What is the Market Analysis portion of the business plan?

Market Analysis plans your approach to understanding the entire market. The market analysis is the backbone of the business plan. The market analysis gives the entrepreneur all of the information necessary to determine whether a product, service, or idea is a valid business opportunity. 

The market analysis will be in-depth and include lots of primary and secondary research. The article below outlines the information from the market analysis that you should include in the business plan. This information will allow you to build the subsequent sections of the business plan, such as your marketing efforts and financial projections.

See our Market Analysis Section for more information on how to conduct market analysis.

How to find out about your potential market?

Start with a plan for conducting Market Research. Research is generally split into primary and secondary research. Secondary research involves using material prepared by third parties that are not specifically oriented to your market. You may look to population and demographic data taken by the government, consumer surveys, targeted articles or surveys, or data derived from other studies. 

Primary research involves direct research of your intended customers. This could include observational research, such as monitoring potential customers. Direct research of customers generally involves some form of information gathering about the customer's preferences, such as questionnaires or surveys. You will need to have a strong handle on statistical analysis to make sense of the many characteristics you identify in your customers. 

In the case of primary and secondary research, you are attempting to obtain both qualitative and quantitative data about your potential customers. This information will be instrumental in evaluating the business opportunity and scoping your approach to conducting business.

Begin by Outlining Your Understanding of Your Product (Features and Benefits)

What are the features and attributes of your products? How will your customers perceive your product? The idea is that you are investigating how your customers will see your product. As the entrepreneur, you naturally have a bias or preconceived notion as to how your product will be received. 

You will have to consciously be objective and unbiased in describing your product's 1) attributes and 2) benefits as the potential customer would perceive them. If you discover or determine that some of the attributes or benefits are not intuitive in the product or service, you will want to begin scoping a plan on how you will make your potential customer aware of these attributes or benefits.

Now Describe Who You Believe Your Customers Are

You understand your product and how the general population will see your product or service. Now you have to identify the individuals or businesses who will be interested in becoming customers. Remember, your product or service will necessarily solve a problem or satisfy a need or want. Importantly, your product or service may serve different needs or wants for different segments of customers. 

As such you will want to identify the characteristics of your potential customer segments and prioritize the amount of demand (how urgent is the need or want?) You will want to document every identifiable characteristic of your potential customers (i.e., customer demographics). For example, for individual consumers you will want to identify: Age, Race, Sex, Ethnicity, Geography, Income Level ,and Social-Economic Class, Family Background, Organizations, Education.

You may have to identify any other unique or identifiable characteristics of businesses, such as Size, Revenue, Ownership Structure, Capitalization, Competitive Status in Market, Geography, Growth Rate, Strategic Plans, and any other potentially relevant information that identifies or quantifies the level of demand (want or need).

Now - What Facts About Your Market Do You Need To Know?

Ok, we have analyzed our product objectively and figured out what features and benefits will interest certain customers. We have divided those customer groups into segments based on their characteristics. This will allow us to directly focus on our marketing and sales efforts on the individual segments. Now the question is - "Will it be worth my time (or profitable) to market my product to any particular segment". You will need to know a lot about each segment in order to determine whether you should even move forward with the venture. Remember, your whole objective is to make money. 

If the market isn't sufficiently large to make the sale of your product, service, or idea profitable, then you will need to revisit something about your product, service, idea, or business model. In some cases, it may be too difficult or too expensive to adequately capitalize on a particular market. There could be marketing, sales, logistics, operational, or strategic costs that make reaching a certain market segment unrealistic or unprofitable. For this reason, you will want to have a firm handle on the feasibility of certain market segments. 

When determining your market size you will want to include only the relevant market segments that can validly reach. Below are some of the questions you will want to ask in determining your target market? 

• Which market segments can I feasibly or profitably reach? 
• What is the size of each feasible market segment? 
• Is one existing market segment prone to more growth than another? (I.e., Is one market segment growing?) 
• Is demand within the market segment created by a need or a want? (Be cautious is assuming that your product, service, or idea will create demand that previously did not exist. Few businesses offer something that creates a previously non-existent demand.) 
• What is the strength of demand within each market segment? - What is the urgency of demand within each market segment? 
• What percentage of each market segment can I realistically capture? (Remember to be conservative in your assessment. Sometimes capturing even 1% of a market share is not realistic). 
• What is the price point for each market segment? (i.e., How much will each market segment pay for the product?) 
• What price point should I set that captures the highest percentage of the most profitable combination of each market segment. (E.g., if you price your product to appeal to a smaller segment of high-end users because of the higher profit margin, you may alienate a large percentage of another market segment. The trick is to determine at what price point you will reach the most profitable mix of potential customers.) 
• Given the feasibility and urgency and price point, how should I prioritize my marketing efforts? (You will undoubtedly have to prioritize your marketing efforts. Understanding the profitability factors will help you understand where to focus these efforts.) 

Conclusion: Your primary and secondary research will give you the information need to determine whether creating a business around your product, service or idea is a profitable business opportunity. It will also supply you with the information necessary to continue planning your business, such as conducting a competitive analysis and creating the financial projections for the business.

Related Topics

• Business Plan, Part 1 (Outline Overview)
• Business Plan, Part 2 (The Executive Summary)
• Business Plan, Part 3(General Description of Business)
  • What is a Mission Statement?
  • What is a Values Statement?
  • Setting Company Goals
• Business Plan, Part 4 (Market Analysis)
• Business Plan, Part 5 (Competitive Analysis)
• Business Plan, Part 6 (Marketing Plan)
• Business Plan, Part 7 (Operations)
• Business Plan, Part 8 (Management and Organization)
• Business Plan, Part 9 (Financial Projections)
• Business Plan, Part 10 (Appendices)
• Business Plan, (Final Modifications)