Target Market Selection
Once the market segments have been identified and analysed, the most profitable and attractive segment or segments need to be targeted by the company. When assessing the attractiveness of a market segment, companies need to consider similar factors to those involved in market analysis. Firstly, they need to look at the size of the segment; how fast it is growing; the level of competition amongst existing firms; and the existing brand loyalty in the segment. From this, they need to look at the potential level of market share they could expect to obtain; whether they will obtain sufficient market share to break even; the total sales potential of the segment; and the profits they could expect to make in the segment.
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In order to determine this, companies will need to use detailed market research and analysis to obtain the relevant information. This will require detailed surveys of buyer intentions, marketing tests, and statistical analysis of existing demand and supply. In addition, it is wise to apply micro environmental and macro environmental models to the market, such as the PESTEL framework discussed in the market analysis section. Companies also need to consider the fact that larger and more profitable segments invariably attract more competition from larger firms. As such, the company itself may see better results from targeting smaller segments where there is less competition. Alternatively, the company may be able to use a specific competitive or technological advantage to effectively create a new segment which it can exploit all for itself. This is the strategy pursued by many pharmaceutical firms when they attempt to produce and patent new drugs.
In addition to the profitability and attractiveness of the segment, the company should also look to determine how suitable the market segments are to the firm. This involves considering how the market fits with the firm’s objectives, resources and capabilities. For example, if the firm aims to be number one in every market segment it serves, it may not want to enter a large segment which is already strongly contested. In addition, the firm needs to consider whether it can offer the customers in the segment superior value and whether the firm’s image fits with the segment. The firm should also consider whether its resources are sufficient to compete in the segment, and whether the firm will be able to access the necessary distribution channels to effectively serve the segment. Finding the segment which offers the highest profitability, attractiveness and suitability is critical to maximising shareholder value.