Do Your Research
Don't forget to include market information in your business plan.
Q: What's the best way to gather market information for my business plan?
A: You've asked a question that pierces the heart of marketing: How do you measure your attractiveness to your market?
If you come from the same background as your customers, you may rely on your personal experience to know that a product will be a hit. Several years ago, for example, a lawyer was tearing his hair out at how hard it was to track changes in contracts. His frustration led him to create CompareWrite, which became the best-selling piece of legal software in history.
A better way to find out if your product will sell is to talk to customers and, ultimately, convince some to buy. The first step is figuring out who your market is. Define your market narrowly enough so you can imagine how you would reach them but broadly enough to be worth serving. Here are a few examples:
- "Our product appeals to teenage western Chicago boys with spiked hair who need temporary tattoos for their senior prom." This market may be too small to be worth the trouble.
- "Our product appeals to 14- to 36-year-old females." This market is so broad that it's unclear how you would generate awareness of your product short of a nationwide advertising blitz.
- "Our product appeals to health-conscious businesspeople who work out at least twice a week." This market is plausible. You can imagine reaching this market through health clubs, running groups, sports stores and so on.
Next, hit the streets and talk to customers face-to-face. Find out if they have a need. If so, is it so strong they'll pay to fix it? How much time and money are you saving people, and how might they value your product? Estimate the percentage of your target market who seem willing to buy and sanity check that guess against "common sense" numbers. For example, when the checkbook program Quicken was first created, there were dozens of personal computer software programs on the market. The founders did a telephone survey of local computer users and asked two questions:
1. Have you ever purchased personal finance software?
2. Do you still use it?
These are great questions. Question one established there was a market need. By asking about behavior, they knew the need was strong enough to prompt a purchase. The second question established that existing products didn't meet the need. Your questions will be different, but make sure you validate the underlying need and gather information about how that need is currently being filled.
Next, extrapolate a market size. If you interviewed 50 heavy machinery manufacturers at random and four gave answers suggesting they'd buy your product, you might decide the market is heavy machinery manufacturers, of which you could eventually expect to capture 8 percent. These numbers are very, very loose, but they would already have more foundation than many of the financials I've had the opportunity to review.
Calculate your estimated market in several ways, then compare the results. For estimate number two, you might discover that 10 percent of all heavy machinery manufacturers adopted a Seuss Widget-o-matic when it came out. If you think your product will sell about that well, 10 percent could be your market share, too. That's close to the 8 percent you reached with the other method. (Note that if the market isn't growing, you'll have to take that 10 percent from another competitor, which could get ugly.)
Finally, double-check your numbers. If you estimate a market size of 250 million, stop right there: That's every man, woman and child in the United States. Is that realistic? A product's viability comes ultimately from the market. So when trying to predict viability, the market is the place to go. With the right questions and a bit of legwork, you should be able to determine whether an idea is worth the gamble or whether you need to revise it before starting your business.
Stever Robbins is a consultant specializing in mastering overwhelm, power and influence. The author ofIt Takes a Lot More Than Attitude...to Lead a Stellar Organization, he has been a team member or co-founder of nine startups, an advisor and angel investor, and co-developer of Harvard's MBA program. You can find his other articles and information at SteverRobbins.com.
This article originally appeared on Entrepreneur.com in 2002.
Stever Robbins is a venture coach, helping entrepreneurs and early-stage companies develop the attitudes, skills and capabilities needed to succeed. He brings to bear skills as an entrepreneur, teacher and technologist in helping others create successful ventures.