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Start It Up

How do you determine if there is a market for your new business idea?

Alvin Fritschle

By Alvin Fritschle

Alvin Fritschle is the Chairman of the Board of First Bank, a community bank serving Southeastern Illinois and Southwestern Indiana. He has provided financial advice to numerous entrepreneurs for over 40 years as a certified public accountant and the President of First Bank. Over this time, he has demonstrated a strong commitment to assisting his clients with their strategic decisions.

In the previous article, "How do you know if you have a good idea for a business?", you completed a preliminary look at the feasibility of your business idea. You may have received great support from family members or business associates, spoken to some enthusiastic prospective customers, or even made a few preliminary sales. While this feedback is encouraging, these people already know you and may not accurately represent the wider market’s response.

Intuition has its place in business, but deciding to start a new business on gut instinct alone is risky and, depending on what you have to lose, even reckless. That’s why doing your homework is so important. The time you spend on market research will strengthen your knowledge and improve any resulting decisions. In short, how can you prove that a market for your business idea exists without concrete evidence?

The biggest challenge at this stage is accurately measuring the market’s response to your idea. It is difficult to conduct a precise feasibility study for your business plan—even large companies can’t predict the exact outcome of a new product launch. The only way to find out how the market will respond to your new business is to start operating and see what happens. However, you should resist the temptation to skip the market research stage. Even an imperfect analysis of your new business’s potential is much better than launching without any data.

Market research: What is it and why does it matter?

Noah Parsons, COO of Palo Alto Software, defines market research as "...the process of learning about your potential customers. Who are they? What are their buying and shopping habits? How many of them are there?"

Studying your ideal prospects is a necessary and important part of the business plan. Don’t put anything less than your full effort into market research. If you just go through the motions and fill something in, you’re making a huge mistake. A thorough market research report will reduce risk and improve your marketing and sales processes.

When it comes to market research, many potential entrepreneurs say they don’t want to spend time on it because it will take too long and prevent them from doing more important things to build their business. If you feel this way, you may very well be spending too much time on market research. Many new entrepreneurs fall into the trap of doing market research the wrong way.

How to conduct market research the right way

The amount of time you need to spend on market research depends upon your existing knowledge of the industry you plan to enter. Before you begin, ask yourself the following questions:

  • Do you have several years of work experience in the industry?
  • Are there other similar businesses in the market already?
  • Do you have a plan to differentiate your business from the options already out there?
  • Do people spend enough on your product or service to support both you and your competitors?
  • Are you primarily serving customers in a local market or do you plan to market your product or services over a wider area?

The more of these questions you answer yes to, the less time you’ll need to spend on market research.

One more common trap with market research is “analysis paralysis.” With so much information available online, it’s easy to get stuck over-analyzing your idea. Take the following steps to keep your project moving forward:

  • Set a research budget and stick to it.
  • Identify the key facts you need to make a decision.
  • Decide upon your research methods.
  • Set a specific time frame to complete the research and stick to it.

Profiling your ideal customer (Identifying target markets)

Researching the market helps you build a profile of your "Ideal Customer": the person or business that is most likely to buy from you. This “Ideal Customer” will become your target market for marketing purposes. Some businesses have multiple target markets, but most business consultants recommend that you target no more than three market segments.

Initially, you will need to make assumptions about your target markets. Your research will either confirm some of these assumptions or you’ll need to refine your target market definitions.

Each of your market segments should share common traits. These common traits may include age, gender, income level, or location, and additional traits such as professional affiliations and social preferences. As you accumulate this data on each market segment, you will find that different groups of people may purchase your product or service for different reasons. You may need a different marketing campaign or approach for each market segment.

Talk to your potential customers

No matter how much desk research you do, the best information you can get is the opinion of your potential customers. Consider their input on important decisions such as location, pricing, range of items to offer, and preferred purchasing methods.

This is one of the most important steps in analyzing a target market and, unfortunately, this is the step most people skip when evaluating whether to start a new business. Asking for opinions makes you vulnerable to rejection, and no one likes to feel rejected: What if they do not like my idea, or what if they are satisfied with their current solution?

Swallow your pride and don’t skip this step—it can mean the difference between a successful new business and failure.

Find out as much as you can about potential customers in your target market, such as:

  • Will people actually want what you are selling?
  • Which people or businesses are most likely to buy your product or service?
  • Which group of customers is likely to be the most profitable?
  • How often will your target markets buy from you?
  • What are the benefits that people want to receive when they buy from you?
  • What are the needs of the people that are not currently being met by other businesses?
  • Where are people currently buying from, and why do they choose to support those businesses?
  • Where are they located?
  • What is the best way to market to potential customers?

Researching your potential customers is critical because it can prompt you to re-define your target markets or refine your business idea. It can also be insightful to talk to suppliers already working in your target market to tap into their knowledge of the marketplace.

There are several ways to conduct market research:

  1. Conduct a simple survey of 20 potential customers and ask them three simple questions
    1. What do you like about this product?
    2. Would you buy it?
    3. What would you pay for it?
  2. Hold a focus group of 6 to 10 potential customers for an in-depth discussion of the product’s potential.
  3. Email questionnaires or leave them at strategic locations where target markets visit. To encourage more replies, consider providing an incentive such as a gift or a prize drawing.
  4. Promote discussion in online chat rooms.
  5. In addition to talking to potential customers, consider talking with suppliers to get their opinions on the market.
  6. If your market research provides positive feedback, consider trial marketing your product or service in a limited area to gauge market demand.

When you bounce your business ideas off potential clients and suppliers, it's easy to end up only hearing positive feedback. Even potential customers might not want to hurt your feelings, so they won't give you their honest opinion. This is why it’s important to find people who don’t like your idea and ask them to shoot holes in it. It's better to start a business with your eyes wide open than to overlook potential pitfalls.

Develop a market profile

Once you have refined your target markets by speaking directly with potential customers, it’s time to determine if the target market is large enough to support your business as well as those already in the market. Even a great idea can’t overcome the problem of not having enough customers to support your business and the competition. In that case, the risk may be too great.

Consider the location of your business and its customers

Building a market profile helps you pinpoint the potential scope of your market: where your prospects live and how many there are. It can also help to clarify how you will reach them. Depending on your idea, you might need to break down the location of your customers by region:

  • Local
  • Regional
  • Overseas

If you are entering an existing industry, much of the information you need may be freely available. Try to use a variety of sources to gather this information, and remember that research is constantly being updated and reworked.

The following is a list of sources to assist you in determining the size of your market:

  • U.S. Census: If you’re opening a business in the US, this website is a gold mine of information. Check it out not only for population data, but also data on how much people spend on your type of business in a given area.
  • Also, be sure to check out their Industry Statistics Portal for industry-specific statistics. You can also use The American Fact Finder to help filter your searches. The U.S. Census has much more than just these three resources, so it’s worth exploring in detail.
  • Bureau of Labor Statistics: Another U.S.-centric resource, but a fantastic site for information on specific industries (hiring and expense trends as well as industry sizes). If your target market is other businesses, this is a good place to look for data.
  • Consumer Expenditure Survey: If you want to know what people spend their money on, this is your source.

Additional information on industry trends, opportunities, and threats can be found in the following sources:

  • Industry and trade publications (many will be online)
  • Reading local and online news sites for possible market changes
  • White papers available online from consultants and industry experts

These online sources are very good at keeping you informed about industry trends and possible solutions to threats within your market.

It’s unrealistic to imagine that 100 percent of the people or businesses fitting your profiles will become your customers. Some will already be loyal to other brands and others may simply not be interested in what you have to sell. A realistic projection of market penetration must be considered in this process.

How will you reach your target markets?

Once you’re satisfied that you have a customer base, how do you plan to reach them? It’s worth spending some time researching this because. In your larger business plan you’ll have to be clear about your channels to market.

There are several possible channels to market:

  • Direct selling to consumers or other businesses
  • Sell through a wholesaler.
  • Sell through a website.
  • Employ your own sales force.
  • Use sales agents or a distributor.
  • License your product or service.
  • Franchise your product or service (normally only an option when you have a proven business model with an established track record).
  • Form a joint venture or strategic marketing alliance with another company (s).

Each option has advantages and disadvantages. For example, if you’re a manufacturer and sell to retailers, they may not appreciate it if you start selling directly from a website or a factory shop. Again, if you choose to sell through a commission agent, you may save the cost of hiring your own sales force, but an agent representing many products might not be as motivated to focus on yours.

Don’t forget to study the broader picture

It’s often said that the only thing that remains constant is change, and this is certainly true of your markets.

Future consumer and economic trends can impact significantly (and sometimes quite rapidly) on businesses of every size, so research the wider marketplace before you start to ensure your business is sustainable over the long term. Pay particular attention to any economic, social and industrial trends or changes that could impact on your business.

  • Industry and market cycles: Every industry (and its market) has a life cycle. Are you entering a growing, mature or declining industry? Study the influential marketplace factors and consider the implications for your business. Generally, the fewer competitors you have, the more feasible your business is likely to be. But a lack of competitors might also indicate a declining market for your product. On the other hand, a declining market may also provide an opportunity for you to develop a specialist niche. It may no longer pay a large company to service a particular market, but there may be good profits for a smaller business.
  • Global influences: Keeping your eye on current affairs and the global marketplace gives you the chance to identify any potential threats and opportunities early on. For example, today many buyers and investors are considering social, political, and environmental factors in their buying decisions.
  • Local influences: Look at what’s happening in your own community to determine if there are any local trends that may influence your success. For example, are there any investment activities in the market that may impact the demand for your product or service? What about new businesses that may expand the market, changes in legislation, etc.?

Take the next step!

If you decide the potential for your business idea is there, the next step is to determine what market share you can realistically gain. Learn more about it in our next article, "How do you analyze your competitors?"

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