I’ve made plenty of mistakes in my business career. Some mistakes were hard to avoid, but one of the biggest and most expensive ones could have been dodged by simply doing a little homework.
I fell victim to a trap that plenty of entrepreneurs fall into every day — I fell in love with a product idea.
Back in the late 2000s, my team and I came up with what we thought was a great idea for a product. Tons of businesses would need it and it was almost guaranteed to be a huge hit!
But, we neglected to do our market research. We ended up with a product that was searching for a market instead of figuring out who our ideal customer was and building a product specifically for them.
Here’s what I learned from this experience, and what you can do to avoid the mistakes that I made by conducting market research.
What is market research?
Market research is the process of gathering information about your potential customers. It helps you define your buyer personas, target market, and understand the viability of your business by answering questions like — Who are they? What are their buying and shopping habits? How many of them are there?
By exploring your ideal customer’s problems, desires, and current solutions, you can build your product, service, and broader strategy to better serve them.
Why do market research?
When you’re starting a business, getting to know your customers is one of the most important things you need to do. If you don’t understand your customer, you don’t know how you can help solve their problems. You don’t know what kind of marketing messages and advertising will work. You don’t know if your product or service is actually something your customers will spend money on.
Conducting market research provides answers to those unknown elements. It will greatly reduce risk as you start your business. It will help you understand your competitive position and the strengths and weaknesses of your competitors. And it will improve your marketing and sales process.
Is marketing research necessary for your business?
You may still be wondering, “does my business really need to conduct market research?” Answer the following questions to find out:
- Are you serving a primarily local market?
- Does the category of business you are starting already exist?
- Do you have a plan for differentiating yourself from your competition?
- Do people spend enough on your type of business to support both you and your competition?
- Do you already know your industry extremely well from prior work experience?
If you answer yes to at least three of these questions, then you can probably get away with less market research. Just know that if you are well-versed in your industry, business-type and competition, that things will always change. It’s wise to be actively researching or establish regular market research sessions to be sure you’re staying ahead of the curve.
How to do market research
Diving into conducting market research can seem daunting at first, but it doesn’t have to be as long as you know what you’re looking for. We’ll get into the types of market research you can leverage in just a bit, but for now start with this step-by-step process.
1. Start by identifying your target market
Imagine that someone walks into your business, or picks up the phone and calls you. It’s your perfect customer: someone who has the problem that you solve and is willing to spend money on your solution. Now imagine the details about this person. Who are they? Can you describe them?
Ideal customers and common traits
This “ideal customer” is your target market. Now, your business might have several target markets, but it will usually serve you best to keep your list of target markets to two or three.
Each of your target markets should share common traits. These might be demographic traits such as age group, gender groups, income levels, or locations. They might be what are called psychographic traits, which are groups of people that like the same things or have similar interests. Or, your target market might be a certain type of employee at another company, such as a CTO or head of marketing.
Most often, target markets are blends of demographic and psychographic groups. For example, you might be developing a new type of shoe targeted at female triathletes. Or you might be opening a hair salon targeting urban, hipster men.
Creating multiple target markets for your company is doing what’s called “market segmentation.” This sounds complex, but all you’re doing is dividing your target markets up into different groups that you hope to sell to. Each market segment might have different characteristics and might buy your product or service for different reasons.
You might end up coming up with different marketing campaigns for different market segments or even customizing your product or service for each segment.
2. Talk to your potential customers
Once you have identified your target market, or at least made a good guess at who your target market is, you need to take the most important step in this entire market research process. You need to get up from your desk, get out from behind your computer, and go outside. That’s right, you need to go and actually talk to people in your potential target markets. This is called primary market research.
Yes, you can do online surveys and other research, but that’s no substitute for actually talking to potential customers. You’ll gain more insight into your customers just by seeing their work or home environments, and get a better understanding of how they make buying decisions by actually talking with them than any survey will ever tell you.
Do this one thing, and you’ll be miles ahead of your competition. Why? Because most people skip this step. It’s intimidating to talk to strangers. What if they don’t want to buy what you plan on making?
So, don’t be like most entrepreneurs (including me!) and skip this critical step. It can mean the difference between success and failure. Getting this step done early will help you refine your business model and make a clear impact on your future success.
3. Find out if your market is big enough
Once you have identified your target market and validated it by talking to them in person, you need to do research to figure out if your target market is big enough to sustain your business. If there aren’t enough potential customers to sustain your business and your competitors, then you need to consider changing your product or service offering.
For example, if your target market only has a few thousand potential customers, you either need to sell to them frequently or sell at a fairly high price to create a sustainable, profitable business.
To figure out if your market is big enough, you need to do some research. Use the attributes you defined in the target market step and then figure out how many people meet your demographic, psychographic, or location criteria. I’ve got some links to resources that will help you figure this out at the end of this article.
If you are targeting an existing market with established competitors, you do what’s called industry research. For example, perhaps you are building a new company in the market for sports drinks or the market for cell phones. In cases like this, understanding how much people buy of the currently existing offerings will give you the best sense of potential market size.
In this case, you want to look for industry reports and read trade publications for your industry. These publications often summarize the market size.
4. Document your findings
The final (and easiest) step in the market research process is to document your findings. How formal your documentation is will really depend on how you plan on using it.
If you only need to share your findings with your business partners and others in your business, then you can probably communicate fairly informally. However, if you’re looking for investors for your business, you may need to write a more formal market analysis and do a market forecast.
Presenting your market research
The single piece of documentation that every business should create is a buyer persona. A persona is a description of a person that hits on all of the key aspects of your target market. And, just like you might have several target markets for your business, you might have several different buyer personas.
Creating a buyer persona converts your target marketing information from dry research into a living, breathing person. For LivePlan, we’ve created a persona named Garrett who drives much of our product development. Garrett embodies the attributes of our ideal customer.
When we think about creating a new marketing campaign or developing a new feature for our products, we ask, “Would Garrett like this?” You can read all about the process we used to create Garrett in this article.
What are the methods of market research?
Even with a market research process in place, it can be difficult to know exactly what market research methods you should leverage. There are plenty of ways together information, but they can be boiled down to two core types of market research. Primary research and secondary research.
What is primary research?
Primary research is the collection of first-hand information from the customers within your market. This cuts out the middleman and ensures that the results you are gathering are straight from your potential customers. As I mentioned before, this is the type of research you should leverage when validating your business idea, and it can be broken down into two result categories — exploratory and specific.
Exploratory primary research involves non-quantifiable customer feedback. You’re not looking to measure these results, but gauge interest or an emotional response through open-ended questions or review options. This type of information can provide greater context for specific data points and results.
Now that data is found by conducting specific primary research. This is where you ask very specific questions that can be quantified later on to help you determine the value of a product or service, the direction you need to take, or even the response of your customer base. It’s this type of research that can help you explore specific issues or opportunities your business has, and come back with numerical (purchases, revenue, estimated sales, etc.) insights to drive and support your decisions.
What is secondary research?
Secondary research covers every other piece of data you have available. This includes resources such as:
- Public sources: Typically free and highly-accessible information gathered through government sponsored research projects.
- Commercial sources: Research studies conducted by private organizations regarding the state of specific markets, industries or innovations.
- Internal sources: Data you have collected through everyday business operations. Everything from financial statements to Analytics reports can qualify.
What’s better primary or secondary research?
Neither primary nor secondary research is better than the other. They simply have different use cases. You want to leverage a healthy mix of primary and secondary research for an effective market analysis and should use them together to understand the full story of your place in the market.
When you’re first starting out, focus on conducting primary research to make sure you are getting the necessary information to validate your business. Compare those findings to secondary resources such as industry benchmarks, market reports, and any internal data you’ve already collected. From there, you’ll likely leverage secondary research more consistently, but it’s wise to run primary research initiatives from time to time, especially when approaching a strategic decision.
Types of market research
So what type of market research can you conduct? Here are a few useful options.
I mentioned this before but the best thing you can do is get out and talk to your potential or current customers, virtually or in-person. Be sure that you have a refined set of closed and open-ended questions ready and be sure to consider the interviewee’s tone, body language, and interest alongside their actual answers.
Similar to interviews, focus groups can provide direct feedback from your customer mix. Rather than receiving answers or reactions in a bubble, you get to see how customers may act when influenced by others in the market. You can simply ask questions, run product tests or have them watch a demo.
You may include questions about pricing when conducting interviews or focus groups, but you can also specifically develop research around pricing. This can be anything from A/B testing different pricing options on your website, offering discounts to exclusive segments, or running ad campaigns with different pricing positions. The goal is to understand what your customers are willing to pay and understand what they consider to be a fair price.
This type of research is about understanding if your target market knows about your brand and how much they happen to know. What do they associate with your brand? What competitors come to mind first?
It’s a great way to understand your current market penetration and who your competitors really are. You can integrate this type of questioning within your other tests, or run surveys attached to an incentive to get this kind of data.
As part of your initial validation process, you should try to understand current customer interest, ie. are customers willing to buy your product or service. You can simply ask questions and look for yes or no, but it may be wise to run a limited-time sale or pre-sale to actually line up initial revenue for your business. You can offer the chance to purchase during your interviews or focus groups, as well as run pre-orders through a simple landing page or by measuring engagement with a paid ad campaign.
This research will help you understand current customer loyalty and what it will take to get customers to come back. Again, you can do this research within focus groups or interviews, but you can also just test loyalty programs, limited-time promotions, customer service initiatives, and other ways to improve customer loyalty.
How do you find market research data?
Finding market research data really depends on the market you are targeting and the industry you are in. Here are a few of my favorite sources for market research:
- U.S. Census: If you’re opening a business in the U.S., the U.S. Census site is a goldmine of information. Check out the Census Business Builder to get not only population data but data on how much people spend in a given area on your type of business.
- Bureau of Labor Statistics: Another U.S.-centric resource, but a fantastic site for information on specific industries: hiring and expense trends as well as industry sizes. If your target market is other businesses, this is a good place to look for data.
- Consumer Expenditure Survey: If you want to know what people spend their money on, this is your source.
- MyBestSegments: This tool from Claritas is a great resource for finding out what demographic and psychographic groups live in a given zip code or where the highest concentration of a given segment lives. While the most detailed data is not free, you can get a lot of great insights from the free version.
- SBDCNet Business Snapshots: You’ll find a great collection of industry profiles that describe how industries are growing and changing, who their customers are, and what typical startup costs are. You should also check out their list of market research resources, sorted by industry.
- ZoomProspector: This tool can help you find the ideal location for your business, or find new locations similar to where you already are for expansion and growth.
Make market research a consistent part of your business
Effective market research can help you avoid costly mistakes early on in the life of your business. But it should remain a core practice that you regularly implement when approaching crucial business decisions, growth opportunities, or just reaffirm your understanding of the market.
Have you done primary research? Do you have a great market research resource? Tell me about it on Twitter @noahparsons.
Editor’s note: This article was originally published in 2015 and updated for 2021.