18.3 Evaluating and selecting target markets

Assessing target market attractiveness is crucial for businesses. It involves analyzing market size, growth potential, and competitor landscape using research data. Companies evaluate financial metrics like revenue potential and profitability to determine the most promising markets to pursue.

Selecting the right target market requires a systematic approach. Businesses assess market size, growth potential, and competition while considering their own resources and capabilities. A framework for market targeting helps companies evaluate and choose the most suitable markets based on defined criteria and strategic priorities.

Assessing Target Market Attractiveness

Attractiveness of target markets

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• Market research data provides insights into market size, growth potential, customer demographics (age, income, education), and psychographics (values, interests, lifestyles)
• Competitor analysis reveals the number and strength of competitors (market share, brand recognition), their strategies, and potential gaps in the market
• Financial metrics evaluate the revenue potential, profitability (gross margin, operating margin, net margin), return on investment (ROI), customer lifetime value (CLV), and break-even point for each target market
  • Gross margin measures the percentage of revenue retained after accounting for the cost of goods sold (COGS)
  • Operating margin assesses the percentage of revenue remaining after covering operating expenses (salaries, rent, utilities)
  • Net margin represents the percentage of revenue left after accounting for all expenses, taxes, and interest

Factors in market selection

• Market size is assessed through total addressable market (TAM), serviceable available market (SAM), and serviceable obtainable market (SOM)
  • TAM represents the entire market demand for a product or service
  • SAM is the portion of the TAM that can be served by a company's products or services
  • SOM is the realistic portion of the SAM that a company can capture given its resources and competition
• Growth potential is determined by analyzing market trends (emerging technologies, changing consumer preferences) and projected market growth rates
• Competition is evaluated based on the number and strength of competitors, barriers to entry (capital requirements, regulations, patents), and opportunities for differentiation (unique features, superior customer service)
• Company resources, such as financial resources (capital, cash flow), human resources (skilled employees, expertise), technological capabilities (proprietary technology, R&D), and brand equity (reputation, customer loyalty), influence the ability to successfully enter and compete in a target market

Evaluating and Selecting Target Markets

Feasibility of market segments

• Feasibility assessment considers the alignment of the target market with the company's mission and values, the required investments and resources (financial, human, technological), and potential risks and challenges (regulatory, cultural, logistical)
• Sustainability factors include long-term market stability (economic conditions, political environment), potential for market saturation (limited growth opportunities), adaptability to changing market conditions (technological advancements, evolving customer needs), and the environmental and social impact of targeting the market (resource consumption, community development)

Framework for market targeting

1. Define selection criteria based on the company's goals and objectives, market attractiveness factors (size, growth, competition), and feasibility and sustainability factors (alignment, resources, risks)
2. Assign weights to each criterion based on their relative importance and strategic priorities (e.g., growth potential may be weighted higher than competition for a startup)
3. Evaluate potential target markets against the weighted criteria using a scoring system (e.g., 1-5 scale) to assess their relative attractiveness and fit
4. Select the target market(s) with the highest overall score, considering the trade-offs between different criteria and the company's capabilities
5. Continuously monitor and reassess the performance of the selected target market(s) to ensure ongoing alignment with company goals and adapt to changing market conditions (customer preferences, competitive landscape)