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A Business Playbook: Market Analysis

The first and most important part of any business plan are the market analysis. New and emerging companies must conduct a detailed market analysis before beginning operations to gain a deep understanding of what they’re getting into. This article highlights the importance of market analyses for businesses and what an effective analysis should include.

A marketing analysis provides much-needed direction for your marketing campaigns and ensures that your money is spent in the most productive manner possible. In the absence of such valuable information, a company would merely be gambling on hunches of the strategies it ‘thinks’ would be successful in the hopes of earning positive returns on their investments.

Furthermore, a clear understanding of both your direct and indirect competition is integral to business success as they impact the overall effectiveness and thus profitability of your business. The key is to understand what makes customers choose one product or service over another.

It is key to clearly define your market before endeavoring to conduct this research. By definition, the pool of customers that are willing to buy your good(s) or service(s) can be defined as your market. However, when speaking of market analyses, the market in question is your potential market in its entirety, not just the actual market served. Your target market isn’t confined to the people you currently cater to, it extends to the people you might potentially reach someday in the near, or even distant future.

Given the volatile nature of markets, knowledge of this information is extremely valuable for your company. Begin with a summary of the market, explain your segmentation, the market’s needs, growth, and trends and then evaluate the information to arrive at a strategic advantage.

A comprehensive market analysis should include:

Industry Description and Outlook – This entails describing the characteristics of the industry you operate in, such as life cycle stage and historical, current and projected growth rates as well as other significant trends characteristics.

Historical Research – Any secondary data available on the market or industry via trade publications, newspapers, industry magazines, the census bureau, the department of labor, the department of commerce and the internet must be thoroughly examined to gain an understanding of the historical trends and characteristics of the market. Of course, your own market analysis also entails extensive primary research to derive specific information that caters to serves your purpose.

Target Market Description – As mentioned before, your target market refers to that consumer segment of the market towards which your marketing efforts and ultimately merchandise are aimed. It is essential that you identify your target market in the analysis, otherwise, you will end up with a lot of information that doesn’t particularly pertain to segments of the market you cater to. Other information relevant to your target market includes:

  • Characteristics Of Target Consumers – You must define the locations and demographics of your target customers, their purchase preferences, determine their critical needs as well as whether those needs are effectively being met, and if not, how you can step in to fill those gaps. Any particular seasonal or purchasing trends (such as Christmas, Easter, Ramadan etc.) that may impact your business are also worth identifying. Be sure to include any and all information on how your business can improve on the goods and services currently being offered by competitors.
  • The Size Of Your Primary Target Market – This not only refers to the absolute number of potential customers but also data relating to the annual purchases your market makes in the industry, current growth rate as well as forecasted market growth rates to determine future profitability.
  • Market Share – This refers to the share of the market’s sales you control expressed as a percentage of total industry sales in a particular period. Upon analysis of various segments on the basis of geography and other demographics, you need to establish the expected percentage and number of customers you can acquire within the short and long term. You will need to examine brand perception, customer loyalty levels, and the overall competitive edge, and develop a strategy to not only make your current share more profitable but also for acquiring a larger market share from the competition. As an aid to decision making, make it a point to explain the logic behind all your calculations.
  • Pricing Strategy – You will need to define your pricing structure by identifying various costs incurred in the production of your good or service, primarily materials, labor, and overheads, among others. You might also need to develop differentiated pricing strategies (such as discriminatory pricing and discounts) for various sectors of the market depending on purchasing power and consumer preferences.

Legislation – Government regulations and restrictions relevant to your market (i.e. any customer or government regulatory requirements) must also be closely studied to avoid any legal action in case of non-compliance.

Competitive Analysis – This is perhaps the most difficult part of the market analysis as it involves defining your competition in terms of product line/service, market segment, and market share. This information is sensitive and can be extremely hard to acquire. You should assess the following characteristics of the industry’s competitive landscape:

  • Each competitor’s respective market share, product lines, pricing, advertising and promotional strategies, unique selling propositions and brand positioning.
  • Strengths, Weaknesses, Opportunities and Threats (this can be done by conducting a SWOT analysis).
  • The importance of your target markets to your competition.
  • Any potential entry and exit barriers in the market. Entry barriers include high set-up costs, a fully saturated market, economies of scale, high switching costs, patents, lack of quality personnel, the presence of cartels and monopoly control whereas barriers to exit include sunk costs (due to investments in special-purpose equipment), specialized skills that are of no use elsewhere and high levels of dedicated fixed costs.
  • Identification of any secondary or indirect competition that may impact your chances of success

The purpose of your entire analysis is to provide a brief overview of market trends and competition and to determine how your business will effectively address market needs as compared to the competition.

So to summarize, a good market analysis should provide

An Economic Overview – This helps you understand where your current market is and where it is going. This entails a detailed analysis of both micro and macroeconomic factors such as consumer spending, growth rates, interest rates and in the case of foreign markets, exchange rates.

A Competitive Overview – This helps determine important information about competitors; the number, strength and intensity of competition prevalent in the market and their strengths, weaknesses and policies.

A Strategic Advantage – This is the end result of a market analysis; the detailed information puts you in a better position to analyze the economy and market much more comprehensively. This enables you to determine the strategic advantage your company has over the competition and identify factors that provide a certain leverage in your area of business. This can be an internal or external strength or some major opportunity just waiting to be exploited.

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