Understanding your customers is the key to success for any startup. If you don’t have a deep understanding of who your customers are, you’ll have trouble developing products that truly fit their needs, and you’ll struggle to develop a successful marketing strategy.
What is a market analysis? A market analysis is a thorough qualitative and quantitative assessment of the current market.
It helps you understand the volume and value of the market, potential customer segments and their buying patterns, the position of your competition, and the overall economic environment, including barriers to entry, and industry regulations.
Why you should conduct a market analysis Whether you are writing a Lean Plan or putting together a detailed business plan for a bank or other investor, a solid market analysis is expected. But, don’t just do a market analysis because you’re developing a plan. Do it because it will help you build a smarter strategy for growing your business.
Once you have in-depth knowledge of your market, you’ll be better positioned to develop products and services that your customers are going to love. And while diving into market research may seem like a daunting task it can be broken up into four simple elements:
Industry overview: You’ll describe the current state of your industry and where it is headed. Target market: Who are your actual customers? You’ll detail how many of them are there, what their needs are, and describe their demographics. Competition: Describe your competitors’ positioning, strengths, and weaknesses. Pricing and forecast: Your pricing will help determine how you position your company in the market, and your forecast will show what portion of the market you hope to get.
How to conduct a market analysis Now, let’s go into each step in more detail so you know exactly what you need for your market analysis.
1. Industry overview In this step, you’ll describe your industry and discuss the direction that it’s headed. You’ll want to include key industry metrics such as size, trends, and projected growth.
Industry research and analysis is different than market research. When you’re researching your industry, you’re looking at all of the businesses like yours. This is different than market research, where you are learning about your customers.
Your industry overview shows investors that you understand the larger landscape that you are competing in. More importantly, it helps you understand if there’s going to be more demand for your products in the future and how competitive the industry is likely to be.
2. Define your target market Your target market is the most important section of your industry analysis. This is where you explain who your ideal customer is.
You may find that through the course of your analysis, that you identify different types of customers. When you have more than one type of customer, you do what’s called market segmentation. This is where you group similar types of customers into segments and describe the attributes of each segment.
You’ll need to start broadly and refine your research by defining the following elements.
Market size-Unlike industry size, which is usually measured in dollars, your market size is how many potential customers there are for your product or service. We’ve got a great method for figuring out your market size that you can read about here.
Demographics-Describe your customer’s typical age, gender, education, income, and more. If you could paint a picture of your perfect customer, this is where you’ll describe what they look like.
Location-Where are your customers located? A specific country, region, state, city, county, you’ll want to describe that here. You may even find that your customer base is segmented based on location which can help you determine where you’ll be doing business.
Psychographics-It’s here that you need to get inside the mindset of your customers, know their needs, and how they’ll react. What are your customers’ likes and dislikes? How do they live? What’s their personality?
This piece can even help you better approach analyzing the competition.
Behaviors-This is essentially an extension of some of your psychographic information. Explain how your customers shop for and purchase products like yours.
Trends-Customer behavior is always changing. If there are trends that you’ve noticed with your target market, detail them here.
3. Competition Your market analysis isn’t complete without thinking about your competition. Beyond knowing what other businesses you are competing with, a good competitive analysis will point out competitors’ weaknesses that you can take advantage of. With this knowledge, you can differentiate yourself by offering products and services that fill gaps that competitors have not addressed.
When you are analyzing the competition, you should take a look at the following areas.
Direct competition-These are companies that are offering very similar products and services. Your potential customers are probably currently buying from these companies.
Indirect competitors-Think of indirect competition as alternative solutions to the problem you are solving. This is particularly useful and important for companies that are inventing brand new products or services. For example, the first online task management software wasn’t competing with other online task managers—it was competing with paper planners, sticky notes, and other analog to-do lists.
How you’re different-You don’t want to be the same as the competition. Make sure to discuss how your company, product, or service is different than what the competition is offering. For a common business type, such as hair salons, your differentiation might be location, hours, types of services, ambiance, or price.
Barriers to entry-Describe what protections you have in place to prevent new companies from competing with you. Maybe you have a great location, or perhaps you have patents that help protect your business.
The best way to research your competition is to talk to your prospective customers and ask them who they are currently buying from and what alternate solutions they are using to solve the problem you are solving. Of course, spending some time on Google to figure out what else is out there is a great idea as well.
4. Pricing and forecast The final step in a market analysis is to figure out your pricing and create a sales forecast to better understand what portion of the market you think you can get.
Pricing your product or service-First, think about your pricing. Of course, you should ensure that your price is more than what it costs you to make and deliver your product or service. But, beyond that, think about the message that your price sends to consumers.
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