Market Analysis for Your Business Plan
A business plan is the blueprint for taking an idea for a product or service and turning it into a commercially viable reality. The market analysis section of your plan provides the evidence that there is a niche in the market that your company can exploit. This analysis provides the foundation on which your marketing and sales plan will rest.
The core components of the market analysis are:
- an industry analysis, which assesses the general industry environment in which you compete.
- a target market analysis, which identifies and quantifies the customers that you will be targeting for sales.
- a competitive analysis, which identifies your competitors and analyzes their strengths and weaknesses.
The precise way in which you choose to organize this information is up to you. As long as you include all the basic facts, there are a number of outline forms that can work well. Just keep the purpose of your plan in mind, and highlight or expand the sections that have the greatest application to what you're trying to accomplish.
It's also important to realize that, as you go about planning a business startup or expansion, you should be doing a lot of research and learning an enormous amount about its marketing environment. Your business plan is not intended to include everything you've learned. It will just summarize the highlights, in a way that shows the reader that you understand your industry, market and individual business.
The industry analysis is the section of your business plan in which you demonstrate your knowledge about the general characteristics of the type of business you're in. You should be able to present some statistics about the size of the industry (e.g., total U.S. sales in the last year) and its growth rate over the last few years. Is the industry expanding, contracting or holding steady? Why?
Who are the major industry participants? While you might not compete directly against these companies (they are likely to be large national or international corporations), it's important that you can identify them, and have a good understanding of their market share and why they are or aren't successful.
You should also be able to discuss the important trends that may affect your industry. For example, significant changes in the target market, in technology, or in other related industries may affect the market's perception of your product or your profitability.
This kind of information is often available for free from the following sources:
- trade association data
- industry publications and databases
- government databases (e.g., Census Bureau, state trade measurements)
- data and analysts' opinions about the largest players in the industry (e.g., Standard & Poor's reports, quotes from reputable news sources)
The Directory of On-Line Resources and the Data Base Catalog are popular services listing many resources available over your computer modem. Or if your prefer to do research the old-fashioned (print-based) way, consult a book called Knowing Where to Look: The Ultimate Guide to Research by Louis Horowitz, published by the Writer's Digest. The American Marketing Association (the "other" AMA) may be able to help you as well. You can reach it by phone at 1-800-AMA-1150, or on the Internet at http://www.ama.org.
The Target Market
How do you determine if there are enough people in your market who are willing to purchase what you have to offer, at the price you need to charge to make a profit? The best way is to conduct a methodical analysis of the market you plan to reach. You need to know precisely who your customers are, or will be.
For example, if you sell to consumers, do you have demographic information (e.g., what are their average income ranges, education, typical occupations, geographic location, family makeup, etc.) that identifies your target buyers? What about lifestyle information (e.g., hobbies, interests, recreational/entertainment activities, political beliefs, cultural practices, etc.) on your target buyers?
You may very well sell to several types of customers--for example, you may sell at both retail and wholesale, and you may have some government or nonprofit customers as well. If so, you'll want to describe the most important characteristics of each group separately.
Directly surveying your current customers can be expensive. For planning purposes, it's acceptable to substitute published industry-wide information; for example, "the average U.S. household computer owner is between the ages of 31 and 42, has graduated from college, and earns $40,000 to $60,000 per year."
Once obtained, this type of information can help you in two very important ways. It can help you develop or make changes to your product or service itself, to better match what your customers are likely to want. It can also tell you how to reach your customers through advertising, promotions, etc.
In the industry overview section of your business plan, you may have identified the largest players in your industry. Not all of these businesses will be directly competing with you, however. Some may be located in geographically distant locations, and others may have pricing or distribution systems that are very different from those of a small business.
Therefore, in your competition analysis, you'll focus on those businesses that directly compete with you for sales--the specific companies or brands that are direct competitors to your product or service, in your geographic locality. In many cases, these competitors offer a product or service that is interchangeable with yours in the eyes of the consumer (although, of course, you hope you hold the advantage with better quality, more convenient distribution, and other special features). For example, if you operate a local garden center, you may compete against the other garden centers within a 10-mile radius. You may also want to include in your analysis some competitors who offer similar products in a different business category or who are more geographically remote.
It's to your advantage to know as much as you reasonably can about the identity of your competitors and the details of your competitors' businesses. Study their ads, brochures and promotional materials. Drive past their location (and if it's a retail business, make some purchases there, incognito if necessary). Talk to their customers and examine their pricing. What are they doing well that you can copy, and what are they doing poorly that you can capitalize on?
Secondary data, as well as information from your sales force or other contacts among your suppliers and customers, can provide rich information about competitors' strengths and weaknesses. Basic information every company should know about their competitors includes:
- each competitor's size and market share, as compared to your own
- how target buyers perceive or judge your competitors' products and services
- your competitors' financial strength, which affects their ability to spend money on advertising and promotions, among other things
- each competitor's ability and speed of innovation for new products and services
There may be a wealth of other facts that you need to know, depending on the type of business you have. For example, if you're in catalog sales, you'll want to know how fast your competitors can fulfill a typical customer's order, what they charge for shipping and handling, etc.
Even for new businesses, company data from competitors may be available by interviewing competitor company executives, attending industry trade shows, and asking the right questions from industry "experts." They may be unaffordable as consultants, but willing to direct you to free databases that you would not ordinarily know of or have access to. And don't overlook your competitor's suppliers. They can be excellent sources of information to aid your research.