One of the most common mistakes I see as an entrepreneurial educator and coach among startup founders is identifying the target market for a business. Most of the time, the defined “target market” is much too large (e.g., “everyone will buy it” or “women 25-44”). The purpose of doing so appears to justify the opportunity’s viability to themselves and possibly to friends and family investors. Yet, as the target market should be, it is a tool for improving the possibility of the business’s success. Misidentifying or confusing a target market with the total available market can be disastrous for a startup. So, let’s explore the distinction between the two market types.
Total Available Market vs. Target Market
The total available market (TAM) is the universe of people who might benefit from your offering. It considers the total number of people regardless of whether they are currently ready, willing, and able to buy your solution. Conversely, the target market (TM) is a specific TAM segment with a higher likelihood of immediate interest and desire for your solution.
For illustrative purposes, let’s assume you have a company that sells high-end, durable gardening tools. Your TAM would include all those who have expressed an interest in gardening without regard to whether they currently own or need gardening tools. Because of the nature of the tools your sell (high-end and durable = “expensive”), your TM may be professional landscapers or farmers who need long-term durability with their tools. If your TM is both, while your customer-identified problem might be the same, the marketing message to each TM could be slightly different.
The purpose of a target market
Startup experts Steve Blank and Bob Dorf (2020) suggest that identifying and understanding a target market has the following four key benefits:
- Identifying customer needs and pain points. The customer-identified problems and pain points are rooted in the needs, values, and expectations. Everyone in that defined target market should have significantly similar needs and pain points for the solution to be of value. While it can be demographically based (e.g., women 25-44), it’s more likely problem-based, which may or may not have anything to do with age or gender.
- Confirming offering-market fit. The market fit for the offering (product/service) helps entrepreneurs determine how well-aligned the customer-identified problem is with the offering the entrepreneur desires to bring to market. If the alignment is off, either the entrepreneur doesn’t understand the customer’s problem or the offering doesn’t provide a valued solution to that problem.
- Reducing offering development costs. Once the customer-identified problems are confirmed and the target market is defined, creating an offering that solves those problems becomes a more focused endeavor. This is critical at the outset because it enables the entrepreneur to mitigate the dreaded “feature creep” that often finds its way into the offering’s development cycle, adding costs and often prolonging its launch, which in turn slows revenue generation.
- Developing practical and effective marketing approaches. A clearly defined target market born from customer-identified problems allows entrepreneurs to tailor their marketing messages and increase competitive differentiation. It also helps the entrepreneur determine the best marketing channels to reach that target market. When combined, these factors have the propensity to improve the effectiveness of the marketing campaigns and have a higher likelihood of converting prospective customers into actual customers. The increased targetability of the marketing campaigns also means fewer marketing expenditures are likely needed for that customer acquisition.
Identifying your target market
Identifying your target market requires research and analysis to understand your prospective customers’ characteristics. While demographics, including age, gender, household income, geographic location, and attitudinal perspectives (interests, values, expectations), are often considered, such factors are limiting.
Typically, quantitively driven research on TMs tell you what’s happening (who’s buying or likely to buy). However, such data doesn’t explain why or how the TM buys. Qualitative data is necessary to understand the latter. Qualitative data typically comes from interviewing prospective customers about their problems and observing their behavior. This data can shape and inform alignment with your offering in ways that will mitigate your market risks.
For example, if you sell high-end anti-aging skin care products, your research tells you women aged 40-65, with higher household incomes, are your TM. However, women aged 40-65 have different needs, values, and expectations regardless of their household income. In truth, this is likely to be your TAM. Yet, if you considered other factors, such as those who value self-care and wellness, you likely will have narrowed your pool of prospective customers to a segment of women in that demographic and arrived at what be a true TM, albeit smaller. You might also find through your interview process that men are candidates for your offering if they also value self-care and wellness.
As you consider a target market for your startup, remember that smaller is better. While the market has to be big enough to allow you to grow and have a long-term opportunity–that’s what the TAM can be–the goal at the outset is to make a connection with a market that values and connects with your offering immediately. So, when planning a startup or a new offering for your existing business, understanding the difference between the TAM and TM is critical for success. A narrowly developed TM defined by prospective customers’ needs, values, and expectations and shaped by demographic factors can reduce marketing costs, increase customer engagement, improve sales conversion, and lay a foundation for long-term customer loyalty.
Blank, S., & Dorf, B. (2020). The Startup Owner’s Manual: The Step-By-Step Guide for Building a Great Company (1st edition). Wiley.