How to Perform a Market Analysis and Define Your Target Market
“Strategy 101 is about choices—you can't be all things to all people.” Michael Porter’s advice is key to understanding how your business identifies a target market and develops a solution to meet the identified need. One of the fundamental parts of any business plan is the market analysis. The business owner will quantify the “problem” your product or service will solve by measuring the total market for the products and services you will offer and illustrate the landscape in which you will be competing.
You have a great idea for a business, but you need to know if that great idea can be both viable and economically sound for your business. There are many factors that determine whether or not an idea is economically feasible and ultimately sustainable. The total market potential for the solution you intend to sell needs to include factors such as a realistic assessment of the number of prospective customers, how many competitors are in the same market, is the market growing or shrinking, and if so, at what rates? Answering these questions will help you to draft the market analysis, which comes after the products and services section. The foundation for the market analysis section of your business plan needs to describe the pertinent industry, identify the target market, analyze your competition and determine how you intend to make a place for your own product and/or service.
Description of the Industry and Prospectus for the Future. Do your research and determine the path of your industry. Have you chosen one that is expanding or contracting? Have you chosen an industry that is experiencing disruption from technology? You need to describe to the reader of your business plan how your chosen field can support a new entrant, whether it is through disruption or growth, as a means to measure and justify the risk to enter the market.
Identify your target market. In other words, describe the ideal market niche for your product or service. Identify any troublesome issues faced by this target niche and how your product or service solves these problems. This is where you can explain your value proposition, how you solve a problem and your estimate of the value of this solution to your target niche. You need to make sure and quantify the size of your target market. How big is the market and what are steps necessary to penetrate that market and sustain it going forward? As you cannot be all things to all people, it is imperative to keep to keep a sharp focus on your particular market to preserve your specific niche.
Results of R&D. Have you performed any research and development for your product or service? If so, you need to describe in detail what R&D was performed and the results of such testing. Not every business needs to perform R&D. If you are starting a service business, such a tax preparation service, you are not likely performing R&D on the service you deliver. However, if you are a software company, you are using computer science to create and test your product, so you have performed R&D. You need to detail the specific steps in the scientific process you followed, as this will give the reader a deeper understanding of your product and the need it will address. Potential investors will be more likely to come aboard with more in-depth information. If you have developed the product, but not yet tested it, it is critical to have detailed plans for testing available for review.
Lead Time. This refers to the amount of time it takes for your product or service to be delivered. If applicable, it is important that this time be competitive with the rest of the market place. Offering a better lead time than your competitors can be a great differentiator for your business, but it is one in which you must be able to execute on an order to make that faster lead time a realistic differentiator.
Competitive Analysis. If there are competitors in your market place, you should perform a Strengths, Weaknesses, Opportunities, Threats (SWOT) Analysis. In performing the SWOT, it is necessary to identify all the roadblocks in order to create a plan to get around them. When your own target market is quantified, it is a good idea to assess the market share that your competitors have claimed. Is there any space in their market that is “green field” (no competition)? Does your chosen niche target “low handing fruit” (short sales cycle)? It is necessary that you differentiate yourself from the competition, as this is very important for your value proposition. A key part of how you will differentiate your business is by your actions, i.e., how you service clients and manage your business. These factors will influence the subsequent advertising and marketing of your product or service when you reach the operating phase.
Identifying and quantifying your target market is likely the hardest part of completing your business plan. The Data Sources available to perform this research are not easy to identify. Start with the internet, as you may be able to find useful information via Google, Yahoo, or your preferred search engine. There are also resources available from your local public library. I have used Reference USA, which is a free database tool accessed through your library card. Performing searches and accessing heat maps are free, but there can be a cost to download data. Identifying your target market is a key pillar to your business plan, as many parts of your business will be built off this information.
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