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Conducting a Market Analysis for Your Business Plan

One of the most critical sections of your business plan is your market analysis. Find out just what information you need to know about your potential customers.
June 13, 2005
URL: http://www.entrepreneur.com/article/78002

Every business plan should include market analysis. This is one of the first and most important reasons to do a business plan. And whether you're just starting a new business or reviewing an existing business, you should renew your market analysis at least every year. Markets change--a business needs to watch for changes in its market.

The market you need to look at is your potential market, not the actual market served, the one that's limited to your existing customers. Your target market is much wider than just the people you already reach. It's the people you might someday reach, or people you could reach, that you need to be concerned about.

For example, the market of a local movie theater or restaurant includes not just the people who regularly go there but everybody who lives within driving distance. The market for a landscaping business includes all the homes and commercial properties within a logical reach. The market for downloadable e-books over the internet includes everyone connected to the web. The market for personal computers includes homes, schools, businesses, and government organizations.

It's your plan--and every plan is different--so you need to know as much as you can about your target market.

Getting the Information
The information sources that will help you conduct a market analysis are different for every business plan. For example, you might need local information you can get from your local chamber of commerce. Or you might be able to find your market information at www.business.gov , which is a good source for information from the U.S. Census Bureau, the Department of Labor, the Department of Commerce and others. You might also need to find other government statistics, or other commercial statistics, so you may be conducting some internet searches to track down the information.

Not all the information you need is going to be publicly available, and you may have to settle for educated estimates. Sometimes you'll have to extrapolate information from different sources to get the information you're seeking. I've seen good market research come from telephone directories, catalogs, industry association statistical compilations, real estate information and density maps.

Segmentation
Always try to divide your target market into useful slices or segments. For years, I consulted with a computer manufacturing company that targeted such market segments as homes, small offices, businesses, educational organizations, and government. Dividing the market into these segments helped the company address the more specific market needs, media, pricing patterns and decision criteria in each of their different market segments.

Segmentation helps you target specific people with specific messages and helps you focus on user needs. Families might need quick, consistent service while students might need late-night service. Families read the newspaper; students read posters on bookstore walls. Knowing your market segments will help you make smart decisions when it comes to providing the products and services that will work best for them and for communicating with them.

Market Size and Growth
You need to be able to measure and quantify your market. For example, if local homeowners are part of your target market, then you should be able to count them. You need to know whether you have 500 people in your market, or 200,000, or 2 billion. Be able to show what the total market is for your business.

When it comes to market growth, you need to think about percentage change as a market forecast. Is the number of homeowners in your target market increasing or decreasing? By how much per year? How many older workers retire every year, and how is this changing? How many people eat in restaurants in your market area, and how is this behavior changing? Market forecasts start with the total numbers of possible purchasers in each market segment, then project percentage change over the next three to five years.

Market Trends
You need to understand what's going on with your market. What trends and fashions do you see having an influence on your market segments? If you're selling cars, for example, is there a trend that shows people responding to higher gasoline prices or more environmental concerns? In computers, is there a trend toward more power and lower prices? How does the increase in TV recorder equipment affect your market? The questions that affect target markets will be different for every business, and these are just examples. What's important is that as you create your business plan, you become aware of the market trends that affect your specific market.