Conducting a market analysis for your small business

Whether your business has a physical location or operates solely online, thorough market analysis can help you to understand your target market and how you can thrive within your industry.  

Market research is the process of gathering information about your customers’ needs and preferences. It can be used to help you start a business, determine the viability of a new product or service, or assess brand perception and awareness.

There are two kinds of research: primary and secondary. Primary market research is information you gather yourself. This could include going online or driving around town to identify competitors, interviewing or surveying people who fit the profile of your target customer, or doing traffic counts at a retail location you are considering.

Secondary market research is information collected from other sources such as trade organizations and journals, magazines, Census data, and demographic profiles. You can find this information online, at libraries, from vendors who sell to your industry, or from government agencies. (quizlet.com)

The amount of research you undertake will depend on how comprehensive an analysis you require for your business. Areas of focus may include:

The total size of your industry

Is your business targeting broad or niche markets? To calculate market size, look for data on the number of potential customers, or number of transactions each year for your service or product. If you are targeting a niche market, determine if there are enough customers to support your business.

Trends in the industry

An industry outlook provides a general direction of where your industry is heading.  Industry trends can include new and emerging competitors, technologies, legislation, and changing preferences amongst your target markets.

Defining the target market

You may have more than one target customer group. For instance, if you sell a product to consumers through distributors, such as retailers, you have at least two kinds of target customers: the distributors (businesses) and the end users (consumers). Identify your target customer groups and create a demographic profile for each group. 

For consumer-driven businesses, this data should include age, gender, location, income level, along with a profile of how the target population tends to think and make decisions. For business-focused markets, an understanding of the industry served, location, size, and annual sales is required. You should also examine the size of the target market, the purchase potential, motivations of the audience, and how you intend to reach the market.   

Trends in the target market

Areas of focus can include an analysis of whether the market is growing or shrinking, how customer needs or preferences are changing, and how these trends may impact your business in the long-term. Calculating your projected growth shows how your business will fare in future projected market conditions.

Your competition

Understanding the level of competition in the market is key. One of the biggest mistakes a business can make is to claim they have no competition. Every business has competitors. Market research can help you identify yours and understand how to differentiate your business.

How can you position yourself to stand out from the competition? There are two types of competitors: direct competitors and indirect competitors. Direct competitors are those businesses that sell the same product as you. Indirect competitors sell a different but similar product to yours. For instance, if you are opening a restaurant that relies on consumers’ discretionary spending, then bars and nightclubs are indirect competitors.

Barriers to Entry

According to Small Business BC, barriers to entry are conditions which make entry into certain industries and businesses difficult. These can include high funding requirements, the need for never-before-used technology, tightly controlled markets, strict licensing, the need for highly skilled employees or specially designed facilities.

High entry barriers make it difficult for new businesses to enter the market. Often this can mean that the potential for profits is higher, as there are fewer businesses offering products and services that are in demand. However, high entry barriers also carry greater risk.

Business with low barriers to entry can easily get saturated, making it difficult to compete in a crowded marketplace and harder to receive a return on investment.

There are many types of barriers to entry which exist, dependent on the type of industry and market that you are intending to enter. Below are the three most common barriers:

Economies of Scale 

The cost of a product is often reduced when manufacturing in large quantities. To save money and increase profits in the long term, it requires business owners to find a larger amount of money to pay for the goods in the short term. This can be a hurtle for small businesses that have committed their initial investment into start-up costs.  

Access to Distribution 

Small businesses often begin with unstable business networks and low bargaining power. As a result, it can be difficult to penetrate markets that have competitors with long-standing relationships. To gain access to these channels and networks, businesses often need to offer incentives and promotions to make themselves appear attractive which can reduce the level of profit.

Governmental Regulation 

Many industries are tightly bound by regulations and policies. This often creates financial barriers in terms of purchasing licenses and permits or adapting services or facilities to adhere to these regulations.

The number and types of barriers can vary wildly depending on the industry, target market and economy. A market analysis is an essential component in examining the relevant barriers to the industry in which your business operates. (smallbusinessbc.ca)

 A market analysis is an organized way of analyzing market opportunities, identifying consumer needs, and developing new products or services to meet those needs. Conducting market analysis is an important part of starting or expanding your business. Market research is time consuming, but it is an important step in confirming the validity of your business, services, and/or products.