If the primary tool for your business success is the business plan, then the market analysis is the key to that arsenal. A business plan not only is essential, it needs to be updated annually, and the market study needs to be refined and renewed as a central part of that update.
Further Reading: Business plan template, Business Development Bank of Canada
What is a market analysis?
A market analysis is an examination of clients (potential, existing and past), market conditions, how your product or service fits in the marketplace, who is your competition (direct, indirect, etc) and how to respond to each one, regulations impacting on your business, trends (growth and decline), market share and feasibility of selling your product or service profitably.
Further Reading: Marketing Plan template, Business Development Bank of Canada
What is the Purpose of a Market Analysis?
Your examination of market conditions is important to learn where your strengths and weaknesses exist, what the threats to and opportunities for your business are.
The analysis should help you streamline your operation, reducing the amount of resources (time, money, assets) into creating a product or service that may not be suited for the market.
That study should also be able to show you how to bring your product into the market more effectively, focusing on specific customers (demographics), territories and geographical reach, uses for your goods, and establish the best pricing.
You will be able to identify niches or emerging growth (or decline) potential, the size of the market, what your share may be in various scenarios, how to sell to specific target markets and any problems or barriers to entering the market that may exist.
A primary external purpose of a market study is to obtain loans, financial backing and investors. Without the research needed to show that you will be viable, lenders may be sceptical.
Further Reading: Lean Market Research
How Do I Write a Market Study?
Further Reading: https://www.businessnewsdaily.com/15751-conduct-market-analysis.html
A market study requires extensive research and planning, good data inputs, careful projections and a professional assessment of SWOT (strengths, weaknesses, opportunity and threats). However, preparing this data for external (financial institutions) consumption requires a universally recognized format, so that lenders may read your plan easily and be able to make a qualified determination of lending potential. We have provided a guide, offered by the federal government, that helps you write that report. There are numerous other business templates available at BDC to assist you.
Further reading: Business Development Bank of Canada Resources
What Do I Include in A Market Analysis?
Further Reading: https://articles.bplans.com/how-to-write-a-market-analysis/
Your analysis really is a composite of several parts, distinct and essential. They include: customer assessment, competitor analysis, industry outlook and description, target market, projections, regulations and requirements, current pricing, and feasibility study.
The core of the study is your customer assessment. From this evaluation springs an understanding of competition, direction and implementation strategies. While the name “market analysis” implies that the competition within the market is your primary focus, it is not. Understanding existing and potential customers will lead you into a clearer understanding of how to overcome competition, and how to plan the future.
Customer Assessment
Ask the following questions:
- Who are my potential (likely) customers?
- How do they buy (online, etc), how often, how much do they spend, when, and other questions relating to their purchase habits?
- What is the size of the market in various locations (including online), and what is the potential size?
- How much will they pay?
- How do they respond to competitor offerings?
- What are the challenges and successes of selling to this market?
- What is the future of that demographic?
- Is my product or service adaptable and can it evolve to serve future growth needs?
- Who are my main competitors and why?
- What are my competitors’ strengths and weaknesses? What threats do they pose and what opportunities do they present?
Your customers may not be who you initially perceive them to be. For instance, a prospective seniors complex may discover that, instead of an assisted living demographic, most potential clients are independent living candidates, affordable housing candidates or supportive housing clients. Your customer assessment, properly done, will reveal trends or situations you may not have considered.
Competitor Analysis
Your competition consists of direct, indirect, potential, future, phantom and replacement competition. Of immediate concern are direct, indirect, potential, replacement, self and future competition, as these five will impact most directly on your business success and your market strategy, in the order presented.
Direct Competition: Direct competitors are those selling the same or equivalent product or service as you, usually in the same market. Two companies that manufacture vinyl siding are direct competitors, while one that manufactures and one that installs are not.
Indirect Competition: Indirect competition occurs when two companies sell dissimilar products but target the same market, such as a chicken fast food and a burger fast food, who target the same audience and may compete, but with different products.
Potential Competition: Potential competitors often go unrecognized at first. A private investigator may not compete with a security firm, until one directly enters the other’s market as a natural offshoot of the original company.
Replacement Competition: Replacement competition is not as rare as it may seem. Plant-based drinks (soy, oat beverage) compete with milk, plant-based meat with real meat, car share coops with ownership or rental companies, and so on.
Self Competition: This seems at odds with business concepts. However, do-it-yourselfers compete with tradesmen, home office tax software with tax preparers, and other home- or in-house services with mainstream commercial businesses offering the same service.
Future Competition: Future competitors are those, often unknown to the business. Who are preparing to enter the competitors market with competing products or services. This is common in technology and IT businesses, but also in pharmaceutical and other “sophisticated” businesses. It may also occur in housing developments, where other building plans that compete directly with yours are in planning stages.
Phantom Competition: Phantom competitors may drain resources as companies attempt to head off the competition, when, in fact, the business only seems to compete. Such examples as Dollarama (or other discount houses) and Walmart, or high-end and mid- or low-end clothing stores.
There are numerous resources upon which you can call to evaluate your competition, each used most effectively for specific purposes.
One of the most effective resources for evaluating competition is the federal government and small business assistance centres in every province. These resources offer census data, as well as data compiled from businesses across the country.
Included in the compilations are listings of businesses operating in various fields, revenues, profits, and trends. It is invaluable data to obtain a broad overview of the market.
However, more intimate and detailed information on competition; particularly local and regional competition is essential to generate a true projection for your business. This requires more effort and more creative “digging.”
In my work with microbusinesses in Manitoba, I often assisted clients as they conducted live “observation” surveys of competitors, counting traffic into the location, surmising age and other demographics. These may be variable and not completely scientific, but they offer an insight into customer patterns.
Other techniques include telephone surveys, mailer (with reward) surveys, and other live gathering of data.
One of the easiest and yet most lucrative hot spots of information is the Internet. Searches can reveal details about a competitor’s operation and even show potential products and services planned. It can provide local, regional, national and global data on everything from pricing to features of a product to employee data.
On a more macro scale, monthly data on the labour market can be revealing of patterns.
Further reading: Exploring Competitor Examples to Improve Business Profits
Industry Outlook and Description
On a broad scale, understanding the direction of your industry and how to frame it are important for long-term planning. However, what happens nationally or globally may not be reflected in local markets.
For instance, in rural communities, post offices still are strong, while in urban centres, the trend is toward online services. In banking, too, many elderly and a select portion of younger clients insist on personal service, while the direction is toward electronic, cashless banking.
Mechanics of yesterday have been replaced substantially by computerized diagnostics, but the physical repairs still require skilled technicians and installers. On the farm, much of the harvesting and planting equipment still demands machinists and mechanics, able to respond at a moment’s notice when a piece of equipment breaks down at a crucial time. These are the rural, mechanical equivalents of doctors making house calls, and may have a limited future. Today, however, they still are essential.
Your evaluation of the industry in general and your niche in specific will dictate your investment and efforts at developing (or abandoning) specific market segments. To evaluate, however, you need to define.
Target Market
The target market section of your business plan requires several essential elements and considerations. It is a focused element of your comprehensive market analysis and assists you in understanding how to approach and respond to local market conditions.
Your target market includes demographics such as age, income and location of prospective and existing clients. Specify what those clients’ interests and buying habits may be, and zero in on how and why you are best positioned to capture and retain that market.
Understand, as well, your market size and growth (or contraction) trends, as well as the reasons for same. If you are aiming for a specific market share, examine how you will garner and maintain that portion.
Projections
Merely knowing your target market does little to establish your operational plan, unless you also are able to project, based on past activity, emerging technologies and competition and buyer habits, where your market will head.
These projections should be data-driven and not based on an arbitrary or random guess. This is particularly true where you will be seeking funding. The data that you have gathered should be used to make these projections, short and long-term.
Regulations and Requirements
In many markets, industry regulations (real estate, financial investment or insurance sales), and government laws and regulations impact on your delivery of goods. Inter-border restrictions (food industry) vary from state to state and province to province. Safety requirements (CSA and ULL) may be universal across a country, but different locally or provincially (home construction and transportation). It is imperative that you research and understand these regulations as part of your market analysis. It is also vital to know the cost in terms of time and money (initial and ongoing) of compliance.
Pricing & Features
With all of the data that you have gathered, your next step is to determine the cost to bring your service or product to the marketplace and retain or increase market share. Here is where you will discover windows of opportunity and barriers to entry. It is the “strengths and weaknesses, opportunities and threats” component of your market SWOT analysis.
Here, you need two scenarios: optimistic and pessimistic. Your optimistic view establishes your goals, the pessimistic the “failsafe” of operating efficiency.
Pricing must consider competitor pricing and gross margins. But pricing is not the sole determinant. Many products rely on the features they offer and the benefits that those features provide as an offset to pricing. Think of Mercedes and Volvo versus Volkswagen and Kia. As Zig Ziglar, a great motivational speaker and car salesman of the 1960s declared, “I would rather explain quality once than price forever.”
Feasibility Study
Now you have determined market demand and opportunity, competitor strengths and weaknesses, established pricing and position and assessed barriers and gateways to entering the market. You have established financial need and revenue potential. Assembled all together, you have the essence of your feasibility study, based on concrete information rather than guesswork.
Combine this with financial projections, management strategy and positioning and you are well on your way to completing a feasibility study for your business.