Choosing Your Target Customers: Where to Compete and Where Not To

"Anyone who needs what we sell" feels like the safest possible answer to the question of who your customers are. In practice it is one of the riskiest, because a business built for everyone can end up tailored to no one and competing mainly on price.

The U.S. Small Business Administration's business planning guidance is direct about this: "Be specific when you name your target market. Your business won't be for everybody, so it's important to have a clear sense of whom your business will serve."

This guide covers how to define possible customer groups, how to compare them, and how to decide where not to compete. That last choice is often the one that makes the rest of your strategy work.

Three ways to define where you compete

In his 1996 Harvard Business Review article "What Is Strategy?", Michael Porter describes three sources of a strategic position. They overlap, but each is a different lens for a small business:

1. Variety: serving a subset of an industry's products or services. Porter's example is Jiffy Lube, which specialized in automotive lubricants rather than offering other car repair and maintenance services. A small-business version might be a bakery that makes only wedding and celebration cakes.
2. Needs: serving most or all of the needs of a particular group of customers. This is closest to traditional market segmentation. A small-business version might be an accounting practice that serves only farm and ranch families.
3. Access: serving customers whose needs are similar to others' but who are best reached in a different way. Porter notes that access can depend on customer geography or scale, such as rural versus urban customers or small versus large ones. A small-business version might be a mobile pet groomer serving small towns that have no storefront groomer.

Porter adds a point that is easy to miss. Differences in customer needs, he writes, "will not translate into meaningful positions unless the best set of activities to satisfy them also differs." If the same operation could serve every group equally well, any competitor could serve your group too. The test for a segment is not only "do these customers want something different?" but also "would serving them well require us to work differently?"

Look at the job and the circumstances, not just demographics

Demographics such as age, income and location are useful for sizing a market, and the SBA recommends gathering them. But they don't always explain why people buy.

Clayton Christensen and his coauthors, writing in Harvard Business Review in September 2016, argue that customers "hire" a product to get a job done, and that the circumstances in which customers try to do that job matter more than buyer characteristics. Their example involves condo developers targeting retirees who wanted to downsize. According to the article, sales were weak until the developers realized they were helping people transition their lives, and added services to help buyers with the move and with deciding what to keep.

For a small business, this suggests defining segments by situation as well as by profile. "Homeowners aged 35 to 55" is a demographic. "Homeowners who just bought an older house and need repairs before winter" is a situation, and it tells you far more about what to offer and when.

Questions to size up each segment

Once you have two to four candidate groups, compare them. The SBA suggests a set of market questions that work well as a checklist:

• Demand: is there a desire for your product or service?
• Market size: how many people would be interested?
• Economic indicators: what are the income range and employment rate?
• Location: where do these customers live, and where can your business reach?
• Market saturation: how many similar options already exist?
• Pricing: what do customers pay for the alternatives?

For free data, the SBA points to federal sources, including the Census Bureau. The Census Bureau's Census Business Builder offers selected demographic and economic data for a chosen location and type of business, with maps, charts and downloadable reports.

Add three questions of your own:

• Fit: does this group value what you are already good at?
• Profitability: can you serve them at a price that leaves a healthy margin?
• Reachability: can you find and talk to them affordably?

Compare segments side by side

A simple scoring table keeps the discussion honest. List your candidate segments as rows and the questions above as columns, and rate each from 1 to 5 based on evidence rather than hope.

For example, imagine a hypothetical three-person landscaping company comparing three groups: new-construction homeowners, homeowners' associations, and small commercial properties. Associations might score high on size and predictability but low on fit if they mostly buy on lowest bid. New-construction homeowners might score high on fit, because they want design help the company enjoys providing, and on reachability through local builders. The numbers don't make the decision, but they make the trade-offs visible.

When scores are close, favor the segment where your activities would differ most from what competitors do. That is where a position is easiest to defend, as our guide Competitive Advantage: Porter's Generic Strategies for Small Firms explains.

Decide where not to compete

Choosing a target also means deciding whom you won't chase. Porter calls the pull in the other direction the growth trap: serving one group and excluding others places a real or imagined limit on revenue, so managers keep stretching the position until it blurs.

Saying no can be specific and practical:

• Decline project types that need equipment or skills your core customers don't need.
• Stop advertising in channels that mostly bring in poor-fit customers.
• Refer certain jobs to a trusted competitor rather than doing them badly.
• Keep serving existing customers outside your target if it's profitable, but stop building the business around them.

Roger Martin, writing in Harvard Business Review in 2014, argues that strategy is about making bets, and that a company should focus on customers and spell out the logic behind its choices. Writing down that logic, in a few sentences about why you chose this group, makes it easier to revisit later.

Test before you commit fully

You rarely need to bet the whole business at once. Consider a small trial: a targeted offer, a page on your website written for one segment, or a conversation with ten potential customers in that group. Track inquiries, conversion and margin for a few months. If the evidence holds up, shift more of your marketing, hiring and service design toward the segment.

Key takeaways

• A clear target market is a strategic choice; the SBA puts it plainly that your business won't be for everybody.
• Porter's three lenses, variety, needs and access, help you see different ways to define where you compete.
• Define segments by customers' situations and jobs, not only by demographics.
• Compare candidate segments on demand, size, saturation, pricing, fit, profitability and reach, using evidence.
• Deciding whom not to chase protects your position from slow blurring as you grow.

Sources

• U.S. Small Business Administration, Plan your business: Market research and competitive analysis; Write your business plan
• Michael E. Porter, Harvard Business Review, What Is Strategy? (November–December 1996)
• Clayton M. Christensen, Taddy Hall, Karen Dillon and David S. Duncan, Harvard Business Review, Know Your Customers' "Jobs to Be Done" (September 2016)
• U.S. Census Bureau, Census Business Builder
• Roger L. Martin, Harvard Business Review, The Big Lie of Strategic Planning (January–February 2014)