What it means
Defining a target market means describing customers by characteristics that predict buying behaviour: industry and company size for business customers, or age, income, location and circumstance for consumers. The test of a good definition is whether it changes what the business actually does rather than simply sounding plausible in a plan.
The commercial case is straightforward. Marketing spend has a fixed budget, so every dollar reaching an unsuitable audience is a dollar not reaching a likely buyer, and a well defined target market raises the response rate on the same spend.
It also shapes the product itself. A payroll system built for firms with 5 to 50 staff looks nothing like one built for firms with 5,000, and trying to serve both usually produces something that satisfies neither.
Analysts often size the target market in layers: the total market for the category, the portion the business can realistically address with its current products and geography, and the share it expects to win. Those layers keep revenue forecasts anchored to something countable rather than to optimism.
The nuance is that a target market is a decision, not a permanent fact, and it should be revisited as the business and its customers change. Narrowing it deliberately is often the fastest route to growth, because a focused offer wins a much higher share of a smaller pool.
In practice
Real-world examples.
Example
A meal delivery service starts by targeting households with young children in three city suburbs rather than a whole region. The narrow definition lets it use local advertising and a single delivery route, cutting the cost of acquiring each customer.
Example
A commercial cleaning firm decides its target market is medical and dental practices rather than offices generally. It invests in infection control training, which becomes the reason it wins work at prices ordinary cleaners cannot match.
Example
A business publisher discovers through analysis that 70% of its subscription revenue comes from finance teams in manufacturing companies. It redirects its editorial and events programme towards that group and lets a general business title lapse.
Think of it
“Your target market is the specific group of people you're trying to reach and serve.
Formula
Calculation
Target market value = number of potential customers x share that fits the definition x average annual spend per customer
A company selling compliance software to accountancy practices identifies 40,000 practices in its country. Its product suits firms with between 10 and 50 staff, which is 12% of that population, so the number of practices in the target market = 40,000 x 0.12 = 4,800.
Each of those practices would typically spend $6,000 a year on this kind of software. Target market value = 4,800 x $6,000 = $28,800,000 a year.
If the business aims for a 5% share within three years, that implies 4,800 x 0.05 = 240 customers and 240 x $6,000 = $1,440,000 of annual recurring revenue, which is a far more useful planning figure than a vague reference to a large market.Case study
Seen in the real world.
The following is an illustrative and fictional example. Saltmere Software, an invented company selling stock management tools, described its target market as small and medium businesses. In practice, that meant selling to anyone who enquired: a bakery one week, a car parts distributor the next, an online clothing brand the week after.
Every sale brought a feature request, and this fictional development team spent two years building for three completely different needs. The cost of acquiring a customer stayed high because the marketing message had to be generic, and the churn rate stayed high because nobody's requirements were fully met.
A new commercial director redefined the target market as independent food and drink wholesalers with 10 to 100 staff, a group of roughly 3,000 businesses. Saltmere rebuilt its messaging, its onboarding and its integrations around that single group. Within eighteen months, cost per acquisition had halved and annual churn had fallen from 24% to 9%, on a smaller addressable market than before.
Watch out
Common mistakes.
- Defining the target market so broadly that it excludes nobody, which makes it useless for deciding where to spend the marketing budget.
- Describing customers by characteristics that do not predict buying, such as a vague personality sketch rather than industry, size or circumstance.
- Confusing the target market with the total market and forecasting revenue from a number the business could never realistically address.
Questions
People also ask.
Is a target market the same as a customer persona?
No, the target market is the group as a whole, while a persona is a detailed portrait of one typical buyer within it.
Can a business have more than one target market?
Yes, but each one needs its own message, pricing and route to market, so most smaller businesses are better served by focusing on one.
How do you know the definition is too narrow?
When the realistic addressable revenue cannot support the business at the share you could plausibly win, even with strong execution.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%