A vital part of your business plan is the market analysis section. This is the section of your plan where you have to show your market expertise and how financially attractive the market is. So how to do a market analysis for a business plan.
What’s market analysis?
A market analysis is both a quantitative and qualitative assessment of your market. You are looking at market size in terms of volume and value, assessing customer segments, buying habits, competitors, the general business environment, associated regulations and barriers to entry.
How to do a market analysis?
The market analysis section has an aim to show investors that you know your market, can you prove it’s big enough to grow and for investors to get a return on their money.
Demographics and segmentation
When analysing the market, you should decide if you need to assess the local, national or international market. If you are a corner shop, local is better, but an international law firm needs to understand the global situation. You may want to split your market into segments. How to decide if you’re going to segment your market? Take a look at your competitors. Do they focus on specific sectors? Don’t necessarily copy them but does their focus reveal any opportunities? Something they have missed or not doing properly?
Volume & value
So moving onto volume and value Work out the number of potential customers in your sector. Then look at the value of each customer. Now you can work out the value of your market.
Define what a future how a potential customer will look like. Where will they be, how will you find them, and what will attract them to you?
Methods for building an estimate
It’s possible to find published market size figure, and some may even be accurate! Government websites have sizing analysis for some markets. There are at least two methods you can use to build an estimate.
A bottom-up approach builds to a global figure starting with single values. As mentioned above, the number of clients X average transaction value. The top-down approach begins with the worldwide number, and you reduce it pro-rata. Work out the number of potential customers in your area, country or city. Then break the global number down to your country, city and region. To test your workings, see how close the top-down and bottom-up figure are. If the numbers are too far apart, it may be wise to look at the figures again.
Now for the target market within your sector. Are you going to sell to the masses or are you going niche, or are you going high end?
This section of your market report shows your investor that you have an excellent understanding of your market. Understand why the market buys from you. What the demand drivers are for your service or product. The high street has the same brands in every town in the country.
Why? People want consistency. They relate to the brand because they know if when using your product, it will be what they expect. A local store with a brand not known outside the town will struggle to get people from other cities to use their services but locally they may offer the best quality to their market. So you have to understand what market you are in and tell your investor what’s your competitive edge. But write it, so they come to that conclusion themselves.
Moving onto your competition. Understand their strengths and weaknesses, as well as their position in the market. Take the opportunity to compare your businesses strengths, weaknesses and market position to that of your competitors. How are you going to exploit their vulnerabilities and beat their strengths? Benchmark yourself against the competitor by looking at price, position, quality, add-on services and other aspects associated with your market.
Barriers to Entry
Onto barriers of entry where you answer three questions, Firstly, what prevents someone else from entering your market and taking your business? Secondly, what makes you think you will be able to enter this market? And finally, what barriers do you have to face to enter this market? As long they do not get in your ways, barriers to entry are good news. Investors will love them. Barriers to entry include:
- Investment – IT would require significant money to enter the market
- Importantly, technology – It would take a lot of new technical knowledge and financing to enter the market
- Regulations – there are many regulations you need to adhere to
- Access to resources – you need to do deals with suppliers and achieve proprietary resources
- Your brand is compelling
- Access to distribution channels distributors, proprietary network exclusivity
Now you have a basic understanding of market analysis for a business plan. And hopefully, you realise it’s a vital part of your business plan is the market analysis section. It’s a chance to show your market expertise and how financially attractive the market is.