Narrowing your “target market” to the right size is difficult. Successfully marketing your company demands that you constantly review your marketing investments. All of your dollars and most of your energy and focus should be allocated to the marketplace you have defined.
How big should your target market be?
There are many ways to narrow your marketplace. The real question is, how wide of a lense should you be looking through? My experience in direct marketing and website optimization has helped me to define a narrow target market. Here is what my basic formula looks like:
(Population of target market) x (target share of market) x (sales per customer) = Sales
This formula may seem obvious, but few people take the time to apply it. You need to have good information, or assumptions, for three of the four variables in order to calculate the remaining value.
Here are two examples of when I have used this formula in the last 60 days:
Example 1 – Aligning marketing with company abilities
In this example, I was evaluating a potential niche for Winding Staircase. We are a small company, and our ability to handle incoming phone calls and information requests is extremely limited.
We found a marketplace of about 15,000 independent institutions that we could sell to. Based on some past experience and conversion rates, I believed we could use direct marketing to achieve a 2-4% sales rate. For illustration purposes here, we will say each account would be worth $1,000 in annual sales. When we plugged in the numbers, here was the outcome:
(15,000 in marketplace) x (3% estimated sales rate) x ($1,000 per customer) = $450,000
For my young organization, this growth would have been too great to handle at one time. So we decided to narrow the target market. Using geography to filter the market, we found that there were approximately 1,000 of these institutions within Ohio. So I ran the numbers again:
(1,000 in marketplace) x (3% estimated sales rate) x ($1,000 per customer) = $30,000
Thirty new accounts is perfectly manageable for us. We could avoid the damage that poor service can do to a brand, and if all goes well, we can expand our lense to include a larger segment of the market over time.
Example 2 – Expanding the target market from the ideal customer
A retail business client sells to consumers through a local store. The retailer knows most of his customers live or work within 5 miles of his location. He also knows his best customers are professionals with above average incomes. His absolute best customer is the owner of an accounting firm that has been married for 30+ years, has grown children, and is “semi-retired.”
This retail client wants to “upscale” his current customer base. He is fine with having fewer total customers if his new customers are more like his absolute best customer. Ahh, the dream of having half as many customers and twice as much revenue….
For illustrative purposes, we will say this client has annual sales of $1,000,000 and that his best customer spends $8,000 each year in his store. Here is our starting formula:
(1 in marketplace) x (100% estimated sales rate) x ($8,000 per customer) = $8,000
Our objective is to increase sales to $1MM. How many customers does our retailer need?
(# of customers) x ($8,000 per customer) = $1,000,000
My seventh grade algebra tells me that our retailer needs 125 customers to get to one million dollars in sales. What if there are exactly 125 semi-retired, once married, business owners with grown children within one mile of the store? Have we found our new target market?
(125 in marketplace) x (100% estimated sales rate) x ($8,000 per customer) = $1,000,000
What is wrong with this picture? Chances are, no matter how well Winding Staircase helps this retailer market his business, this retailer will never have a 100% sales rate within his target market. From past experience, we estimate a 15% sales rate for this very specific marketplace. How big does our marketplace need to be?
(Population in marketplace) x (15% estimated sales rate) x ($8,000 per customer) = $1,000,000
A little pencil work tells us that my retailer client needs to expand his target market to 833 potential customers. We can now evaluate the best ways to expand his marketplace lense, by expanding one of the limiting variables of his current lense.
Your target market: What is the right size?
What is the right client for your business? How many customers can you properly service? When did you last compare your website, web advertising, direct mail, and other marketing efforts against your target market?
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