How to make a market analysis is one of the typical questions faced by many entrepreneurs when they evaluate a business idea and / or approach the writing of a business plan.
The market analysis, which you are opening a shop, a bar or a travel agency, serves to understand what your potentials can be in a given market and understand the effective attractiveness of that market from an economic point of view.
But what is a market analysis? It is basically a market assessment in terms of quantity and quality, defining the volume and value, identifying the segments of the public and the relative purchasing mechanisms, the competition in the sector, and the economic environment, i.e. the possible barriers to entry and possible stumbling blocks in terms of regulations, regulations, and legislation.
The objective of the market analysis is primarily to assess the terrain on which the company will have to move and make effective and informed strategic choices. Furthermore, it is essential to convince any potential investor that …
- You know what you’re talking about because you know that specific market;
- That entering that market is a clear opportunity for profit.
To do market analysis, you will need to have a clear vision of each of these elements …
The demographic analysis allows you to know the number of inhabitants of a given area, population density, income brackets, professions, age. Many of this information is available on the web.
If your business will be linked to the territory – for example a restaurant or a business with a sales point – you will then have to define your catchment area, circumscribing the geographical area from which your customers may come, or the radius within which you can manage shipments and deliveries.
This preliminary survey will be useful for analyzing the target market, the purchasing potential and the motivations of the public, how you intend to reach that specific market and position yourself against the competition.
If instead your business is of a B2B nature (business to business) and therefore your customers are mainly other companies, the “demographic” analysis will pass for the analysis of the companies present on the territory that you think you can serve. Your source will then be more likely the local Chamber of Commerce or if the market is foreign the country’s International Chamber of Commerce.
Now you have to define the size of the market you want to insert into. Your approach will depend on the type of business. If your business is for a store or a restaurant, you’ll need to focus on a local approach and analyze the market around your business. If you are writing the business plan for a chain of restaurants, you will have to evaluate the market on a regional or national scale. Depending on the type of market you will also have to segment different bands, especially if your competitors are focused only on certain segments.
There are two factors that you must bear in mind when evaluating the size of a market …
The volume is given by the number of potential customers. Who I am? It depends on which business you have chosen. If, for example, you want to open an office furniture store, your potential customers will be all the companies within your catchment area. Probably most companies will have only one person in charge of purchases, so in evaluating the number of your potential customers you will not be interested in knowing how many employees each company has. This data will be relevant when you need to evaluate the value of that market.
Estimating the value of a market is a fairly complex operation, generally taking place through two distinct approaches …
- Top down (from top to bottom)
- Bottom up (bottom to top)
In the first case (top down) we start from a global vision, breaking it down and gradually detailing in particular. In the second (bottom up), on the contrary, we start by specifying in detail every single component of a system, connecting them to macro-components, which interconnected in turn will give a complete view of the system.
Taking up the case of the supply of office furniture, here are the steps to follow using the two approaches.
Top Down Analysis
- Do a search to find the value of the office furniture market on a national scale;
- Divide that value by the number of companies in your area of expertise;
- It multiplies the result by the total number of employees and divides by the number of employees on a national scale, keeping a default approach considering that different types of companies have different needs in terms of office furniture.
Bottom Up Analysis
- Isolate the individual segments (desks, chairs, equipped walls …);
- Starting, for example, from the segment of the desks, report it to the number of companies in your area of expertise multiplied by the number of their employees, maintaining an approximation by default as not all employees of a company need a desk;
- Relates the result to the average duration of a desk, that is the period of time between the purchase of a desk and its replacement (renewal of the purchase), obtaining the volume of possible annual transactions;
- Apply the average price of a desk to the annual transaction volume, and get the value of your market analysis.
It is preferable to search using both approaches and then compare the results. If they are too far apart, there is probably a wrong approximation metric used. Re-calibrate and repeat the analysis until you have an acceptable match.
You can obtain most of the information necessary for your analysis by cross-referencing the data available from sources such as the Business Register, Chambers of Commerce, trade associations, and doing research on Google My Business, LinkedIn and other resources that are easily usable.
Once estimated market value volume, you will need to identify which market segment you want to address and why.
The reference market – or target market – represents the segment of customers to whom you intend to offer your products / services.
At this stage you will find useful information obtained through demographic analysis, to identify the data relating to the segment of public you want to address: age, gender, income, lifestyles. For example, if you want to sell jewelry, you can be generalist or decide to focus on the high-end or low-end market.
This part of the analysis becomes very important when your market has well-defined segments with different demand drivers (factors that determine the demand). In the example of jewelry, the low price is the driver for the low-end market, while the exclusivity and prestige are for the high-end market.
If up to this point, therefore, your market analysis has focused mainly on the quantitative aspect, now you will have to focus on the qualitative one, going to define what are the elements that act as a demand driver.
Needs of the target market
Be careful to develop this part in the best way, first of all because it will allow you to understand the motivations behind the choices of your potential customers, moreover, if you are looking for funding, you will be able to demonstrate to your potential investor how well you know the market to which you refer.
Example: Think of something as simple as a coffee and the differences between a small café and a large franchise. Those who prefer to turn to the franchise do so because they know that in every store in the chain, coffee will always have the same flavor, can buy it quickly, can take it away in an airtight container and drink it, for example, while traveling by subway.
Being often traveling from one city to another, this type of customer will preferably turn to the various cafes of the franchise, reassured by the fact of always finding his favorite coffee / cappuccino / frappuccino.
Why, then, should you think about opening a small independent cafeteria in the same city where there are already one or more cafes in that chain?
Because you intend to leverage a different demand driver and, consequently, on a different target of customers. In your restaurant you will not only sell coffee, but you will sell the experience of consuming it in a pleasant, quiet, welcoming place, where you can stop and meet people , perhaps enjoying special blends and artisan pastry products.
You will go, in short, to meet other market needs.
In this phase of the analysis you set the bases for defining your competitive advantage and your positioning in the market. For this reason, you need to focus on demand drivers not covered by your competitors.
The objective of this section is to provide a clear overview of the level of competition in your target market. In practice, for this section, it will be essential to carry out a competitive analysis and a SWOT analysis. You have to explain how your competitors are positioned and describe their strengths and weaknesses, comparing it all to your competitive advantage.
To do this, you have to compare all the application drivers that affect your market analysis (price, quality, purchase methods, accessory services, etc.) between you and the competition, exploiting the weaknesses of the competitors to define your position and your benefit.
Also in this case you can use the information obtained during your preliminary analysis, seeing how many activities similar to yours are present in your area and where they are located. In the case of specific activities, linked for example to restaurants or hospitality, you will also have available thematic resources such as TripAdvisor or Booking that will provide you with further information about their price ranges, their specialties, their appreciation from the public.
Barriers to entry
In this section you will have to answer at least two questions, the same ones that any potential investor would ask you …
- What makes you think you can succeed by entering this market?
- What prevents someone else from opening a store identical to yours on the other side of the road and stealing 50% of the profits?
Here are some examples of entry barriers …
- Consistent initial economic investment
- High technology required
- Brand value
- Regulations and laws
- Access to resources
- Access to distribution channels
- Structural costs
The answers will depend on the type of your business, the team you have chosen, your knowledge … there is no single answer.
Make sure you have analyzed and presented them in the right way.
Investors love entry barriers because they reduce competition.
If regulations are a barrier to entry into your industry, then it will be the first thing you have to think about.
Otherwise, this section can be a simple exercise to explain the regulations applied to your sector and what steps you intend to take to comply with them, further demonstrating how much you are prepared on the subject.
All these elements will allow you to get a complete and in-depth market analysis, which will have a key role in your business plan.