What is market analysis?
The term “market research” might conjure up images of people conducting street surveys or offering free samples in a store, but in reality it’s an umbrella term for researching the potential market for your product or service, to make sure there is a demand and a space for your business. Understanding your market involves analyzing quantitative data — such as the demographics of your city — and qualitative data from focus groups and surveys. The resulting market analysis will help you write your business plan, which in turn can help you develop a solid understanding of your potential customers.
What to include in your market analysis
The goal of market research is to understand whether there is room in the market for your business. The first step is identifying the overall market size of your industry and then drilling down to look at trends. From there you can see the potential for growth within your market, and then the potential for a space in the market for your service or product. Analysis can be done by splitting your research into digestible sections, such as these below:
- Market size (current and future)
- Market trends
- Market growth rate
- Market profitability
- Industry cost structure
Market size is the number of potential customers for your business. Your market can be broken down into total available market (TAM), served available market (SAM), and share of market (SOM). To determine how much of a market you can capture, or indeed should capture, you want to assess the individual segments of the market. For example, if you are planning on opening a gluten-free bakery in Calgary, then the TAM may be the population of the city, further split into the demographics most likely to visit your bakery (you can estimate this using resources such as Statistics Canada to create a profile of your ideal customer). The SAM would be an analysis of the market that the bakeries in Calgary already serve (this would involve walking the neighbourhoods to identify current bakeries and conducting surveys with customers) and your SOM would be the potential number of customers for a gluten-free bakery — again based on a top-down and bottom-up approach to research. Top-down means estimating your market based on what slice of the total market you could theoretically take and bottom-up means estimating your potential sales.
When looking at market size, you should also examine market trends. These can include the financial direction that markets take over a period of time (growth) or the wider social trends for your industry (check out our ideas for staying ahead of industry trends). Determine the ups and downs of your market by looking to see if there are high and low seasons (such as in retail, hospitality or wedding photography) and consider the risk factors of entering this market. Risk factors could include political, economic and social considerations: Perhaps you’re opening a new coffee shop in Canada and need to think about how the U.S. dollar might be affected by world events (as coffee beans are traded in USD). Socioeconomic trends could be found by looking at news stories to see if there is a new trend for direct trade rather than fair trade beans, for example, or whether there have been studies released recently that link coffee intake to a particular health issue.
Customer habits should also be considered, so you can build a customer profile based on when people will be buying your product and what customer need you are offering to solve. Field research from surveys and focus groups, combined with searches of industry internet forums can help you gather this information.
Growth rate is the speed at which your chosen market is expanding. Here, you can look at resources such as the stock market, Statistics Canada, online reports about the number of new businesses opening in your sector and a physical survey of your geographic area for a brick-and-mortar business (e.g walk around the area and see what’s there already). Market growth can be affected by barriers to entry into the market such as legal or financial regulations that can hinder businesses in your industry. This could include issues such as permits, city zoning and licensing costs. Talking to city officials is important, as is finding out if there is a regulatory or professional board that oversees your industry.
Be sure to also consider market saturation. If there are already too many similar businesses or a particular trend is on the wane – such as the cupcake fad that lasted between the early 2000s and 2014, or the decline of video rental stores — then the market might be expected to continue shrinking at a rapid rate.
Market profitability is the potential for your business to actually make money in your chosen sector. Perhaps you want to launch an organic hemp clothing store, but the costs of manufacturing and base materials could mean that it’s not a profitable venture. Determine whether you’ll make money in your chosen market by looking at your potential buying power (based on the size of your business and how much stock you’ll be buying from suppliers) and considering who and what your suppliers will be when you launch.
You can learn a lot from your competitors as you study them to determine how they run their businesses, especially if they are the current “big fish” market leaders. Competitor analysis is essential as it examines the strategies that rivals are using. It also acts as a barometer for your strengths and weaknesses by comparing your structure and resources to other similar businesses. Understanding your competition is crucial, especially for small businesses in a local market where another similar store or service can make a big impact.
How will you determine whether your business is a success? Determine key indicators of success through profit margin, sales targets or expansion plans. Conduct a SWOT analysis of your strengths, weaknesses, opportunities and threats to help identify your unique selling proposition (USP) so you can focus your market research.
Industry costs are a major part of your financial planning. Calculate the typical costs faced by someone opening and running your type of business — you can check average lease prices, equipment costs and staff salaries by, for example, talking to other people in your industry or getting quotes from suppliers (if available). Common costs for brick-and-mortar businesses are rent, decor, equipment, products, insurance and staffing, whereas online businesses tend to be more focused on customer service, shipping and distribution. Start up costs vary based on industry and your market may require special insurance, licensing or more space to operate. Check out Small Business BC’s guide to estimating startup costs.