The market analysis is one of the most important parts of any startup strategy. Do it right, and you will have a clear idea of the path down which you are headed. A good market analysis will enable you to lure investors, sidestep pitfalls, and most importantly, attract customers.
Bear in mind that all businesses starting out are different, and they may be creating business plans and strategies for different reasons or audiences. If your business is quite small and you know your customers inside and out, this may not be the best use of your time. If this is an internal plan, and there isn’t a need for industry data to corroborate your forecast, a market analysis may not be necessary. Be sure to assess the value of this information for your business, and act accordingly.
If you are seeking funding, market analysis is going to be key data to convince your audience that your business idea has the facts and hard numbers to back it up. With that said, let’s explore the details of writing a market analysis.
What is a market analysis?
Market analysis is anything but empty lingo. It’s really exactly what it sounds like: determining the characteristics unique to your particular market and analyzing this information, which will help you make decisions for your business. By conducting a market analysis, you will be able to gather valuable data that will help you get to know your customers, determine appropriate pricing, and figure out your competitors’ vulnerabilities.
Market analysis and your business plan
It’s smart to write a business plan, especially if you are beginning a new business venture. Even if you’re a sole proprietor or don’t intend to borrow any money to get your business off the ground, it’s important to have a clear plan in place. The market analysis isn’t just one part of a successful business plan—it’s one of the best reasons to write one.
If you do need banks to lend you money or investors to jump on board, a market analysis section is required, as savvy lenders or investors will need to know that the business you’re pitching has viable market appeal. Either way, a solid business plan complete with market analysis will be invaluable. You’ll need to identify your potential customers and attract investors, and it will help you to be clear about what you want to do with your business, both now and in the future. The time you spend doing the research and putting it all together will come back to you many times over in dollars earned and heartbreaks avoided. You’ll look like a professional, and you’ll outshine the competitors that didn’t write one.
A market analysis can be a measuring stick you use over time to see how far you’ve come, and it allows you to make projections based on data rather than guesswork. Because you’ll know the size of the mountain you’re about to climb, you’ll be able to pace yourself and prevent problems in the future.
What to include in your market analysis
Your market analysis should include an overview of your industry, a look at your target market, an analysis of your competition, your own projections for your business, and any regulations you’ll need to comply with.
Industry description and outlook
This is where you’ll discuss the current state of your industry overall and where it’s headed. Relevant industry metrics like size, trends, life cycle, and projected growth should all be included here. This will let banks or investors see that you know what you’re doing, and have done your homework and come come prepared with the data to back up your business idea.
In the previous section of your market analysis, you were able to look at the general scope. In this section, you’ve got to be specific. It’s important to establish a clear idea of your target market early on. A lot of new entrepreneurs make the rookie mistake of thinking that everyone is their potential market. To put it simply, they’re not.
This is a good thing—by narrowing in on your real customers, you’ll be able to direct your marketing dollars efficiently while attracting loyal customers who will spread the word about your business. The target market section of your business plan should include the following:
- User persona and characteristics: You’ll want to include demographics such as age, income, and location here. You’ll also need to dial into your customers’ psychographics as well. You should know what their interests and buying habits are, as well as be able to explain why you’re in the best position to meet their needs.
- Market size: This is where you want to get real, both with the potential readers of your business plan and with yourself. Do your research and find out who and where your competitors are, and how much your customers spend annually on your product or service. How big is the potential market for your business?
This is the section in which you get to dissect your competitors, which is important for a couple of reasons. Obviously, it’s a good idea to know what you’re up against, but it also lets you spot the competition’s weaknesses. Are there customers out there being underserved? What can you offer that similar businesses aren’t offering? The competitive analysis should contain the following components:
- Market: How big is the market for goods and services similar to what you plan on offering? What’s the growth rate? Include the general outlook and trends for this market. Who are your main competitors? Are there any secondary competitors who could impact your business?
- Competitor strengths and weaknesses: What is your competition good at? Where do they fall behind? Get imaginative to spot opportunities to excel where others are falling short.
- The importance of your target market to competitors: Ideally, you’re going after customers whose needs aren’t being met by your competitors.
- Barriers to entry: What are the potential pitfalls of entering your particular market? What’s the cost of entry—is it prohibitively high, or can anyone enter your market? This is where you examine your weaknesses. Be honest, with investors and yourself. Being unrealistic is not going to make you look good.
- Window of opportunity: Does your entry into the market rely on time-sensitive technology? Do you need to get in early to take advantage of an emerging market?
- Market share: When you know how much money your future customers spend, you’ll know how much of the market you have a chance to grab. Be practical, but don’t sell yourself short. Make sure you are able to explain how you came up with your numbers.
- Pricing and gross margin: This is where you’ll lay out your pricing structure and discuss any discounts you plan to offer. Your gross margin is the difference between your cost and the sales price. Again, be realistic yet optimistic. Optimistic projections not only serve as a guide, they can be a motivator.
Are there any specific governmental regulations or restrictions on your market? If so, you’ll need to bring them up here and discuss how you’re going to comply with them. You will also need to address the cost of compliance. Addressing these issues is essential if you are seeking investment or money from a lender, and everything has to be legally squared away and above board.
How to acquire the data for your market analysis
Market analyses vary from industry to industry and company to company. The hard truth is that some of the information you wish to include may not be publicly available. A little estimation is okay, but the bulk of your numbers need to be based on facts. Here are some good places to start your market research:
- Your current customers: If your business is already up and running, your current customers are an invaluable resource. They are your existing market. You can use online surveys or social media to gather feedback about buying habits, needs, and other psychographic information.
- U.S. Census Bureau: Here’s where you’ll find demographics you can use to figure out your market share. There is plenty of other information you can use in your market analysis here as well.
- Business.gov: The go-to place for national industry information, as well as links for state and local resources.
- U.S. Small Business Administration: The SBA offers industry guides, development programs, and local resources, as well as loan guarantees when the time comes.
- Bureau of Labor Statistics: The BLS is the place to find out where your industry has been and where it is headed.
- Commerce.gov: The U.S. Department of Commerce has a lot of good general information that you may be able to use, depending on your industry.
- Internet: You can do internet searches to find information about any state or local regulations or licenses you may need for your industry. As always, there’s a lot of stuff out there, so make sure you’re depending on reliable sources. For your market analysis, Wikipedia won’t cut it. On the other hand, you can find plenty of useful information, including sample business plans right here on Bplans, where you can also obtain free industry reports as well.