Are your business decisions supported by facts? If not, you might be steering your company off course without even realizing it. Conducting a market analysis can help you create a business plan that keeps you on track.
When you do a market study, you research what products and services bring in profit, and what products and services do not meet demands. You can learn about your customers, competitors, and industry.
Market research doesn’t have to be difficult or cost a lot of money. Here are five steps about how to conduct a market analysis for your small business:
1. Decide the purpose of your market study
There are several reasons why you might conduct market research. Simply put, business owners do market studies because they help reduce problems and create opportunities. You look at past issues to decrease future risks. You also look at past successes to establish profit-making strategies.
Before you start the market research, decide if the analysis is for internal or external purposes. Depending on which purpose you choose, you can use the results to improve business operations or to speak with an outside lender.
A market analysis is an important part of your business plan. If you want to apply for a business loan, you have to show the bank a business plan. Lenders want to see that you know your industry and have explored the potential for your business to grow.
The research you conduct is guided by your purpose for conducting a market analysis. A study done for internal purposes may not need some of the data necessary for research shown to lenders.
For example, lenders want to see how you will handle industry regulations. If you already have a system for managing regulations, you do not need to include this in a study meant for internal purposes.
2. Determine target customers
Everyone will not be your customer, and that’s OK. By focusing on a target market, you gain loyal customers that return to your business. For your research, you need a clear idea of your target customer.
Once you pinpoint your target customers, research the needs, interests, and demographics of the group. Focus on the size, trends, and growth of your potential market.
To make data easier to understand, categorize your target market into manageable groups. For example, if you repair air conditioners, separate data about home customers from business customers.
3. Gather data for conducting a market analysis
Information is your greatest ally when you do a market analysis. The more data you gather, the more useful your results may be.
Your report should be unbiased, factual, and relevant. A strong argument for your company presents less risk to lenders and helps you make informed business decisions.
Here are a few places to start conducting your research:
- Bureau of Labor Statistics and Economics & Statistics Administration
- State and local commerce websites
- Articles in trade journals
- Interviews, focus groups, questionnaires, and surveys from your target market and trade associations
- Competitor strengths and weaknesses
Look at trends in customer behaviors. Find out how different variables affect your business. For example, if you own a beachfront restaurant in a vacation town, the season might determine your sales volume.
4. Analyze your information
Organize your research to present the analysis for your business. You can project how well a product will sell, a cash flow cycle, and a gross margin, among other figures.
Here’s what to include in your market analysis:
- An overview of your industry including size, growth rate, and major customer groups.
- Target market traits including the needs, demographics, buying trends, size, and forecasted growth.
- The market share percentage that you expect to gain, pricing, gross margin, and any discounts you plan to offer.
- The results of your competitive analysis, including market share and strengths and weaknesses of your competitors.
- How you will follow regulatory restrictions and the impact of compliance on your business.
5. Put your market analysis to work
You spend a lot of time and effort conducting a market analysis for your business. Make sure that after you complete it, you put your study to work. If you are talking with lenders, be prepared to speak about how you arrived at your conclusions.
For internal purposes, look at how you can use your findings to improve your business. See if any processes could be made more efficient or if you need to address any target customers.
There may be bumps in the road, but a market study helps you see them coming before you reach them. Whether you are starting a business, introducing a new product, or growing your company, market research can help get you to the next level.
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This article was updated from its original publication date (8/22/2012).