Before starting a new business—and periodically thereafter—it is important for company executives to carry out a market analysis, also called a market evaluation. Most entrepreneurs conducted a market analysis (to the best of their abilities) when they were developing a business plan. However, for many business owners, this is the only time they perform a formal review.
Regular market analyses are critically important to know who your prospective customers are, what they need, what they want, how much they’re accustomed to paying for it and/or how much they are willing to pay for it. You need to have a deep understanding of how you can best fulfill customers’ needs and wants—and how to do it better than your competitors. This is where a market analysis comes in.
What Is a Market Analysis?
A market analysis is an in-depth evaluation of a product or service’s potential customer base and competition. It provides important details such as the needs and wants of prospective clients, how their needs are currently filled, and gaps in current market fulfillment. It is a crucial step in informing viability and risk, business strategy, marketing and sales structure, competitive advantage, pricing, and more.
Some important components of a market analysis are:
- Identifying the target market
- Determining the needs and wants of prospective customers in that market
- Brainstorming ways to fill those needs and wants
- Evaluating the market competition
- Finding ways to gain and maintain a competitive advantage.
Some companies do their own market analysis, typically with help from their CFO, while others may utilize the services of outside consultants or market research firms.
What Are the Benefits of a Market Analysis?
A market analysis is critical to informing business strategy. Here are some of the primary benefits:
Knowing your market can reduce risks associated with your business. Since you will gain an understanding of major market trends, the main players in your industry, and what it will take to be successful, you can learn from existing data to increase the probability of success. This data can help inform business decisions from pricing to marketing, customer service, and more. To further protect your enterprise, you can also conduct a SWOT analysis, which examines the strengths, weaknesses, opportunities, and threats that apply to your business.
Before embarking on a new venture, and periodically thereafter, it is important to gauge how well your company is meeting its goals and staying competitive. A market analysis can measure your company’s performance against your business plan and key performance indicators (KPIs). This part of the process is informative in ensuring your price points are strategic, your vendor contracts are competitive, your profit margins make sense in your market, your close rate is typical for your industry, and more.
A market analysis should examine your company’s past mistakes as well as industry-specific anomalies. For instance, the analysis might uncover the reasons why a particular product failed to meet projections or what caused an unexpected surge in expenses. This information can help you avoid repeating errors and provide guidance to help you through future difficulties.
You are in a much better position to serve your customers when you have a firm grasp on what they expect from you. When you know who your ideal customers are and their current available solutions, you can use that information to tailor your company’s offerings to better suit your customers’ needs.
Staying ahead in business is often about being quick to spot a new opportunity or industry trend. When this happens, a market analysis can help you evaluate and take advantage of the situation.
A financial forecast is a key component of most market analyses and vice-versa. This will give you an idea of how much profit you can expect, allowing you to adjust your business plan and budget accordingly.
Periodic market analysis can help you identify those marketing efforts that are working well and which aspects need attention. A study of your competitors’ marketing strategies can help you find ways to stand out and attract more sales.
When Should a Market Analysis Be Conducted?
A startup company should conduct a market analysis before engaging in business to determine whether the business idea is viable, who the target customers should be, how much competition to expect, and what the projected revenue will be.
It is wise to do a market analysis whenever a new project is contemplated that requires a substantial investment of money, time, or resources.
Ideally, a company should do a market analysis at least annually to evaluate its current situation and plan for the year ahead.
What Steps are Involved in a Market Analysis?
The procedures followed will vary according to the type of business, the particular industry, the size of the market, and many other factors. A market analysis may be broad, covering many aspects of the business, or it may be limited to a specific purpose such as evaluating brand recognition or comparing the effectiveness of different ad campaigns. Here are some general steps that generally apply to most market analyses.
1. Determine the Scope
Because market analysis can be expensive, it is important to set clear goals and timelines for the study. The issue to be examined and the data to be gathered should be clearly defined and understood by all participants. Specific assignments should be made, reporting procedures established, and deadlines set.
2. Define the Market
It is important to identify the industry, the target customers, the geographic area, and the competitors that will be studied. Going outside of the defined scope of the analysis can result in extraneous data gathering and skewed findings.
The current size and growth potential of the market as well as any trends or foreseeable changes in the industry should be investigated and taken into consideration.
3. Establish Data Requirements
Determine what information is needed to meet the goals of the market analysis. Create a spreadsheet or database to store the findings. Build a list of questions to ask respondents. Decide whom to interview and how to proceed.
Here are some questions you may wish to consider as you decide what data to gather:
- Who are my potential customers or clients?
- Where do my ideal customers look for information?
- What are my prospective customers’ buying habits?
- How big is my target market?
- How much would customers be willing to pay for my product or service?
- Who are my principal competitors?
- What are the strengths and weaknesses of the competition?
4. Gather the Data
Once the data requirements have been set it is time to do the research.
Some information can be collected online using sources that are as current as possible. This may include market reports, trade association news, competitors’ websites, census information, etc.
Face-to-face interviews, telephone calls, and web conferences may be used to gather information from current customers, industry experts, and others who have relevant knowledge to share.
A focus group consisting of a few representative customers can be a way to gather valuable feedback if you have something to show them such as a product prototype or advertising campaign.
A survey can be posted online or sent out via email or postal mail. In most cases, you will need to provide some sort of incentive to encourage participation.
Gathering data on the competition can be challenging. You may be able to interview a friend who works for a competitor or someone who buys their products or provides services to them. Visiting their websites and viewing their advertisements can also be beneficial.
When interviewing individuals, it is useful to record relevant characteristics such as their age, gender, and geographical location. This can help you refine your understanding of the target market.
Analyze the Data
Organize the collected information and prepare a summary report. Make sure there is sufficient data to make reasonable conclusions and that the data gathered is relevant. If anything is missing or seems anomalous, you may need to collect more data to ensure a full understanding.
Make Business Decisions
Based on the results of the analysis, company executives can determine whether and how to proceed. A market analysis can expose the need for changes in product features, pricing, or marketing strategies. It may identify unexpected trends or new customer types. Or it may indicate that the proposed project is not worth pursuing at all.
A market analysis can help you make appropriate, informed business decisions, particularly when you are considering a new idea or project. Regular analysis of the market can help keep your business on target for growth and competitiveness.
If you would like further information or help with market analysis and other financial needs, we encourage you to contact Preferred CFO today.
About the Author
Anna Bissell is an experienced finance professional with a track record of improving performance and processes in organizations ranging from $5M to over $500M. She has a particular talent for strategic growth, process improvement, financial controls, and asset protection.
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