A market analysis is an essential step in developing a business plan. It helps you understand the current state of your industry, what factors are important to success, and how you will differentiate yourself from your competitors.
A market analysis is a tool that helps to determine the size of a potential market, and how many people are currently in it. It can also help you to see if there are any barriers to entry for your business.
You know your market if you’re like most company owners—otherwise, you wouldn’t be in business. If you’re creating a strategy for internal use, you don’t need to prove a market. Still, taking a new look at your market once a year is a smart idea, and this article may assist.
And, whether you’re a first-time entrepreneur just starting out or a seasoned company owner putting up a business plan to get financing, your strategy should contain a thorough market study. It should comprehend, explain, and demonstrate the market’s potential.
As you work on this section of your strategy, keep in mind the words of Marc Andreessen, a renowned entrepreneur and venture capitalist: “The only thing that counts is getting to product/market fit.”
And you’ll need to be familiar with the market to do so.
Understand your target market
Sifting, sorting, digesting, determining what’s essential, and placing it in perspective are all part of today’s market information. If needles and haystacks were the norm in the past, now it’s all about locating the correct needle among a mountain of needles.
According to one study of small company owners, social media is significant to fewer than a third of them; yet, another survey shows that social media is essential to more than two-thirds of them. The differences include in the survey’s design, who was contacted, and how they were reached.
Is it true that eggs are harmful for you? There’s evidence to back it up. Is it true that eggs are healthy for you? There’s evidence to back it up. The importance of the narrative underlying the data cannot be overstated.
Start with a narrative in your market study
I witness dozens of company presentations each year, read hundreds of summary memoranda, and study 50 or more formal business plans. The best of them use tales to build the market portion of the strategy. Data are great, but tales provide meaning and significance for the numbers.
As an example, the market study section for a new, high-tech, smog-free technology begins with a smoggy city and the pollution’s effect. A market study for giving restaurant leftovers to the homeless begins with a photograph of the trash area behind a restaurant, which is piled high with abandoned food. The one for a global crafts market begins with an image of an African lady who could sell her products all over the globe using just her cellphone.
When an abstract issue is difficult to visualize, focus on a person or individuals who have a need and will benefit from the solution. The narrative of a particular kid and his parents serves as the foundation for a computer game designed to assist autistic youngsters. Two elderly baby boomers begin a presentation for a revolutionary medical technology. I recall one that began with a cemetery and a claim about how many deaths might be prevented by a new technology. Your market analysis becomes more valuable as a result of these tales.
To complete the narrative, you’ll need to find the numbers
When it comes to data and research, don’t develop tunnel vision.
Some individuals lose sight of what’s essential for marketing planning—targeting, message, and so on—and mistakenly believe that this section of a business plan is all about gathering comprehensive data for your whole market, target market, market segments, and so on.
I observe individuals trying to locate knowledge that fits their preconceived ideas of what’s required much too frequently, rather than adapting to what’s available. Not only to obtain research data, but to influence your choices and improve your company.
For example, I worked with someone who was going insane attempting to split companies into groups based on yearly income, which is difficult, rather than establishing categories based on the number of workers, which is simple to do. Finally, separating companies into size groups based on the number of workers is equally as helpful as breaking them into size categories based on total income in terms of information to use for operating a company.
The notion is that you use whatever information is available if it leads to important business decisions—not the information you desired.
Consider the following scenario:
- If you wish to split U.S. companies into groups based on size, utilize the government’s employment statistics; don’t insist on using another size criteria like revenue or office space.
- Use the government categories to split companies into sizes based on staff counts. Employee numbers in the United States are classified as follows in the economic census. It’s clear that dividing the sizes into 1 to 15 and 16-20 makes no sense since the government already employs a different categorization.
- When searching for market data, you’ll often come across categories that were created by someone else before you began looking. Be adaptable. Make the most of what you have.
Taking into account market segmentation
Few marketing ideas are more effective than segmentation, which is breaking down a market into manageable chunks. Divide a population by age and gender, for example, and you’ve got a basic demographic segmentation. This is clearly beneficial to companies who deal with clothing and shoes, for example.
You may also want to consider if you’re married or single, whether you’re married or divorced, and other factors. You may also concentrate on one gender in one age group and just those who are married or not, concentrating on several variables at the same time.
When you divide a population by income, you get a distinct segmentation, also known as economic segmentation, which is beneficial for many companies. Automobile dealers, restaurants, travel companies, and luxury goods merchants, to name a few, may base their strategy and tactics on segmentation. The government keeps track of household income.
Psychographics, which are collections of personalities, values, views, attitudes, hobbies, and lifestyles, are used in certain innovative segmentation methods. I’m intrigued by the concept of psychographics; for example, knowing that someone drives a certain vehicle may help you anticipate other apparently unrelated preferences.
So, a guy driving a pickup truck may choose cowboy boots over Birkenstock sandals, while a lady driving a Volvo station wagon would prefer organic spinach over fried chicken. So it seems. I dislike stereotypes, therefore the concept bothers me, yet it seems to work for products and marketing.
It’s all about the market’s potential
Potential consumers, not existing customers, are the focus of a market study. Include a prospective consumer analysis in your formal business strategy if it is required. Estimate the number of prospective consumers as a crucial initial step. The method you use to calculate this is dependent on the kind of company you have.
A retail shoe shop, for example, wants to know about local residents; a graphic design company needs to know about local businesses; and a national catalog needs to know about homes and businesses throughout the country.
What are TAM, SAM, and SOM, and why are they important?
Make sure you understand the distinctions between the whole market (total potential market), your attainable market, and your share of the market, or the amount of consumers you’ll actually land, when you consider your prospective customers.
TAM, SAM, and SOM are three acronyms to be aware of in case they are used in inquiries or conversations.
The total addressable market, also known as the total accessible market, is referred to as TAM. That is the whole market potential. That’s presumably a total population of over two and under 85 or 90 for a movie theater. It’s a big number that’s basically worthless.
SAM replaces total with serviceable—serviceable addressable market or serviceable accessible market—which is a more meaningful figure. The amount of theater tickets sold each month or year in a certain geographic region would be my definition of a movie theater’s SAM. Others may include the whole population, assuming that even those who didn’t go to the cinema during that time period would decide to go the next day.
SOM stands for market share. Market share is a term that is often used. I would divide a theater’s monthly or annual ticket sales by the total number of tickets sold in the whole region for that month or year. For example, if this theater sold 30,000 tickets last year while all the other theaters in the region sold 100,000, it had a 30% share.
All of these phrases have the issue of becoming buzzwords. I like to discuss the prospective market and present market share, and to consider the potential market to be the whole market accessible. I dislike acronyms and buzzwords that obscure the true meaning of a phrase.
Understand the business you’re in: research in the industry
A market study usually involves a look at the industry you’re in. People want to see a picture of the industry that includes things like industry trends, industry growth, current innovations, common keys to success, how concentrated the industry is in how many major companies, how many overall participants, and other variables.
The specifics of the business plan event, or why you need your plan, are determined by the industry and the type of the company plan. And you, the company owner, clearly need to be well-versed in your sector in order to succeed—whether you write it down in a formal plan or just keep it in mind with strategy and tactics in a Lean Plan.
If it helps you achieve your goal, go ahead and do it, but don’t overload your strategy with too much detail. I recently recommended an entrepreneur opening a new bar in a resort region to condense his long study of the bar industry into his primary plan and transfer the rest of the material to an appendix.
Doing a market study for your company is a smart method to ensure that you’ve considered who your true consumers are and that you’re not wasting money on advertising and marketing to the wrong people.
Check out this post for additional information on how to do market research and discover more about your consumers.
The original version of this essay was published in 2016. In 2018, it was modified.
Frequently Asked Questions
How do you write a market analysis for a business plan?
A market analysis is a process of gathering information about the current and future state of a particular market. This can be done by conducting research, analyzing data from previous studies, or consulting with experts in the field.
What are the six components of a market analysis?
A market analysis is a process of gathering information about an existing or potential market. Market research methods may include surveys, focus groups, and interviews.