In a recent article we discussed the importance of the role that an effective executive summary plays in a business plan. This article will address another critical component of any business plan -- the market analysis.
Conducting a market analysis is an essential process for anyone looking to start a successful business.
The market analysis portion of your business plan should communicate your profound knowledge of your particular market, and provide an explanation of why that market is enticing from a financial perspective.
What is a Market Analysis?
A market analysis consists of the combination of quantitative and qualitative assessments of a given market.
A thorough market analysis will convey insights derived from investigating the size of the market in both volume and value, the customer segments that comprise the market, the buying habits that these consumers exhibit, competitors, and any barriers to entry. We’ll go into detail on barriers to entry later on in this article.
The purpose of the market analysis section of a business plan is to prove to stakeholders such as potential investors that you know your market thoroughly, and that there is viable opportunity for a sustainable business venture.
How to Perform a Market Analysis
Step #1: Determine Market Size
The first step in performing a market analysis is to assess the size of the market.
While doing so, your approach will depend on the scale of your potential business. For example, if you’re looking to open a local coffee shop then you should take a local approach to assessing your market.
Contrastly, if your business plan is proposing a nationwide chain of coffee shops, then you need to assess your market at a national scale.
While determining market size, you must look at both volume and value. Volume refers to the number of potential customers, and value refers to the value of the market itself.
Determining market value can be a challenge. One approach is to see if the figure is publicly available, perhaps shared by a government entity. Other approaches include buying a market research report, or simply estimating the figure yourself.
Step #2: Conduct Market Segmentation
If your proposed business will target certain market segments, then you should segment the market to understand it further.
A best practice to start market segmentation is to examine the market from a demographic perspective. This provides surface level insights that can help you determine where next to drill into.
You can even use these various methods of segmentation in tandem!
Step #3: Define Your Target Market
A target market is comprised of the customers that you will focus on within the market.
For example, if you were thinking about opening a coffee shop, you could decide to either be a generalist -- selling standard, affordable coffee drinks -- or you could choose to focus on high-end, expensive gourmet coffee instead.
Each of these examples would appeal to different market segments, and the approach to connecting with the relevant target market would be different despite having a similar core product (coffee).
Defining your target market is most important when your market has obvious segments that have differing drivers of demand.
Step #4: Define The Market Need
Now we are moving on to the more qualitative assessment of the market by defining the market need.
While defining the market need, you should go into detail on the drivers of demand for your product. Why will people buy your product? What problem is it solving? How is it different from what is already in market? Why should this market purchase from your company specifically?
It helps here to be exhaustive about researching existing competition in the market and their relevant strengths and weaknesses. This will inform your market positioning, which should be thoroughly addressed later on in your business plan.
The market need can often be derived from looking at the efforts of competitors, and drilling down into the areas that they are not focusing on, or areas that you can provide better value than what they offer.
Step #5: Outline Barriers to Entry
In this section of your market analysis, you should answer two questions that investors always ask:
- What factors prevent someone from opening a competing shop in proximity to yours and taking 50 percent of your business?
- What factors do you think will make you successful while entering this market?
Simply put, barriers to entry protect your business from new competition.
Examples of barriers to entry include:
- Brand -- the costs required to obtain a certain level of recognition
- Access to resources -- such as suppliers and third-party vendors
- Access to distribution channels
By following the steps outlined above, you’ll be able to put together a comprehensive market analysis for your business plan.
Doing so will give you the familiarity and knowledge necessary for deciding whether or not to move forward with launching your business plan.
To learn about another vital component of any business plan, an effective executive summary, be sure to read this recent article.