A market analysis is an assessment of any given market that includes both qualitative and quantitative research. Conducting a thorough market analysis as a key piece of your business plan ensures that you know everything there is to know about your market.
Coincidentally, it reassures any current or future investors that you know what you’re doing, that you’ve done you’re homework and that you’re the right entrepreneur to address the gap in this particular market.
But — in order to conduct a thorough market analysis — you need to cover a wide range of topics. Before diving into the specifics, remember that at its core, a market analysis is about learning the most you can about your market.
You’ll discover who your customers will be — and how many are out there! You’ll poke around and learn where they’re spending their money and how much they’re willing to dish out for a product just like yours. Oh, and you’ll also do some major sleuthing on your competitors.
What does the industry in which your startup or small business exists look like? Be sure to include size, trends, life cycle, and any projected growth. It’s good to start with an industry description and outlook because it gives the rest of your market analysis solid, broad view to start from.
If your startup or small business targets more than one market segment, you need to outline that in the demographics and segmentation section. Start with demographics and then examine other possible segments. Some to consider include geographic segmentation (where do people live) and behavioral segmentation (what are specific, relevant actions people take).
If the industry description is the broad view a market analysis starts from, then target market is the view from a microscope. This is where you’ll determine and lay out exactly who your product is for. Be specific. A target market description should include the market size as well as a specific user persona.
When developing a user persona, create an actual person. What’s their name? How old are they? What do they do for work? Do they have a family? The specifics will help you narrow down exactly who you’re targeting and will help you outline more general demographics for your target market.
The total addressable market (TAM) explains just how much potential for growth your startup has. Investors want to know you’re solving a painful problem in a giant market. They want to invest in good companies that can have huge outcomes to make up for all the bad investments they might have made. They’re thinking to themselves, “If this startup isn’t going after a big enough market, it won’t be able to create an exponential outcome for me.”
TAM addresses the question “How many people could potentially use this product?” It doesn’t mean how many people will use your product. This is the question you’ll get asked the most, and the answers are often the most wrong. We’ll get to that later.
The problem starts when people don’t realize they are using different terms interchangeably. Are you being asked how many people could potentially use your product or how many people will use your product? Nearly every person on the planet may have the ability to watch Netflix, but that doesn’t mean the TAM for Netflix is the entire population of Earth!
Market need is about determining the drivers of demand for your product? Why do your potential customers need your product? What will drive them to spend their money on it? In this section, you’re going to look at the current behaviors of your target market and outline how those behaviors prove that they’ll be interested in spending money on your product.
Market need is not your competitive analysis, but it does help to look at your competition in order to determine how people are already behaving. It also helps because you can find gaps in the market — need that aren’t currently being filled that your company can fulfill.
If you’ve been able to conduct market tests — or if you have access to market test results that have been conducted by someone else — you should write them up in the market test results section. What conclusions did you come to after running your tests or doing your research? How did you get to those conclusions? Do you have any experts who can back you up?
An important part of a market analysis is determining who’s already on the field. Who are your competitors? Outline their strengths and weaknesses. Once you’ve determined those, you’ll be able to use them to determine your own startup’s advantage and marketing position.
You need to be able to give an estimate of how much customers will pay for your project. Imagine if you were an investor and you got a pitch for a product that was essentially a ballpoint pen and the founder was trying to claim that people would be willing to pay $4,000 for it. You’d throw that pitch away, right?
So, be realistic. Do your research. Examine the market. See what people are already paying for similar products and peg your price in the same range. You don’t want to undervalue your product — but you don’t want to over value it either.
The barriers to entry section on your market analysis is all about what prevents a competitor from taking over your position in the market and what makes you the best person and your company the best company to do what you do. You need to be able to answer the question of what prevents a competitor from opening up and taking a large portion — or the entirety — of your market away from you. You also need to be able to explain why you’ll be successful in this market.
What are the specific barriers to entry for your competitors? Consider things like technology required, any regulations in your market, investment needed, access to resources, brand visibility, and location, depending on your business and your market.
What regulations are required for your market? Explain what they are and the steps you’ll be taking to remain compliant with them.
While there are online tools that can help you with your market analysis (and we’ll highlight some below), a great market analysis can’t be done solely with online tools. Instead, you’re going to have to put in the work to really dig deep, sometimes using old fashioned research methods.
When you’re looking for demographic info, look no further than the US Census Bureau. You can find great information ranging from locations to age to race (to name just a few) on their site.
If you’re looking to gather information about your competition and your company is primarily online, check out SimilarWeb for extensive data. It’s a great resource for boosting up the credibility of your numbers.
The Chamber of Commerce is a good option for companies that are locally based. So if your small business or startup is focusing specifically on the local market, head to the Chamber of Commerce to learn more about the business climate in your area, as well as who’s already out there in your field.
When you’re trying to learn more about your market, why not ask them yourself? A well-designed survey can give you information about your users that you never would have expected. You can design and conduct surveys yourself, if that’s in your skill set, or you can hire a professional firm to conduct them for you.
Another option is to hire a market analysis or market research company or consultant to help you complete this essential task. Startup founders often think that they have to do everything — and they try to save money by “wearing all the hats” — but it’s fine to admit that you just don’t have the skills for certain things. If market analysis feels way to far out of your wheel house, do a little research and find a company that can take care of it for you.
Your market analysis should be thorough, clear, and comprehensive.
You’re learning about your market to help you convince investors, but you’re also doing it to ensure you truly know the market your startup is in. Both are essential for success, so don’t skip steps on this one.