What’s market analysis and how to write a useful one
This article asks what’s market analysis and how to write a useful one. Market analysis is a qualitative and quantitative market assessment. Assessing market size in volume and value, customer segmentation and buying patterns, and also looking at your competitors and the isolating of barriers to entry.
The very important aspect of any business plan or strategy is market analysis. Without it, can’t you demonstrate your own market expertise and knowledge? Or show how attractive the market is to customers and investors.
Size of your target market
The first step of the analysis is working out the size of your target market. By assessing your market, your approach depends on what sort of business you are. Your potential customer definition will also depend on your type of business. Estimating the market value in which you operate is usually a complex analysis. More complicated than assessing your potential customers.
So your approach to market sizing depends on the type of business you are. If you’re a local retailer, you may want to approach market sizing from a local perspective. Say the potential market within 10 miles of your location.
Similarly, you need to look at the assessment on a national level for a chain of shops.
This could be colossal, so you may wish to slice it into different market segments. Especially relevant if you and your competitors focus only on specific segments. Factors which you should take into account but calculate separately when market sizing:
- The number of potential customers
- the value of the market
Why separate them?
Why separately? Think about a scenario where you wish to open a recruitment agency in one of two towns. You find that the first town looks very competitive, and many more competitors are trying to sell recruitment services to your potential market. The second town has fewer competitors. So you may be tempted to move there after all the first town has 20 competitors compared to the 4 in the second town.
But on a closer look, you see the first town has 2000 potential customers. Better infrastructure and access to grants have brought more businesses into the area. But the second town has only 200 potential customers.
Try dividing the number of potential customers by the number of competitors. The 20 competitor town with 2000 potential customers offers 100 customers per competitor. The town with fewer competitors gives 2000 potential customers split between 20 competitors. – 50 customers per competitor. Perhaps a simplistic example, but it highlights the point well. Maybe you will look deeper than just dividing competitors over potential customers. But it’s an excellent way to start seeing the market quickly.
Defining a potential customer depends on your type of business.
The delivery company will have a delivery range and will only have so many vehicles and drivers. So it’s best to focus efforts on the highest potential return.
Estimating the market value is more complex than assessing how many potential customers. The first step is to see if the figures are publicly available. Usually via a secondary source such as a consultancy or government organisation, and mostly from websites or national business libraries. And then ask people in the industry for their opinion and thoughts.
Bottom-up top down
The two main methods used to create market size estimates are the bottom-up approach and the top-down approach.
The bottom-up approach builds a global number that starts with unitary values, such as the number of potential clients timed by the average transaction value.
First, assess the size of the businesses in your target market area. Then estimate the number of times a customer will buy from you every year. Estimated market value is the average price to the annual volume of transactions
- Get the amount and size of businesses in your market area from the national statistics.
- Potential customers will tell you how many times they usually buy what you offer
- Ask your competitors for market data and pricing information
That’s the bottom-up approach. Now move on to the top-down approach.
The top-down approach starts with the big global number and then reduces it pro-rata. So your UK market is valued at £750m. Then look at the business in your area who could buy your products time the times a year they will buy.
Compare and contrast
Conduct both bottom-up and top-down approaches when estimating market size. Then compare your findings and work out any differences between the two results. If the results differ wildly, you probably missed something or used the wrong numbers. Now it’s time to determine which market segment you believe should be your target market.
The target market is defined as the type of customers you will target within the market. Not rocket science. If you sell men’s shoes, you can either:
- Be a generalist
- Focus on the high end
- Sell to the lower end of the market
Clearly, each segment will have different drivers of demand. For example, price is the primary driver in the lower end market. At the same time, hand-made exclusivity and prestige would drive the high end.
The more qualitative side of the market analysis
The qualitative side of the market analysis assesses what drives the demand. It’s essential as it shows your team or an investor if you are seeking funding:
- How well do you know your market?
- You know why they buy
You need to dig into the key drivers of demand for your product or services.
Take beer as an example. A driver for beer is consistency. The beer you are served in a pub chain is not necessarily better than that from a smaller one across the street. But if you don’t know the city, you dont know if the beer in the smaller one is up to standard. It probably is, and it’s probably better. But you don’t know for sure.
Now you know the beer from the brewery chain will taste like every other pint you have drunk. So most people tend to buy a pint from chains rather than risking a small independent pub with funny named beer. You know the beer is going to be consistent.
Your competitive edge
This is the section of the market analysis where you define your competitive edge. Or, if you are seeking an investor, point to the competitive advantage. But allowing (or leading) the investors to see it. Let them think they are clever enough to see your competitive advantage.
Then take a look at your competition.
Give an honest view of whom you are going to be competing against. And then explain your competitors’ positioning and describe their operation. Determine their strengths, weaknesses and market positioning. Something more than just a quick and easy SWOT analysis. Try asking why they are stronger or weaker than you? And then what you can do about it?
Then explain your own market positioning. And isolate the drivers that your competitors are not putting much effort into. Analyse your competitor’s route to market, and find weaknesses that you can use in your own market positioning and message to your consumers.
Try benchmarking your competitor against each of your market’s key demand drivers. Include price, quality and add-on services. Service levels and product features etc. Present the results in a comparison table. But always look to go beyond benchmarking. You don’t want to be the same as your competitors. You want to be much better.
As you would have guessed, barriers to entry are great things for investors. They protect your business and their investment from new competition! And because of this, high barriers to entry tend to be more expensive.
What’s market analysis and how to write a useful one
This article asked what’s market analysis and how to write a useful one. Now you know how to do a fundamental market analysis for a business plan! I hope you found this helpful article. If so, please share it, and if not, let us know what we need to improve.