Market Analysis: Everything You Need To Know
Market analysis is the qualitative and quantitative assessment of a specific industry market for the purposes of business planning.3 min read
Market analysis is the qualitative and quantitative assessment of a specific industry market for the purposes of business planning. The analysis examines the market's customer segment, value, volume, buying patterns, economic environment, competition, and barriers to entry such as regulation.
Purpose of Market Analysis
Creating a market analysis helps you truly understand your target audience and the conditions of the market, which will inform your ability to create a successful service or product. It will also allow you to distinguish yourself from the competition and stand out in a crowded market. Having a specific audience in mind will help you best use your resources to consider their needs.
Structure of Market Analysis
Your market analysis should include the following sections:
- Demographics and segmentation, which means dividing the market into separate sections with independent drivers of demand.
- Market need.
- Target market, which is the type of customers within the market to whom you plan to appeal.
- Barriers to entry.
The size of the market you'll be looking at depends on the type of business you have.
Market Volume and Value
When assessing the market size, you need to separately look at the value of the market and the volume of potential customers. Develop a specific definition of "potential customer" depending on your business goals. For example, if you have a small local delivery business, your customer base is limited to your community. If you sell vintage T-shirts through an online store, your customer base is widened by geography but limited by interest in secondhand shopping.
More challenging than estimating the number of potential customers is figuring out the total value of the market. In some cases, the market value is made publicly available by the state or an industry organization.
You can use either a top-down or bottom-up approach when making this estimate. With the latter approach, start with unitary values to create an overall number. This could include a calculation of the number of potential clients in your market segment times the average value of a transaction. If you sell office furniture, for instance, this might be the cost of a desk multiplied by the number of people in your area who might need a desk.
For a top-down approach, start with the market size and then work backward to figure out the average spend per customer. For best results, try both the bottom-up and top-down approaches, then compare your results. They should be fairly close if they are within the range of accuracy.
In this section, you'll take a realistic look at similar businesses in the market and detail their strengths and weaknesses. Analyzing these elements clearly will help you understand the niche you can fill by finding potential gaps in the market.
Drivers of Demand
Drivers of demand are the factors that drive the customers in your target market to purchase a product or service. This is a critical part of your business plan as it demonstrates your thorough market knowledge to potential lenders and investors.
Let's look at potential drivers of demand for takeout coffee. In this market, the consistency of the product is likely a major driver. Although a chain coffee shop isn't necessarily better than a local shop, customers know what to expect because they get the same cup of coffee every time at every location.
Ideally, your business plan will address specific drivers of demand for your target market that your competitors do not address. For the coffee shop example, you could discuss that your shop would offer a community meeting space in addition to great coffee. Your target market would be locals looking for a warm, friendly spot to gather.
The following resources can help you gather the research you need to create a comprehensive market analysis.
- The U.S. Small Business Administration provides national, state, and local industry information and resources.
- The U.S. Census Bureau provides demographics you can use to calculate your market share as well as other pertinent information.
- The Bureau of Labor Statistics provides workforce information for your industry.
- The U.S. Small Business Administration also offers development programs, industry guides, and local resources as well as guaranteed loan programs for small businesses.
- The U.S. Department of Commerce offers further online resources.
If you need help with your market analysis, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.