability
    • plant capacities
    • suppliers' financial resources

    Government buyers are subject to numerous government contracting rules and regulations.

    Consumer-Goods Buyers

    Consumer-goods buyers are subject to different influences when compared with business-to-business and government buyers. The major factors affecting this channel are:

    • there may be many buyers at multiple levels in the same company
    • small to large transactions
    • national, regional, and local buyer concentration
    • direct company sales to buyers, or broker relationships
    • directly dependent upon end-user buying patterns
    • end users influenced by company advertising and promotion spending
    • an elastic market, meaning that the demand for goods and services is easily affected by slight changes in price.

    Regardless of the channel of the intermediate buyer, you can expect the sales cycle to be longer and more complicated than that involved with sales directly to the end-user.

    Economic Factors Are Essential to Intermediate Buyers

    If intermediate buyers are involved prior to products reaching the end user, influences other than customer demographics and lifestyle factors are likely to be important. For example, grocery buyers of consumer packaged goods may have strict profit margin guidelines (e.g., minimum 25 percent on discount retail price programs), and minimum discount thresholds that they will accept (e.g., at least 10 percent off invoice). Buyers are also heavily influenced by brand advertising and promotion support programs (e.g., coupons in local newspapers on the promoted brand). For new products, cash payments to the stores for each new item (e.g., $500 to over $25,000 per item) and free case goods on each new item for each store are common for larger chains. Some of the more important factors include:

    • Profitability of the item. The higher the margin and dollar profit per item vs. competitive category products, the more likely the trade will accept it, regardless of product quality.
    • Availability of discounts. Discounts can increase margin, volume, and velocity of the item. For example, 10 percent to 25 percent off invoice each quarter for all purchases during the period are typical discounts for grocery and drug retailers.
    • Advertising and promotion support programs. Multimedia TV, radio, print and PR support, plus heavy consumer couponing, sweepstakes, and contests are typical consumer packaged goods programs that may be run one to four times a year.
    • Slotting fee allowances. New item "slotting fees" are the subject of controversy and frustration for many manufacturers supplying grocery, drug, and mass merchandiser retailers. Slotting fees are cash payments and/or free goods that are not refundable, even if the products are dropped after six months by the retailer. Slotting fees range from a few hundred dollars to over $50,000 per item in some chains.
    • Availability of free samples. Allowing the intermediate purchaser to have a "free trial" of the product can encourage future sales. For example, one case per store is common for new grocery item distribution.
    • Personal buyer/seller relationships. There will always be personal relationships influencing buying decisions as long as there are people selling to people. That's why you hire good salespeople
    • Sales incentive programs. These programs may spur salespeople on to greater productivity and sales of a particular item or offering.

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