Step-by-step market analysis for building a new product

Market analysis in a business plan is done to assess your position in a market and to justify investing in it. For a precise view of the market you must look at both quantitative and qualitative aspects, so you can show your expertise in that particular market and how attractive the market is financially.

How to analyze a market

We recommend the following steps:

Step 1: Assess market size

The first step in market analysis is assessing market size. To do that, look at the following:

Demographics and segmentation

How you assess market size depends on the type of business. If your business plan is small, take a local approach and try to assess the market around you. If you are writing a large business plan, assess the market at a national level.

Volume and value

Studying market size helps you tell the difference between the total available market (all the revenue you could earn) and your accessible market (the part of the total market you can actually capture). Calculating market size also gives you a sense of market trends and clues about the direction of the market, so you notice if substitute or similar goods start to affect the size of your own market.

Another factor to watch when assessing market size is the number of potential customers. It is important to examine both of these separately.

Potential customer

What a potential customer is depends on the type of business. A general definition: there are always people who need your goods or services but do not use them, or who meet the need through similar businesses.

These people are likely to be attracted to your business and should be among the main targets of future marketing plans.

More simply:

Potential customers are the audience who could become customers: they need our product or service and have not bought from us yet.

Market value

To calculate market value, look at publicly available figures published by a consulting firm or a government body. In most cases you can find at least one national-level figure. If those statistics are not available, you can buy some market research or estimate market value yourself.

Estimation methods

Here are five methods for these calculations:

1. Identify your market subsets.

Even the largest companies do not own the entire market. Focus on your primary customers and, before you expand, make sure you can reach a group of those primary customers.

2. Calculate market size top-down.

Start with the size of the total available market. Then, given competitors’ likely share, calculate a realistic share of that market for yourself.

3. Run your analysis bottom-up.

Estimate where you want to sell the product, which locations you can actually have, and how much of competitors’ goods sell in those places. Try to be as objective as possible. That helps you see your real growth over the next five years. Then compare your calculations with the total available market.

4. Pay attention to existing competition.

How saturated is the industry you are in, and which firms are the leaders?

5. Calculate the stagnant size of the market.

Working in a stagnant market puts you in intense competition, because every year you compete with other firms for the same customers. So you need to know how the market is moving in the long run.

Being realistic about your activity is the most important part of estimating market size. That means being impartial and objective not only about your goods or services, but also about customers’ wants and needs. Otherwise you may be confined to a small market.

After assessing the market you may also need to look at your product opportunities.

Step 2: Analyze the target market

The target market is the type of customer you want to aim at in the market. This matters when your market has clear segments with different kinds of demand. Now is the time to focus on the more qualitative part of market analysis, given the demand that exists.

Market need

This section is important because it shows a potential investor that you have real knowledge of the market and that you know why an investor would want to invest in your business.

Here you need to know the drivers that increase demand for your product or service.

From a tactical point of view, this is also where you indirectly improve your competitive position without being blunt about it. In a business plan, before you introduce strategy, you should talk about how you compete, your strengths and weaknesses, and your market position. What you want is to prepare the reader to understand your position and the implications of investing in your company. To do that, in this section raise some of the drivers competitors have not focused on.

Step 3: Identify competitors and analyze the competitive market

Competitive analysis can be done at different levels of the organization. Competitor product analysis is part of that. The first analysis is identifying your competitors. Note that competitors can be of different kinds:

1. Other players offering products similar to yours.

2. New players in your industry.

3. Companies that make substitutes for your products.

Many companies have both potential and actual competitors. Actual competitors are visibly competing in the same arena. Potential competitors have not yet presented themselves as competitors in your industry.

Your company has more competitors than you think, and several types of competitor, and you should consider all of them.

Step 4: Barriers to entry

This section answers two questions from your investors:

First: what will stop others from entering your business?

Second: what do you think will let you enter the market successfully?

As you can guess, barriers to entry are large. Investors like these barriers because they protect your business from new competitors.

Here are a few examples of barriers to entry:

• Investment (a project that needs significant capital)

• Technology (the advanced technology needed to design a website is not the same as processing uranium; as a product manager you need enough technical fluency)

• Brand (high marketing costs to reach a certain level of recognition)

• Laws and regulation (licenses and special privileges)

• Access to resources (exclusivity with suppliers, proprietary resources)

• Access to distribution channels (exclusivity with distributors, a proprietary network)

• Location

Step 5: Laws and regulation

If regulation is one of the barriers to entry in your sector, I recommend merging this section with the previous one. Otherwise this section should explain the main regulations that apply to your business and the steps you will take to comply.

Conclusion

The goal of market analysis in a business plan is to show investors that you know your market and that the market is large enough to support a durable business. So it is better to run the market-analysis steps with care and precision.

Author: Atefeh Abbasizadeh