Understanding your target market and the behavior patterns of your potential consumers is one of the most important and underrated aspects of planning and running a business. In fact, it is one of the core marketing fundamentals that should be considered for a business.
Understanding your consumer makes it easier and cheaper to reach them in large volume with targeted advertising and outreach. It also makes it simpler to create a product that better fits their needs, and is used by them in a manner that is convenient to them (important for product adoption and customer retention). It also helps you to better understand your market size which enables you to make more accurate financial estimates because you will have a deeper understanding of your total addressable market.
The addressable market is the part of the total market which you can target with your product. It is important to understand the difference between the entire market and the addressable market. If, for example, you are opening a fine dining restaurant, the overall market may be all the people in your city, but your addressable market is much narrower. It is only those people who like to eat certain kind of food and are in a demographic which can also afford to eat out instead of dine at home. Your addressable market is probably more constrained by geography as well as people will not travel too often out of their way for food. They may do it rarely, but not too often. So understanding your addressable market helps you make less mistakes when calculating the size of your market.
For example, the United States shoe market is in the billions of dollars per year. But if you made a shoe like a slipper for men, then your addressable market is some portion of all men.
At that point it might be tempting to say that the addressable market is all men. But that is not true. Many men hate wearing slippers and it is very difficult to force kids to wear slippers. Older men tend to wear slippers at home more commonly, but they shop least often and many elderly people live in poverty and can get items like slippers for free. The deeper you understand who behaves and spends in what particular way, the better you will be able to estimate who you can sell to. Additionally, how will you possibly market to all men? They are in every walk of life and you cannot possibly reach there with your advertising. If you are not able to effectively pick where to advertise, your business might not make it.
A common point of misunderstanding is thinking that targeting a certain demographic limits the total opportunity of the business. There are two reasons why this is a misleading line of thought:
1) Choosing a target market is meant to help you focus your advertising efforts and optimize your product to make that certain group very pleased with it. It still means you will take anyone as a customer if they want to be your customer. You are not rejecting customers. You are helping your business get the most out of a certain demographic of people.
2) If you start small with sharper focus on a certain demographic, it does not mean you cannot grow bigger. When your business is ready, you can add more demographics to target as you expand.
Once you identify who your target consumer is, you need to begin marketing to them and reaching them. We have an article on this topic too. The article is called marketing strategies for different business types.