Understanding Your Market: The Key to Smart Marketing

Effective marketing starts with truly understanding your market. Before you can promote your products or services, you need to know who your customers are, what drives their decisions, and which segments of the market are most valuable to your business. This means defining your market, estimating its size, learning your customers’ demographics, and identifying patterns in how they make purchasing choices. Without this research, your marketing efforts are like working in the dark—you won’t know which strategies or tactics will actually work. To make this easier, we approach market analysis as a structured process. By following a clear, seven-step process, you can uncover actionable insights that guide your marketing decisions with confidence.

These steps are:

1. Define your relevant market.

2. Estimate how big your market is (market size).

3. Understand buyer descriptors.

4. Examine how your customer buys.

5. Segment your overall market into groups of customers with similar needs and buying behaviors.

6. Prioritize who you are going to target.

7. Assess the competition.

Set Clear Boundaries for Your Market

To focus your marketing and sales efforts, it’s important to define where the majority of your customers will come from—usually 90% or more. You may occasionally get customers outside these boundaries, but don’t let them distract you. By setting clear geographic or demographic limits, you can spend your time and resources on the customers who matter most.

For example, an entrepreneur in Oklahoma discovered he could take discarded Styrofoam, treat it with a fire retardant, and sell it as affordable home insulation. He defined his target market as building contractors with 20 or more employees in the major metro areas of Texas, Oklahoma, and Kansas who specialize in remodeling existing homes.

Similarly, a barber opening a new shop might focus on African American males aged 16 and older who live within three miles of the shop. By setting boundaries like these, you can focus on reaching the customers most likely to buy from you, making your marketing more effective and efficient.

Knowing the size of your market helps you make smarter decisions about marketing, sales, and growth. There isn’t one “perfect” way to calculate it—you need a method that works with the data you can find. In communities with limited data, you may need to gather information from published sources, surveys, or ask knowledgeable people like suppliers, competitors, or local officials. The key is to make your assumptions logical, conservative, and believable.

There are two main approaches to estimating market size: Build-Up and Break-Down.

Build-Up Approach:

Start with a single customer or unit and multiply up to reach the total market.

Example: Wedding Photography in Orlando, Florida

1. Average wedding cost in Central Florida: $22,000 (a)

2. Portion of wedding budget for photography: 15% (b)

3. Portion of photography budget spent on video: 20% (c)

4. Number of weddings per year in Central Florida: 8,600 (d)

Formula:
Market Size = a × b × c × d

Calculation:
$22,000 × 0.15 × 0.20 × 8,600 = $5,676,000

This means the total market for wedding photography videos in Central Florida is about $5.7 million per year.

Breakdown Approach:

Start with a total population and narrow it down to your relevant customer segment.

Example: Retail Fashion Store in Indianapolis

You sell professional women’s clothing for big and tall sizes, targeting women aged 20–35.

1. U.S. population: 320 million (a)

2. Percentage that is female: 51% (b)

3. Percentage of females who wear big and tall sizes: 35% (c)

4. Percentage of females aged 20–35: 23% (d)

5. Percentage of U.S. population in Indianapolis metro: 0.6% (e)

6. Average number of professional suits owned: 3 (f)

7. Average cost per suit: $165 (g)

Formula:
Market Size = a × b × c × d × e × f × g

Calculation:
320,000,000 × 0.51 × 0.35 × 0.23 × 0.006 × 3 × 165 = $39,018,672

This means the total potential market for your store in Indianapolis is about $39 million per year.

Tips for Entrepreneurs:

• Always base your assumptions on realistic numbers.

• Use multiple sources whenever possible to check your estimates.

• Decide whether a build-up or break-down method makes more sense for your business.

• Even rough estimates are better than guessing—it helps guide pricing, marketing, and growth decisions.

Understanding Your Customers: Who They Are and Who Makes the Buying Decisions

Before you launch or grow your business, it’s essential to know the market you’re serving. This means understanding two key things:

1. Who Your Customers Are

You need to define the characteristics of the people or businesses that make up your relevant market. Focus on traits that relate to what you are selling. Some examples to consider include:

• Gender

• Age groups

• Income levels

• Marital status, including single heads of households

• Race or ethnicity

• Education level

• Employment status (full-time, part-time, unemployed, students)

• Vehicle ownership

• Homeownership versus renting

• Use of public assistance

• Current users of your product/service versus potential new users

• Social media use

Knowing these details helps you tailor your product, service, marketing messages, and pricing to the people who are most likely to buy.

2. Who Makes the Buying Decision

It’s important to understand that the person who actually uses your product may not be the one deciding to buy it. Some examples:

• A parent might decide where their child buys clothes or gets a haircut, even though the child is the end user.

• In households, one person may dominate certain purchase decisions while the other handles different types.

• When selling to businesses, the decision-maker might be a business owner, director of operations, office manager, purchasing manager, or someone else entirely.

Talking directly to potential customers is the best way to understand who influences the purchase and what factors matter most to them. This insight helps you design offers, marketing, and sales approaches that reach the right decision-makers.

Understanding How Your Customers Make Buying Decisions

Every product or service has a unique path that customers follow before making a purchase. People shop differently depending on what you sell—buying a dress is not the same as buying alcohol, a cooking stove, or a cell phone. Some decisions happen in seconds, while others take months or even years.

As an entrepreneur, it’s important to step into your customer’s shoes and understand how they make buying decisions. A simple model to guide this is:

1. Need Recognition – The customer realizes they have a need or problem.

2. Information Search – They look for options or solutions.

3. Alternative Evaluation – They compare different products, services, or providers.

4. Purchase Decision-making – They decide whether, what, and from whom to buy.

5. Post-purchase Evaluation – They assess satisfaction, which influences repeat purchases.

Not every step applies to every purchase. Sometimes customers skip the information search or there may be only one available option, leaving the decision to buy or not.

The key is to ask yourself:

• How do my customers realize they have a need for my product or service?

• Where do they look for information about options?

• How many alternatives do they consider?

• What factors influence which option they choose?

• What makes them satisfied with their purchase and likely to come back?

• How long does it take them to make the decision?

By mapping out the decision process for your specific product or service, you can better design your marketing, sales approach, and customer experience to meet customers where they are and guide them toward choosing your business.

Understanding Market Segments: How to Break Your Customers Into Groups

Every market is made up of many different types of customers, and not all customers behave the same way. To better serve your clients and make smarter marketing and sales decisions, it’s important to break your customers into groups, or what we call market segments.

A market segment is a group of customers who share similar needs or buying behaviors for the product or service you are selling. For example, older married men may shop differently than younger single women when buying shoes, choosing a bank, or purchasing a laptop.

The best way to segment your market depends on what you are selling, where you are selling it, the resources you have, and any constraints you face as a business owner. For some products, segmenting by income levels might be most useful. For others, age, gender, or ethnicity may matter more. Often, the most effective approach uses more than one characteristic to define your market segments.

By understanding and targeting specific market segments, you can tailor your marketing, pricing, and product offerings to meet the needs of each group, instead of trying to serve everyone the same way.

Click here to view some examples of market segments for:

‍ ‍ a) companies making and selling bread products, and

‍ ‍ b) companies selling financial services, both in South Africa

Focusing on the Right Customers: Choosing Your Target Market

If you are running a business with limited resources, you cannot serve every customer or every market segment. Each group of customers has its own needs, preferences, and expectations, which affect what you sell, how you reach them, the messages you use, and even the prices you can charge.

The key is to focus on the most attractive segments for your business. To do this, evaluate each segment using four simple questions:

1. Size: How many potential customers in this segment have the willingness and ability to buy your product or service? Is the segment big enough to be worth your effort?

2. Competition: How many competitors are already serving this segment, and how strong are they? Is it a crowded market?

3. Advantage: In which segment do you have the strongest advantage compared to competitors? Where can you stand out?

4. Ease of Marketing: How much time, money, and effort will it take to reach and engage this segment effectively?

Once you answer these questions, you can identify one or two segments to prioritize. These become your target market—the customers you will focus most of your time, energy, and marketing resources on for the next year or two. By concentrating on the right segments, you increase your chances of success while using your resources efficiently.

Evaluating Your Competition: Know Who You’re Up Against

Once you know which market segments you will focus on, the next step is to assess your competition. A common mistake is assuming there is no competition because your product or service is different or better—but there is always competition. Even if no other business offers exactly what you do, you are still competing for your customers’ attention and their money.

A practical way to evaluate competition is to create a simple table listing both direct competitors (businesses offering similar products or services) and indirect competitors (businesses offering alternatives that satisfy the same customer need). For each competitor, note:

• Key strengths: What they do really well.

• Key weaknesses: Where they fall short or could improve.

You can gather this information by observing competitors, reviewing their marketing, and asking your customers what they think. This process helps you see opportunities to stand out and understand how to position your business effectively in the market.