Market research is one of the most important parts of startup or starting a business.
Your market research should both highlight the financial attractiveness of the market and demonstrate your knowledge of the market: you know who buys and why.
This article begins with a definition of market research and explores the methodology to conduct a market study to understand your customer.
Your priority should be to establish the typical profile of your consumers and validate the demand for your offer.
The idea is very simple and very effective. We begin by defining assumptions about: the consumer, his problem, and the ideal solution. Then we must identify all the assumptions on which the concept of the company rests, then define an experiment to validate them one by one (or to invalidate one and move on to the next idea).
The experiment should allow you to validate or invalidate a hypothesis with the least possible work and a minimum cost. We do not spend 50 k € in a prototype before having collected the interest of potential buyers. On the contrary, we go gradually: we start by talking with potential customers to validate the problem, then we present a solution (paper, PowerPoint, a web page) and we collect something to validate the interest (an email address, order, etc.), then prototypes are presented until a satisfactory satisfaction rate is obtained from the customers.
The example of Trevor Let's take an example. Trevor wanted to sell electric scooters, his assumption was that buyers of Vespa would prefer an electric scooter imported from China (cheaper and more environmentally friendly) than a Vespa. In an attempt to validate the idea, he put a small Vespa sales ad on Craiglist and asked the buyers who responded to the ad why they wanted to buy a scooter. Catastrophic results: Vespa buyers are not interested in ecology!
He then evolved the idea to offer people who work in areas of Manhattan poorly served by public transport and have never had a scooter to try a Vespa and then buy it. Trevor first interviewed potential customers to test if the problem was a lack of information about scooters. It came out that people were well aware of the solution but were not sure that the life style and the image returned by the Vespa were for them.
Uncertainty about the way of life associated with the scooter does not invalidate the solution (try a scooter then buy it), Trevor then made a final test to validate the idea. He put online a fake buying page on the internet offering to try a Vespa for $ 250 / month for 2 months with an option to buy the scooter at the end of the test. Result: 50 orders in 2 hours! Conclusion: we talk to customers first and then write the business plan Imagine the strength of his business plan if Trevor had pursued his idea of a scooter: in 2 hours he managed to get orders for $ 12,500.
Uncertainty about the way of life associated with the scooter does not invalidate the solution (try a scooter then buy it), Trevor then made a final test to validate the idea. He put online a fake buying page on the internet offering to try a Vespa for $ 250 / month for 2 months with an option to buy the scooter at the end of the test. Result: 50 orders in 2 hours! Conclusion: we talk to customers first and then write the business plan Imagine the strength of his business plan if Trevor had pursued his idea of a scooter: in 2 hours he managed to get orders for $ 12,500.
Market research is a quantitative and qualitative analysis of a market.
The study should analyze the market in volume (how many potential customers) and value (what profit potential per customer), the various segments, consumer buying habits, and the business environment (competition, barriers to entry and regulations).
How do market research?
The objectives of market research is to show to potential investors:
- you know your market
- the market is large enough and accessible to be able to build a sustainable business
To do this, The Business Plan Shop recommends the following plan:
- Demographics and Segmentation
- Target market
- Need
- Competition
- Barriers to Entry
The first step in market research is to estimate market size.
Demographics and Segmentation
The approach to use depends on the type of opportunity you are trying to sell to investors. If you write a business plan for an independent restaurant you must evaluate the market around your business. However, if your plan is for a store chain, you need to assess the market at a national level.
According to the aspect of your market it may be useful to cut it into segments. This is particularly relevant if your competitors do focus on certain segments.
Volume and Value
There are two factors that you should consider when looking to assess the size of your market: the number of potential customers and the market value. It is very important to analyze these factors separately. Let's take an example to better understand why.
Imagine that you got the opportunity to sit either in a town or in a city A B:
The approach to use depends on the type of opportunity you are trying to sell to investors. If you write a business plan for an independent restaurant you must evaluate the market around your business. However, if your plan is for a store chain, you need to assess the market at a national level.
According to the aspect of your market it may be useful to cut it into segments. This is particularly relevant if your competitors do focus on certain segments.
Volume and Value
There are two factors that you should consider when looking to assess the size of your market: the number of potential customers and the market value. It is very important to analyze these factors separately. Let's take an example to better understand why.
Imagine that you got the opportunity to sit either in a town or in a city A B:
Table: A City against City B
Although the city B seems more competitive (10 competitors against 2 in City A) and less attractive market (size of 100 m € against 200 m € in City A), with 1000 potential customers it really is more accessible In the city with only two leads
Although the city B seems more competitive (10 competitors against 2 in City A) and less attractive market (size of 100 m € against 200 m € in City A), with 1000 potential customers it really is more accessible In the city with only two leads
Potential client?
The definition of a potential customer depends on your area. For example if you open an office furniture store, your target market will be all the businesses in your delivery radius. As in the example above it is likely that each company only have one person in charge of purchasing the furniture so firm size does not enter the calculation of the number of potential customers. However you will consider when estimating the value of the market.
The definition of a potential customer depends on your area. For example if you open an office furniture store, your target market will be all the businesses in your delivery radius. As in the example above it is likely that each company only have one person in charge of purchasing the furniture so firm size does not enter the calculation of the number of potential customers. However you will consider when estimating the value of the market.
Value of the contract
Estimate the market value is often more difficult than to estimate the number of potential customers. Your first reflex should be to see if the number was not published either by INSEE, or by a consulting firm. You should at least be able to get a figure at national level.
If the figure is not available you can either order a market study from a consulting firm or try to estimate yourself.
Estimate the market value is often more difficult than to estimate the number of potential customers. Your first reflex should be to see if the number was not published either by INSEE, or by a consulting firm. You should at least be able to get a figure at national level.
If the figure is not available you can either order a market study from a consulting firm or try to estimate yourself.
Methods for constructing an estimate
There are two methods to construct an estimate: the "bottom-up" method or the method "top-down".
The "bottom-up" method is to start unit value to build a global figure. In our case it is estimated the number of transactions by volume and multiply that by the average value of a transaction.
Let our example office furniture store and trying to assess the value of the office segment. The first step is to consider the size of companies in our delivery radius to estimate the size of the office park. Then it will try to estimate the fleet renewal rate to derive the annual volume of transactions. Finally it will multiply by the average transaction price for the contract value.
You will find detailed steps and guidance on where to find information.
There are two methods to construct an estimate: the "bottom-up" method or the method "top-down".
The "bottom-up" method is to start unit value to build a global figure. In our case it is estimated the number of transactions by volume and multiply that by the average value of a transaction.
Let our example office furniture store and trying to assess the value of the office segment. The first step is to consider the size of companies in our delivery radius to estimate the size of the office park. Then it will try to estimate the fleet renewal rate to derive the annual volume of transactions. Finally it will multiply by the average transaction price for the contract value.
You will find detailed steps and guidance on where to find information.
- Size office park = number of business in the delivery radius x number of employees (ideally you should refine this number by using the sector to reflect the fact that all employees not necessarily an office)
- Renewal rate = 1 / life of an office
- Transaction volume = size office park x turnover
- Transaction value = average price of a desktop
- Value of the contract transaction volume x value of a transaction
Here you should be able to find most of the necessary information for free. You will find the number of companies and their size on the INSEE website, your accountant can provide the economic life of an office (but you should know as this is your market!) you can obtain the average price of a desktop on price stores nearby or online.
That's the method "bottom-up", now see the method "top-down".
The method "top-down" is from a global figure and applying a coefficient to obtain the size of the local market. In our case we would leave the value of the estimated French market office furniture in 1023 m € in 2011 by IHS Global and would reduce our local market by applying a proportion to the number of business in our market relative to the total national. Again should be adjusted figure to take account of sectoral specificities of our market.
When you feel yourself market size it is advisable to use the two methods mentioned above and compare the results. If they are too far away is that you missed something.
Once you have estimated the market size must tell your drive on which segment you intend to focus on.
Target market
That's the method "bottom-up", now see the method "top-down".
The method "top-down" is from a global figure and applying a coefficient to obtain the size of the local market. In our case we would leave the value of the estimated French market office furniture in 1023 m € in 2011 by IHS Global and would reduce our local market by applying a proportion to the number of business in our market relative to the total national. Again should be adjusted figure to take account of sectoral specificities of our market.
When you feel yourself market size it is advisable to use the two methods mentioned above and compare the results. If they are too far away is that you missed something.
Once you have estimated the market size must tell your drive on which segment you intend to focus on.
Target market
The target market includes all the clients you plan to target your market.
For example if you sell jewelry you can decide to either be general or to concentrate on the costume jewelery or on the high end. This section is only relevant if your market has well-defined segments with "drivers" of different application. In my example jewelry, the price is a demand factor on the fantasy segment as the exclusivity and quality influence the demand on the high end.
It is now time to address the qualitative part of market research by looking at the triggers of purchase.
For example if you sell jewelry you can decide to either be general or to concentrate on the costume jewelery or on the high end. This section is only relevant if your market has well-defined segments with "drivers" of different application. In my example jewelry, the price is a demand factor on the fantasy segment as the exclusivity and quality influence the demand on the high end.
It is now time to address the qualitative part of market research by looking at the triggers of purchase.
Need
This section is crucial because it allows you to demonstrate to your investor you are an expert in your area: you know why customers buy.
Here you have to go into the details of the factors influencing the demand for your products and services. It can be for example the price, quality, related services, location, ambience, etc.
In the following sections you will talk about your competitors and their positioning before reaching the section on your strategy where you have to justify your position. From a tactical point of view you've got to prepare the reader here to accept your position in the market without mentioning it explicitly.
To do this you need to highlight certain factors influencing demand on which your competitors are less likely. For example if you open a restaurant in a street or are other restaurants all belonging to chains, you can say that in addition to price, quality of service and cuisine; two important factors in your industry are authenticity and terroir. Then in the strategy section will accentuate your positioning on the experience offered to your customers and your your authentic regional cuisine.
This section is crucial because it allows you to demonstrate to your investor you are an expert in your area: you know why customers buy.
Here you have to go into the details of the factors influencing the demand for your products and services. It can be for example the price, quality, related services, location, ambience, etc.
In the following sections you will talk about your competitors and their positioning before reaching the section on your strategy where you have to justify your position. From a tactical point of view you've got to prepare the reader here to accept your position in the market without mentioning it explicitly.
To do this you need to highlight certain factors influencing demand on which your competitors are less likely. For example if you open a restaurant in a street or are other restaurants all belonging to chains, you can say that in addition to price, quality of service and cuisine; two important factors in your industry are authenticity and terroir. Then in the strategy section will accentuate your positioning on the experience offered to your customers and your your authentic regional cuisine.
Competition
The objective of this section is to give the investor a comprehensive overview of the forces present in your market. You must explain who your competitors are, what is their positioning and what are their strengths and weaknesses. It is recommended to write this section in parallel with the competitive advantage of the Strategy section.
The idea here is to analyze the angle of your competitors in the market to identify weaknesses that you can exploit in your positioning.
One way to do this analysis is to analyze the positioning of your competitors with respect to each of the factors influencing the demand identified above and present the results in a table.
Here's a hypothetical example for a furniture store in Normandy, as you can see in the table are the competitors for now all positioned on the low / mid-range market making way for a new entrant positioned on the high end.
Table: Competitive Analysis
Barriers to Entry
The goal here is to answer two questions for investors:
- what is stopping a competitor to open in front of your store and take 50% of your business?
- responding to question what makes you think that you will succeed in penetrating this market? (For business creation only)
Examples of barriers to entry:
- Investment (project requiring a significant investment)
- Technology (advanced technology, have a website is not one, control the enrichment of uranium yes)
- Brand (marketing costs necessary to achieve a high level of notoriety)
- Regulation (licenses and concessions in particular)
- Access to resources (exclusively from a supplier)
- Access to distribution networks (with exclusive distributor, own network)
- Location (a store Toy store in a museum)
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