There are several different ways of being innovative, such as inventing a new product or service, significantly improving one, pioneering a new method of production or revolutionizing an industry. A less-common way of innovating is to create an unmet need or an entirely new market space or recreate an existing market space. However, innovation alone is not enough. There has to be a market for your product or service. The DeLorean Motor Company, Billy Beer and, more recently, the Kardashian Kard are examples of what were thought to be brilliant ideas that failed, at least partially through lack of demand.
Some entrepreneurs come up with an idea for a product or service and then look for a market that can use it. Others start with a particular market or industry in mind and then conceive an idea to serve that specific market or industry. Either way, for an idea to evolve into a successful business, there has to be a market need–whether it’s an already existing one or a newly discovered or created one.
After completing the feasibility assessment I discussed in an earlier article, you should be able to identify your target market or niche, describe an ideal customer and explain how you will help them achieve a goal, solve a problem or satisfy a need. As part of the assessment, you should conduct enough preliminary research to gauge potential market interest. Ways to do this include questionnaires, focus or discussion groups, interviews and surveys. The feasibility assessment should be done before starting work on a business plan.
Once you reach the business planning stage, you will want to do a more indepth market analysis. According to Entrepreneur, market research is, in part: “The process of gathering, analyzing and interpreting information about a market, about a product or service to be offered for sale in that market, and about the past, present and potential customers for the product or service.” Market research will help you better understand the industry or industry sector in which you operate, the strengths, weaknesses and competitive advantages of your competitors, and the wants and needs of your potential customers. It will also help you determine whether or not there is an adequately-sized market for your product or service.
Market research is usually classified as either primary research or secondary research, depending on the sources and methods used. Primary research consists of gathering your own data through observation, interviews, surveys, focus groups, yellow pages, etc. It also includes professional market research. Secondary research includes the use of data obtained from the Internet, government agencies, public libraries, industry or trade associations and publications, chambers of commerce, vendors and others.
Professional market research is expensive and beyond the reach of many startups and small businesses. Fortunately, other low-cost or no-cost alternatives are open to the do-it-yourselfer. Public libraries used to be, and to some extent still are, an excellent resource. Nowadays, though, you will probably find far more information–and find it more easily and quickly–on the Internet. Several government websites provide statistical and other information, including the U.S. Census Bureau, the Bureau of Labor Statistics and FedStats. The Audit Techniques Guides on the IRS website contain useful data about numerous industries and market segments. Public records information is available at BRB Publications.
Facts and figures about specific industries or companies can be found by using your Internet search engine. Here are a few examples. To find out about trends in the renewable energy industry, type “renewable energy” “market trends” into the search field. Type “organic food” “market size” for information about the size of the organic food market. Type Toyota “market share” to obtain Toyota’s market share.
Web portals are websites that provide data gathered from diverse sources on the Internet. They can be used to obtain information about specific markets or industries, including trade associations, trade journals and trade shows. For example, type “construction industry web portal” into your search engine to research the construction industry. The websites mentioned above are only a sampling of the multitude of data sources available on the Internet. When doing your own market research, do not overlook your local bookstore.
The results of your market research should be included in your business plan, probably in summary form. You might have a section titled Industry, Market and Competition or something similar. Other names often used include Definition of the Market, Market Analysis or just The Market. This section of your business plan might be organized as follows.
Provide a short description of the industry, industry sector or segment in which you operate, including a brief history, unless such information is generally well-known.
Industry and Market Analysis.
Summarize your understanding of the current state of the industry or market, including its total size, growth potential, factors affecting future growth (such as economic outlook, government regulations and technological advancements), trends in customer needs, customer preferences and product/service development.
Target Market and Ideal Customer/Client.
Segment the market according to the following factors: geographic, demographic, psychographic (personality) and behavioral (loyalty, buyer motivation and expectations, etc.). Profile each segment based on market share, revenue and profitability potential. Identify and describe your target market or niche. Explain your perception of target market size, demand, and critical customer problems, wants and needs. Identify your current or initial (i.e., startup) share of the market and the potential for growth.
Describe your ideal customer or client according to their demographics and other pertinent characteristics. If selling business-to-business (B-to-B), these characteristics may include industry or industry sector, size of firm (revenue, number of employees), location, years in business, values, product or service usage, purchase criteria, decision-making process, loyalty, and price, quality and technology expectations.
If selling business-to-consumer (B-to-C), relevant characteristics may include age, gender, marital status, family size, location, income, occupation, education, ethnicity, nationality, religion or beliefs, lifestyle, leisure interests, motivation for buying, loyalty, values and attitudes. If selling to consumers through intermediaries, rather than directly, consider the characteristics of the end-user as well as the wholesalers, distributors and/or retailers. If you have several target markets or customer groups, identify and describe the most important ones.
Identify your major competitors and describe their strengths and weaknesses, including the following: image, reputation, stability, reliability, market share, location, customer service and credit policies, variety of products and services offered, quality and price. Explain whether they compete only for specific products and services, specific customers, specific locations or across the board. Include both direct competitors (those that serve the same target market with the same or similar products and services) and indirect competitors (those that serve the same target market with different products and services, or those that serve a different target market with the same or similar products and services).
Describe your competitive advantages and disadvantages (strengths and weaknesses) relative to each of your major competitors and, if appropriate, to your individual products and services. Describe your products and services from a customer’s perspective, using the relevant criteria identified above under competitor strengths and weaknesses, and focusing on benefits, rather than features. Describe the barriers to entry for other competitors wanting to enter the market (e.g., capital costs, production costs, marketing costs, brand recognition, skills, experience, training, licensing and technology requirements). Explain how you will use these barriers to entry to protect your customer base.
In conclusion, your business plan must demonstrate that you understand the industry or market in which you operate. You must identify and properly size your target market or niche (not the entire market) and be able to describe your ideal customer. You must also show that you know who your competitors are. Keep in mind that a company that does not conduct any market research will be at a distinct competitive disadvantage compared with a company that does.