Know Your Market: Develop a Market Analysis
Thinking about entering a new market? Introduce new products or services? Starting a new business? Your best first step is to conduct a market analysis to ensure that a viable market exists. Without customers, even the best ideas have no chance of success.
The process involves asking – and answering – a number of questions. The more thorough your queries, the better your chances of picking 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’re targeting:
- What is the market size? 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, psychographic and behavioral attributes comprise 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 increasing?
- Are other competitors currently serving this market? Do they appear to be successful? How do they market to customers and how do they service those customers? Are competitors entering or leaving the market?
- 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 custom or specialized item?
Focused Market Analysis
At this point, dig a little deeper. The goal is to understand the characteristics and purchasing capabilities of 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, anyone under the age of 16 and over the age of 60 is less likely to be a customer. In addition, women make up a smaller percentage of total motorcycle buyers. Take these subgroups into consideration when estimating numbers.
- Total households. This number can be important, depending on your business. For example, if you sell heating and cooling systems, knowing the number of households is more critical than a full population tally.
- Median income. Spending power is important. Does the target area have sufficient income to purchase enough of your products and services for you to make a profit?
- Income by demographics. You can also determine income levels by age group, ethnic group and gender. If you sell services to local businesses, try to determine the amount they currently spend on similar services.
- Psychographic characteristics. The “why” about people buying your product or service can be a huge differentiator. Consider, for example, young upwardly mobile professionals, or “yuppies.” They have a track record of high-end purchasing because status motivates them.
If you plan to sell products online, the landscape is incredibly competitive. Any business can establish an online store and ship products around the world. Never assume that you can capture a meaningful market share. For example, the bicycle industry is a mega-billion dollar sector. If you live in an area with 50,000 people and only one bike shop, you may be able to tap into that market more successfully than you would an online clientele. It is much easier to serve a market you can define and quantify.
Surveys can help you evaluate whether a new product or service will gain acceptance in a particular market. Surveys can yield valuable data, but only if properly constructed. Many companies provide professional survey services – well worth considering if you want hard data.
Arguably the most valuable survey models 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 your queries. Don't ask leading questions. Be clear and to the point. Allow respondents to answer honestly. And most importantly, avoid personal questions.
Use a well-constructed, carefully administered survey as a final piece of your market analysis puzzle. If you've done your homework you'll know exactly what questions to ask and what potential customers to target.
Market Potential Analysis
A Market Potential Analysis, allows you to forecast sales for your organization. When you acquire this information, you then can develop projections. Ask these questions:
- What is your market territory?
- How many total buyers are there?
- How many competitors share the total group of buyers?
- How many buyers already purchase this product or service?
- What do they spend annually?
- How many new buyers do you expect in the next three years?
- How fast will their demand grow for this product?
What percent are likely to become new buyers in the next year? Two years? Three years?