Market Analysis

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

How to do a market analysis for a business plan

A key part of any business plan is the market analysis. This section needs to demonstrate both your expertise in your particular market and the attractiveness of the market from a financial standpoint.

This article first look at what we mean exactly by market analysis before looking at how to make a good one for your business plan.

What is a market analysis?

A market analysis is a quantitative and qualitative assessment of a market. It looks into the size of the market both in volume and in value, the various customer segments and buying patterns, the competition, and the economic environment in terms of barriers to entry and regulation.

How to do a market analysis?

The objectives of the market analysis section of a business plan are to show to investors that:

  • you know your market
  • the market is large enough to build a sustainable business

In order to do that I recommend the following plan:

The first step of the analysis consists in assessing the size of the market.

Demographics and Segmentation

When assessing the size of the market, your approach will depend on the type of business you are selling to investors. If your business plan is for a small shop or a restaurant then you need to take a local approach and try to assess the market around your shop. If you are writing a business plan for a restaurant chain then you need to assess the market a national level.

Depending on your market you might also want to slice it into different segments. This is especially relevant if you or your competitors focus only on certain segments.

Volume & Value

There are two factors you need to look at when assessing the size of a market: the number of potential customers and the value of the market. It is very important to look at both numbers separately, let’s take an example to understand why.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

Imagine that you have the opportunity to open a shop either in Town A or in Town B:

Table: Town A vs. Town B

Town A B
Market value £200m £100m
Potential customers 2 big companies 1,000 small companies
Competition 2 competitors 10 competitors

Although Town B looks more competitive (10 competitors vs. 2 in Town A) and a smaller opportunity (market size of £100m vs. £200 in Town A), with 1,000 potential customers it is actually a more accessible market than Town A where you have only 2 potential customers.

Potential customer?

The definition of a potential customer will depend on your type of business. For example if you are opening a small shop selling office furniture then your market will be all the companies within your delivery range. As in the example above it is likely that most companies would have only one person in charge of purchasing furniture hence you wouldn’t take the size of these businesses in consideration when assessing the number of potential customers. You would however factor it when assessing the value of the market.

Market value

Estimating the market value is often more difficult than assessing the number of potential customers. The first thing to do is to see if the figure is publicly available as either published by a consultancy firm or by a state body. It is very likely that you will find at least a number on a national level.

If not then you can either buy some market research or try to estimate it yourself.

Methods for building an estimate

There are 2 methods that can be used to build estimates: the bottom up approach or the top down approach.

The bottom up approach consist in building a global number starting with unitary values. In our case the number of potential clients multiplied by an average transaction value.

Let’s keep our office furniture example and try to estimate the value of the ‘desk’ segment. We would first factor in the size of the businesses in our delivery range in order to come up with the size of the desks park. Then we would try to estimate the renewal rate of the park to get the volume of annual transactions. Finally, we would apply an average price to the annual volume of transactions to get to the estimated market value.

Here is a summary of the steps including where to find the information:

  1. Size of desks park = number of businesses in delivery area x number of employees (you might want to refine this number based on the sector as not all employees have desks)
  2. Renewal rate = 1 / useful life of a desk
  3. Volume of transactions = size of desks park x renewal rate
  4. Value of 1 transaction = average price of a desk
  5. Market value = volume of transactions x value of 1 transaction

You should be able to find most of the information for free in this example. You can get the number and size of businesses in your delivery area from the national statistics. Your accountant should be able to give you the useful life of a desk (but you should know it since it is your market!). You can compare the desk prices of other furniture stores in your area. As a side note here: it is always a good idea to ask your competitors for market data (just don’t say you are going to compete with them).

That was the bottom up approach, now let’s look into the top down approach.

The top down approach consist in starting with a global number and reducing it pro-rata. In our case we would start with the value of UK office furniture market which AMA Research estimates to be around £650m and then do a pro-rata on this number using the number of businesses in our delivery area x their number of employees / total number of people employed in the UK. Once again the number of employees would only be a rough proxy given all business don’t have the same furniture requirements.

When coming up with an estimate yourself it is always a good practice to test both the bottom up and top down approaches and to compare the results. If the numbers are too far away then you probably missed something or used the wrong proxy.

Once you have estimated the market size you need to explain to your reader which segment(s) of the market you view as your target market.

Target Market

The target market is the type of customers you target within the market. For example if you are selling jewellery you can either be a generalist or decide to focus on the high end or the lower end of the market. This section is relevant when your market has clear segments with different drivers of demand. In my example of jewels, value for money would be one of the drivers of the lower end market whereas exclusivity and prestige would drive the high end.

Now it is time to focus on the more qualitative side of the market analysis by looking at what drives the demand.

Market Need

This section is very important as it is where you show your potential investor that you have an intimate knowledge of your market. You know why they buy!

Here you need to get into the details of the drivers of demand for your product or services. One way to look at what a driver is, is to look at takeaway coffee. One of the drivers for coffee is consistency. The coffee one buys in a chain is not necessarily better than the one from the independent coffee shop next door. But if you are not from the area then you don’t know what the independent coffee shop’s coffee is worth. Whereas you know that the coffee from the chain will taste just like in every other shop of this chain. Hence most people on the move buy coffee from chains rather than independent coffee shops.

From a tactical point of view, this section is also where you need to place your competitive edge without mentioning it explicitly. In the following sections of your business plan you are going to talk about your competition and their strengths, weaknesses and market positioning before reaching the Strategy section in which you’ll explain your own market positioning. What you want to do is prepare the reader to embrace your positioning and invest in your company.

To do so you need to highlight in this section some of the drivers that your competition has not been focussing on. A quick example for an independent coffee shop surrounded by coffee chains would be to say that on top of consistency, which is relevant for people on the move, another driver for coffee shop demand is the place itself as what coffee shops sell before most is a place for people to meet. You would then present your competition. And in the Strategy section explain that you will focus on locals looking for a place to meet rather than takeaway coffee and that your differentiating factor will be the authenticity and atmosphere of your local shop.

Competition

The aim of this section is to give a fair view of who you are competing against. You need to explain your competitors’ positioning and describe their strengths and weaknesses. You should write this part in parallel with the Competitive Edge part of the Strategy section.

The idea here is to analyse your competitors angle to the market in order to find a weakness that your company will be able to use in its own market positioning.

One way to carry the analysis is to benchmark your competitor against each of the key drivers of demand for your market (price, quality, add-on services, etc.) and present the results in a table.

Below is an example for a furniture shop in France. As you can see from the table all the actors on the market are currently focused on the low medium range of the market leaving the space free for a high end focused new player.

Table: side by side competitive analysis

Company Competitor 1
(Small shop)
Competitor 2
(Small shop)
Competitor 3
(Chain)
My Company
Revenues € 750,000 N.A. € 1,500,000 € 400,000
(year 1 target)
Nb. employees 10 5 20 5
Size 1 shop in Caen,
1 shop in Cabourg
1 shop in Caen 3 shops in Caen 1 shop in Caen
Price Low Average Average High
Quality Low Average Average Superior
Choice Large Low Very large Average
Delivery No € 50 Free from € 100 Free

Barriers to Entry

This section is all about answering two questions from your investors:

  1. what prevents someone from opening a shop in front of yours and take 50% of your business?
  2. having answered the previous question what makes you think you will be successful in trying to enter this market? (start-up only)

As you would have guess barriers to entry are great. Investors love them and there is one reason for this: it protects your business from new competition!

Here are a few examples of barriers to entry:

  • Investment (project that require a substantial investment)
  • Technology (sophisticated technology a website is not one, knowing how to process uranium is)
  • Brand (the huge marketing costs required to get to a certain level of recognition)
  • Regulation (licences and concessions in particular)
  • Access to resources (exclusivity with suppliers, proprietary resources)
  • Access to distribution channels (exclusivity with distributors, proprietary network)
  • Location (a shop on Regent’s Street)

The answer to the questions above will be highly dependent on your type of business, your management team and any relations it might have. Therefore it is hard for me to give any general tips about it.

Regulation

If regulation is a barrier at entry in your sector then I would advise you to merge this section with the previous one. Otherwise this section should be just a tick the box exercise where you explain the main regulations applicable to your business and which steps you are going to take to remain compliant.

Now you know how to do a market analysis for a business plan! I hope you found this article useful. If so please share it, and if not let us know what we need to improve.

Market Analysis in 4 Steps

Posted March 15, 2020 By Noah Parsons

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.

This is where a market analysis comes in. It may sound like a daunting and complex process, but fortunately, it’s not.

A market analysis consists of four parts:

  • 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.

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.

Now, let’s go into each step in more detail so you know exactly what you need for your market analysis.

Step 1: Industry overview

In this step, you’ll describe your industry and discuss the direction that it’s headed. You’ll want to discuss 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. For a more detailed explanation of the difference, check out our article on the differences .

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.

For example, if you are selling mobile phones, you’ll want to know if the demand for mobile phones is growing or shrinking. If you’re opening a restaurant, you’ll want to understand the larger trends of dining out. Are people eating at restaurants more and more over time? Or is the market potentially shrinking as consumers take advantage of grocery delivery services?

If you’re in the United States, the U.S. Census has excellent industry data available . I’ve also found Statista to be useful. You should also look up your industry association—they often have a wealth of information on the trends in your industry.

Step 2: 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’ll detail:

  • 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: If you find your customers in a specific location or region, describe that here.
  • Psychographics : Describe your customer’s likes and dislikes. A better way to think about psychographics is to think about your customer’s lifestyle and personality.
  • 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.

It’s O.K. if you have 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.

If you need more help with market research, check out our guide .

Step 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.

Step 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.

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.

Customers usually link high prices to quality. But, if you are pricing on the higher end of the spectrum, you need to make sure the rest of your marketing is also signaling that you are delivering a high-quality product or service. From what your business looks like to its logo and customer service experience, high-prices should come with a high-quality experience during the entire sales process.

On the other end of the spectrum, maybe you’re competing as a low-priced alternative to other products or businesses. If that’s the case, make sure your marketing and other messaging are also delivering that same, unified message.

Once you have an idea of your pricing, think about how much you expect to sell. Your industry research will come into play here as you think about how much of the overall market you expect to capture. For example, if you’re opening a new type of grocery store, you’ll want to know how much people spend on groceries in your area. Your forecast should reflect a realistic portion of that total spend. It’s probably not realistic to gain 50 percent of the market within your first year.

However, don’t make the mistake of assuming that you can easily get 1 percent of a very large market. 1 percent of a 3 billion dollar market is still $30 million and even though 1 percent seems like a small, attainable number, you need to understand and explain how you will actually acquire that volume of customers.

When you build your forecast, use it as a goal for your business and track your actual sales compared to what you had hoped you would sell. Tools like LivePlan can help you automatically compare your forecast to your accounting data, so it’s easy to do. But, even if you use a spreadsheet, tracking your progress will help you adjust your business strategy quickly so that you can do more of what’s working and less of what isn’t.

Creating a good market analysis is a very worthwhile exercise. It will help you uncover your blind spots and prepare you to compete with other businesses. More importantly, it will help you understand your customers so you can deliver the best possible service to them.

Looking for some examples of market analysis? Take a look at our free sample business plans on Bplans. There are more than 500 of them across a wide range of industries, and each one of them has a market analysis section.

How to Write a Market Analysis

By: Michael Kerr

Doing a market analysis might sound overly daunting and formal, but don’t be dissuaded. It’s actually really important, and it’s not all that complex.

A market analysis is the process of learning the following:

  • Who are my potential customers?
  • What are their buying and shopping habits?
  • How many of them are there?
  • How much will they pay?
  • Who is my competition?
  • What have their challenges and successes been?

The market analysis is one of the most important parts of any startup strategy. It can actually help reduce risk because if you really understand your potential customers and market conditions, you’ll have a better chance of developing a viable product or service.

It should also help you get clear on what exactly makes you different from your competition, which can make or break your chances of standing out in a crowded landscape.

However, don’t fall into the trap of simply saying that your solution is for everyone. Ultimately, setting some parameters around your target market will help you focus your resources.

Ultimately, your market analysis should enable you to:

  1. Avoid putting a lot of resources and time into creating a product or service before you’ve determined that your solution is needed.
  2. Determine that the need for your product or service is big enough that people will pay for it.

Do you even need to do a market analysis?

Bear in mind that all new businesses are different, and strategies for structuring a business plan can be different depending on the goal of the plan or the intended audience. If your business is quite small and you know your customers inside and out , a deep, formal market analysis might not be the best use of your time.

For instance, if you are writing an internal business plan, meaning that you’re not going to use it to try to secure a loan or other funding, you may not have a specific reason to spend time reviewing industry data to corroborate your financial forecast. Be sure to assess the value of this information for your business; determine why you’re doing an analysis in the first place so that you don’t waste time and energy on an unnecessary aspect of your plan.

On the other hand, if you’re not absolutely clear on what makes your business different from the competition, or if you have made (but not tested) some assumptions about who will be interested in your product or service, you might want to consider at least an abbreviated market analysis. You’ll want to make sure that the business you’re building is solving a real problem, and that consumers both desire your solution and are willing to pay for it. A market analysis is a good way to get clarity.

Finally, if you are seeking funding, a market analysis is going to be key data to convince your audience that your business idea has the facts and hard numbers to back it up.

Market analysis and your business plan

It’s smart to write a business plan, especially if you are beginning a new business venture. Even if you’re a sole proprietor or don’t intend to borrow any money to get your business off the ground, it’s important to have a clear plan in place. The market analysis isn’t just one part of a successful business plan—it’s one of the best reasons to write one.

If you do need banks to lend you money or investors to jump on board, a market analysis section is required, as savvy lenders or investors will need to know that the business you’re pitching has viable market appeal.

Either way, a solid formal business plan or Lean Plan complete with market analysis will be invaluable. You’ll need to identify your potential customers and attract investors, and it will help you to be clear about what you want to do with your business, both now and in the future.

The time you spend doing the research and putting it all together will come back to you many times over in dollars earned and heartbreaks avoided. You’ll look like a professional, and you’ll outshine the competitors that didn’t write one.

Because you’ll know the size of the mountain you’re about to climb, you’ll be able to pace yourself and prevent problems in the future. But most importantly, thoroughly understanding your market means that you’ll be able to build the best solution possible for your customers’ problem.

What to include in your market analysis

Your market analysis should include an overview of your industry, a look at your target market, an analysis of your competition, your own projections for your business, and any regulations you’ll need to comply with.

1. Industry description and outlook

This is where you’ll outline the current state of your industry overall and where it’s headed. Relevant industry metrics like size, trends, life cycle, and projected growth should all be included here. This will let banks or investors see that you know what you’re doing, and have done your homework and come prepared with the data to back up your business idea.

2. Target market

In the industry section of your market analysis, you focused on the general scope. In this section, you’ve got to be specific. It’s important to establish a clear understanding of your target market early on. A lot of new entrepreneurs make the rookie mistake of thinking that everyone is their potential market. To put it simply, they’re not.

For example, if you’re a shoe company, you aren’t targeting “everyone” just because everyone has feet. You’re most likely targeting a specific market segment such as “style-conscious men” or “runners.” This will make it much easier for you to target your marketing and sales efforts and attract the kinds of customers that are most likely to buy from you.

This is a good thing; by narrowing in, you’ll be able to direct your marketing dollars efficiently while attracting loyal customers who will spread the word about your business.

The target market section of your business plan should include the following:

  • User persona and characteristics: You’ll want to include demographics such as age, income, and location here. You’ll also need to dial into your customers’ psychographics as well. You should know what their interests and buying habits are, as well as be able to explain why you’re in the best position to meet their needs.
  • Market size: This is where you want to get real, both with the potential readers of your business plan and with yourself. How much do your potential customers spend annually on the types of products or services you plan to offer? How big is the potential market for your business?

3. Competitive analysis

This is the section in which you get to dissect your competitors, which is important for a couple of reasons. Obviously, it’s a good idea to know what you’re up against, but it also lets you spot the competition’s weaknesses. Are there customers that are underserved? What can you offer that similar businesses aren’t offering?

The competitive analysis should contain the following components:

  • Direct competitors: What other companies are offering similar products and services? What companies are your potential customers currently buying from instead of you?
  • Indirect competitors: If your company is creating a new product category, perhaps you aren’t competing with similar companies, but instead competing with alternate solutions. For example, Henry Ford wasn’t competing so much with other car companies, but was instead competing with other forms of transportation such as horses and walking. A more modern example might be a to-do list application, where the indirect competition would include notebooks and hand-written lists.
  • Competitor strengths and weaknesses: What is your competition good at? Where do they fall behind? Get imaginative to spot opportunities to excel where others are falling short.
  • Barriers to entry: What are the potential pitfalls of entering your particular market? What’s the cost of entry—is it prohibitively high, or can anyone enter? This is where you examine your weaknesses. Be honest, with investors and yourself. Being unrealistic is not going to make you look good.
  • The window of opportunity: Does your entry into the market rely on time-sensitive technology? Do you need to get in early to take advantage of an emerging market?

4. Projections

At this point, your projections are educated guesses, so don’t worry about absolute accuracy. However, it pays to be thoughtful and avoid hockey-stick forecasting.

  • Market share: When you know how much money your future customers spend, you’ll know how much of the market you have a chance to grab. Be practical, but don’t sell yourself short. Make sure you are able to explain how you came up with your numbers. Don’t make the mistake of saying that you’ll easily get 1 percent of a huge market, and that this is enough to grow a successful business. Instead, do a bottom-up projection where you explain how your marketing and sales efforts will enable you to get a certain percentage of the market.
  • Pricing and gross margin: This is where you’ll lay out your pricing structure and discuss any discounts you plan to offer. Your gross margin is the difference between your costs and the sales price. Again, be realistic yet optimistic. Optimistic projections not only serve as a guide—they can also be a motivator.

5. Regulations

Are there any specific governmental regulations or restrictions on your market? If so, you’ll need to bring them up here and discuss how you’re going to comply with them.

You will also need to address the cost of compliance. Addressing these issues is essential if you are seeking investment or money from a lender, and everything has to be legally squared away and above board.

How to acquire the data for your market analysis

Market analyses vary from industry to industry and company to company. The hard truth is that some of the information you wish to include may not be publicly available. A little estimation is okay, but the bulk of your numbers need to be based on facts. Here are some good places to start your market research:

  • Your current customers: If your business is already up and running, your current customers are an invaluable resource. They are your existing market. You can use online surveys or social media to gather feedback about buying habits, needs, and other psychographic information.
  • U.S. Census Bureau: Here’s where you’ll find demographics you can use to figure out your market share. There is plenty of other information you can use in your market analysis here as well.
  • Business.gov: The go-to place for national industry information, as well as links to state and local resources.
  • U.S. Small Business Administration: The SBA offers industry guides, development programs, and local resources, as well as loan guarantees when the time comes.
  • Bureau of Labor Statistics: The BLS is the place to find out where your industry has been and where it is headed.
  • Commerce.gov: The U.S. Department of Commerce has a lot of good general information that you may be able to use, depending on your industry.
  • The internet: You can do internet searches to find information about any state or local regulations or licenses you may need for your industry. As always, there’s a lot of stuff out there, so make sure you’re depending on reliable sources. For your market analysis, Wikipedia won’t cut it.

Ultimately, conducting a market analysis will help you uncover any blind spots. It should help you do some initial tests that will verify that your solution is actually addressing a real problem—and many startups don’t last simply because founders failed to figure out if anyone was interested enough in their solution to pay for it.

Whether you do a comprehensive analysis, or just spend a few hours on a leaner version, what you learn can be the difference between thriving and struggling.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

Like this post? Please share to your friends:
How To Start Binary Options Trading 2020
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: