When it comes to defining your target market in the business plan you should have the following two questions in mind:
- Who is benefitting from the problem that my product/service solves?
- Am I demonstrating that a significant market opportunity exists for this product/service?
Many entrepreneurs tend to focus on one of these questions but do not adequately address both. You don’t want your target market too narrowly defined, where the market size will be unattractive to an investor.
However, you do not want to define your market too broadly as investors will assume you either: don’t understand the marketplace, or you do not have a clear focus on who your most attractive market segment is.
In order to solve this problem, you will want to start by defining your addressable market and follow this up with your target market.
The addressable market is the group of people (or businesses) whom might be interested in what you are selling. It is the broadest umbrella of potential customers that your target or service may be suited for.
The target market are those people (or businesses) within your addressable market whom are most likely to buy from you. Typically, they are the lowest hanging fruits and therefore the cheapest to acquire.
By starting with the addressable market, you are giving prospective investors a good understanding of the overall potential market opportunity should the business take off.
However, you do not scare them away by coming off as thinking too ‘pie in the sky.’
By following up the addressable market with your target market you are showing that you have a clear understanding of the various market segments and which are most attractive to you.
It shows that you have a clear plan for how you will take your product/service to market and how you will allocate your resources effectively to targeting this group of consumers/businesses.
When selecting your target market(s), you will want to target the lowest hanging fruits – those consumer/business segments that are most likely and able to buy.