February 11, 2020

How Do You Do a Market Analysis?

Small Business
Ronald B. Allen

A successful business makes products or offers services that it can sell. That means you need to do a market analysis of what you are selling in the area where you want to sell it. An analysis of your proposed market should be part of your business plan. How do you do a market analysis and what specifically do you want to learn?

What Do You Need to Learn from a Market Analysis?

The basics of a market analysis or market study should include what products and services will sell, which will bring in a profit, which customers will buy them, and where those customers are. It is important to also include competitors in the industry as part of your market analysis. This can be a very detailed and expensive undertaking, but it does not have to be. So, how do you do a market analysis and not break the bank? Start by looking at exactly why you are doing your analysis.

What Is the Purpose of Your Market Analysis?

Is this for a new business, expansion of an existing business into to new geographic area, or the introduction of a new line of products and services? Is it that business has dropped off recently and you need to know why? Or, are you looking at using the internet to promote your business and need to know what the possibilities are and what SEO tools to use?

If you offer a high-end service that sells well in the affluent area where you do business, will you be able to make sales in other parts of town, or other cities? Or, will there be too little business to make such a move profitable. On the other hand, is a competitor going to move in next to your territory? If so, you may choose to accept a lower profit margin in order to protect your business.  Or, you may decide that there is so little business in the new area that your competitor will not succeed and will simply go away.

One important point to keep in mind is whether you are doing market analysis simply for your own purposes or in order to seek financing. This could affect how formal your study will be and also how complete. As an example, a lender may wish detailed information about how you will deal with governmental and industry regulations. This is not necessarily information that you will need to publish for use “in house.”

What Customers Will You Target with Market Analysis?

Is your business a local service business that will not be likely to draw customers from too far away? Or, do you sell on the internet and not have to worry about how far away people live? Your market analysis should include where your customers are, which will affect how you reach them. Then, you will look at population sizes and growth or shrinkage of that part of your market. In doing this, it is a good idea to break the analysis down by product or service if the likely markets are different. And, business customers should be considered separately from others as they will have different needs and requirements.

Market Analysis Requires Numbers

Depending on what information you need, there are good sources. You usually do not need to start going door to door asking questions. However, if your sales people have kept good records of who has purchased what, that is always a good place to start. Otherwise, here are a few good ideas for finding numbers.

Articles in Trade Journals

Any formal surveys

Interviews, questionnaires, focus groups, from trade associations and focused on your likely customers

State and Local Commerce Websites

Bureau of Labor Statistics and Economics & Statistics Administration

Any information about your competitors’ strengths and weaknesses

It is important to look at trends as well as static numbers. For example, there may not be many potential customers on the edge of your city, but if that is the current growth corridor, it may be exactly where you want to expand. Seasonal changes can also be important, depending on your business.

Analyzing the Market Information

If you use QuickBooks for your business accounting, you are already a step ahead as this handy accounting software can also give you market share reports and competitor analysis. And, there are several apps that integrate with QuickBooks to make the job easier.

In general, start with the big numbers including potential market size, rate of growth, and identifiable customer groups.

Then, look at the traits of your target market including demographics, buying trends, needs, and forecasted growth.

Create an overview of your industry to include size, growth rate, and major customer groups.

In here is where you want to estimate and/or predict what percent of the market you are aiming for, what pricing the market will sustain, expected extra costs of going after this market, and your likely gross margin. This is the point at which you need to consider if you will attempt to get into this market with price breaks and discounts. And, your analysis should consider how long you can sustain that. Here, again, is where QuickBooks is useful. But, if you feel your current bookkeeping setup is not keeping up, you may wish to outsource your accounting for this task.

Even though you may only be doing this market analysis for “in house” consideration, you need to consider all aspects of complying with regulations as these are costs of doing business. And, if your new business efforts will increase those costs, you need to include that in your analysis.

Market Analysis Should Be Put to Use

To be of use, your market analysis needs to be well organized, contain useful (and accurate) information, and integrate with the business knowledge that you already have. And, it should ideally amenable analysis with modern business intelligence software like QQube, QBAR, or Microsoft Power BI. If your intent for doing market analysis was to expand your business, you will follow your market analysis to its conclusion in deciding if you can do that and in what manner. If your market analysis indicates that your plans will not work out, you need to make sure that your data is OK, your conclusions are sound, and bounce the report off someone you trust. As the top accounting firm in the Kansas City area, we at Exigo Business Solutions commonly help companies apply market analysis to real world problems and plans. If you have any questions, please feel free to contact us.

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