Know Your Market: Develop a Market Analysis¹
Thinking about entering a new market? Considering whether to introduce new products or services? Thinking about starting a new business? Your first step is to conduct a market analysis to make sure there is a viable market for what you hope to offer. Without ready, willing, and able customers, even the best ideas and best-run businesses have no chance of success.
The process involves asking, and more importantly, answering a number of questions. The more thoroughly you answer the following questions the better you'll understand the market and the better the chances you can pick the right market for your products and services.
We'll start by evaluating the market at a relatively high level.
High-Level Market Analysis
Answer these questions about the market (or industry) you may target:
- What is the size of the market? Is it growing, stable, or in decline?
- Is my industry growing, stable, or in decline?
- What segment of the market do I hope to reach? What demographic and behavioral attributes make up the market segment I will target?
- What avenues exist for reaching this market? Mass media? Other types of marketing? Can I create partnerships or affiliate relationships?
- Is demand for my product or service rising?
- Are competitors currently serving this market? Do they appear to be successful? How do they market to customers, and how do they service those customers?
- Can I differentiate myself from the competition in a meaningful way? Can I differentiate cost-effectively?
- What do customers expect to pay for my product or service? Is it considered a commodity or a somewhat custom or specialized item?
Focused Market Analysis
Then dig a little deeper. Work hard to understand the characteristics (and purchasing capabilities) of the potential customers within your market. Quick Internet searches can yield a tremendous amount of data. For the market you hope to serve, determine:
- Potential customers. Roughly speaking this is the number of people in the market segment you plan to target. For example, if you sell motorcycles, in general terms anyone under the age of 16 and over the age of 60 or so is unlikely to be a customer; in addition, women make up a small percentage of total motorcycle buyers. Knowing the total population for the market is not particularly helpful if your product or service does not serve a need for the total population. (Most products and services do not.)
- Total households. Sometimes this number is important, depending on your business. For example, if you sell heating and cooling systems, knowing the number of households is much more important than simply knowing the total population in the area.
- Median income. Spending power is important; does the area have sufficient spending power to purchase enough of your products and services for you to make a profit? Some areas are more affluent than others; don't assume every city or locality is the same in terms of spending power.
- Income by demographics. You can also determine income levels by age group, by ethnic group, and sometimes by gender. (Again, potential spending power is an important number.) If you will sell services to local businesses, try to determine the amount they currently spend on similar services.
The key is to understand the market in general terms, and then to dig deeper to understand whether there are specific segments within that market, (the segments you will target) that will become customers and help support your initiative.
If you plan to sell products online, the landscape is incredibly competitive. Any business can establish an online product and ship products around the world; don't assume that just because, for example, "The bicycle industry is a $61 billion business worldwide," that you can capture a meaningful percentage of that market. However, if you live in an area with 50,000 people and only one bike shop, you may be able to enter that market and attract a major portion of bicycle customers in that area. It is much easier to serve a market that you can define and quantify.
You can use surveys to evaluate whether a new product or service will gain acceptance in a particular market. Surveys can yield valuable data, but only if they are constructed properly. Many companies provide survey services; consider enlisting the help of professionals if you decide to perform market analysis through surveys.
There are a number of survey methods, but arguably the most valuable involve face-to-face or telephone interviews. Taking surveys in person allows you to ask follow-up questions, show examples or samples, and check out the respondents' body language and nonverbal cues. The key is to survey companies or individuals who are within your target market; after all, your goal is to know whether the "right" customers are interested in your product or service.
Give careful thought to the questions you will ask. Don't ask leading questions. Be clear and to the point. Allow respondents to answer honestly. Avoid personal questions.
Surveys are only useful if constructed and implemented properly; otherwise the data you gather may be misleading at best and completely inaccurate at worst. Use a survey as a final piece of your market analysis puzzle. And if you've done your homework during other stages of market analysis, you'll know exactly what questions to ask and what potential customers to target.