Doing a market analysis might sound overly daunting and formal, but don’t be dissuaded. It’s actually really important, and it’s not all that complex.
A market analysis is the process of learning the following:
- Who are my potential customers?
- What are their buying and shopping habits?
- How many of them are there?
- How much will they pay?
- Who is my competition?
- What have their challenges and successes been?
The market analysis is one of the most important parts of any startup strategy. It can actually help reduce risk because if you really understand your potential customers and market conditions, you’ll have a better chance of developing a viable product or service.
It should also help you get clear on what exactly makes you different from your competition, which can make or break your chances of standing out in a crowded landscape.
However, don’t fall into the trap of simply saying that your solution is for everyone. Ultimately, setting some parameters around your target market will help you focus your resources.
Ultimately, your market analysis should enable you to:
- Avoid putting a lot of resources and time into creating a product or service before you’ve determined that your solution is needed.
- Determine that the need for your product or service is big enough that people will pay for it.
Do you even need to do a market analysis?
Bear in mind that all new businesses are different, and strategies for structuring a business plan can be different depending on the goal of the plan or the intended audience. If your business is quite small and you know your customers inside and out, a deep, formal market analysis might not be the best use of your time.
For instance, if you are writing an internal business plan, meaning that you’re not going to use it to try to secure a loan or other funding, you may not have a specific reason to spend time reviewing industry data to corroborate your financial forecast. Be sure to assess the value of this information for your business; determine why you’re doing an analysis in the first place so that you don’t waste time and energy on an unnecessary aspect of your plan.
On the other hand, if you’re not absolutely clear on what makes your business different from the competition, or if you have made (but not tested) some assumptions about who will be interested in your product or service, you might want to consider at least an abbreviated market analysis. You’ll want to make sure that the business you’re building is solving a real problem, and that consumers both desire your solution and are willing to pay for it. A market analysis is a good way to get clarity.
Finally, if you are seeking funding, a 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.
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 formal business plan or Lean 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.
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. But most importantly, thoroughly understanding your market means that you’ll be able to build the best solution possible for your customers’ problem.
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.
1. Industry description and outlook
This is where you’ll outline 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 prepared with the data to back up your business idea.
2. Target market
In the industry section of your market analysis, you focused on the general scope. In this section, you’ve got to be specific. It’s important to establish a clear understanding 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.
For example, if you’re a shoe company, you aren’t targeting “everyone” just because everyone has feet. You’re most likely targeting a specific market segment such as “style-conscious men” or “runners.” This will make it much easier for you to target your marketing and sales efforts and attract the kinds of customers that are most likely to buy from you.
This is a good thing; by narrowing in, 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. How much do your potential customers spend annually on the types of products or services you plan to offer? How big is the potential market for your business?
3. Competitive analysis
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 that are underserved? What can you offer that similar businesses aren’t offering?
The competitive analysis should contain the following components:
- Direct competitors: What other companies are offering similar products and services? What companies are your potential customers currently buying from instead of you?
- Indirect competitors: If your company is creating a new product category, perhaps you aren’t competing with similar companies, but instead competing with alternate solutions. For example, Henry Ford wasn’t competing so much with other car companies, but was instead competing with other forms of transportation such as horses and walking. A more modern example might be a to-do list application, where the indirect competition would include notebooks and hand-written lists.
- 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.
- 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? This is where you examine your weaknesses. Be honest, with investors and yourself. Being unrealistic is not going to make you look good.
- The 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?
At this point, your projections are educated guesses, so don’t worry about absolute accuracy. However, it pays to be thoughtful and avoid hockey-stick forecasting.
- 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. Don’t make the mistake of saying that you’ll easily get 1 percent of a huge market, and that this is enough to grow a successful business. Instead, do a bottom-up projection where you explain how your marketing and sales efforts will enable you to get a certain percentage of the market.
- 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 costs and the sales price. Again, be realistic yet optimistic. Optimistic projections not only serve as a guide—they can also 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.
- USA.gov: The go-to place for national industry information, as well as links to 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.
- The 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.
Ultimately, conducting a market analysis will help you uncover any blind spots. It should help you do some initial tests that will verify that your solution is actually addressing a real problem—and many startups don’t last simply because founders failed to figure out if anyone was interested enough in their solution to pay for it.
Whether you do a comprehensive analysis, or just spend a few hours on a leaner version, what you learn can be the difference between thriving and struggling.