Market Analysis

Market analysis can help you identify how to better position

your business to be competitive and serve your customers.
• A market analysis is a thorough assessment of a market within a specific industry.
• There are many benefits of conducting a market analysis, such as reducing risk for your
business and better informing your business decisions.
• There are seven steps in conducting a market analysis.

Understanding your customer base is one of the first key steps to success in business. Without
knowing who your customers are, what they want and how they want to get it from you, your
business could struggle to come up with an effective marketing strategy. This is where a market
analysis comes in. A market analysis can be a time-intensive process, but it is straightforward
and easy to do on your own in seven steps.

What is a market analysis?

A market analysis is a thorough assessment of a market within a specific industry. With this
analysis, you will study the dynamics of your market, such as volume and value, potential
customer segments, buying patterns, competition, and other important factors. A thorough
marketing analysis should answer the following questions:

• Who are my potential customers?

• What are my customers' buying habits?
• How large is my target market?
• How much are customers willing to pay for my product?
• Who are my main competitors?
• What are my competitors' strengths and weaknesses?

What are the benefits of running a marketing analysis?

A marketing analysis can reduce risk, identify emerging trends, and help project revenue. You
can use a marketing analysis at several stages of your business, and it can even be beneficial to
conduct one every year to keep up to date with any major changes in the market.

A detailed market analysis will usually be part of your business plan, since it gives you a greater
understanding of your audience and competition, helping you build a more targeted marketing
strategy.

These are some other major benefits of conducting a market analysis:

• Risk reduction: Knowing your market can reduce risks in your business, since you'll
have an understanding of major market trends, the main players in your industry, and
 what it takes to be successful, all of which will inform your business decisions. To help
you further protect your business, you can also conduct a SWOT analysis, which
identifies the strengths, weaknesses, opportunities and threats for a business.

• Targeted products or services: You are in a much better position to serve your
customers when you have a firm grasp on what they are looking for from you. When you
know who your customers are, you can use that information to tailor your business's
offerings to your customers' needs.

• Emerging trends: Staying ahead in business is often about being the first to spot a new
opportunity or trend, and using a marketing analysis to stay on top of industry trends is a
great way to position yourself to take advantage of this information.

• Revenue projections: A market forecast is a key component of most marketing analyses,

as it projects the future numbers, characteristics and trends in your target market. This
gives you an idea of the profits you can expect, allowing you to adjust your business plan
and budget accordingly.

• Evaluation benchmarks: It can be difficult to gauge your business's success outside of

pure numbers. A market analysis provides benchmarks against which you can judge your
company and how well you are doing compared to others in your industry.

• Context for past mistakes: Marketing analytics can explain your business's past
mistakes or industry anomalies. For example, in-depth analytics can explain what
impacted the sale of a specific product, or why a certain metric performed the way it did.
This can help you avoid making those mistakes again or experiencing similar anomalies,
because you'll be able to analyze and describe what went wrong and why.

• Marketing optimization: This is where an annual marketing analysis comes in handy –

regular analysis can inform your ongoing marketing efforts and show you which aspects
of your marketing need work, and which are performing well in comparison to the other
companies in your industry.

How to conduct a market analysis

While conducting a marketing analysis is not a complicated process, it does take a lot of
dedicated research, so be prepared to devote significant time to the process.

These are the seven steps of conducting a market analysis:

1. Determine your purpose.

There are many reasons you may be conducting a market analysis, such as to gauge your
competition or understand a new market. Whatever your reason, it's important to determine it
right away to keep you on track throughout the process. Start by deciding whether your purpose
is internal – like improving your cash flow or business operations – or external, like seeking a
business loan. Your purpose will dictate the type and amount of research you will do.
2. Research the state of the industry.

It's vital to include a detailed outline of the current state of your industry. Include where the
industry seems to be heading, using metrics such as size, trends and projected growth, with
plenty of data to support your findings. You can also conduct a comparative market analysis to
help you find your competitive advantage within your specific market.

3. Identify your target customer.

Not everyone in the world will be your customer, and it would be a waste of your time trying to
get everyone interested in your product. Instead, decide who is most likely to want your product
using a target market analysis and focus your efforts there. You want to understand your market
size, who your customers are, where they come from, and what might influence their buying
decisions, looking at factors like these:

• Age
• Gender
• Location
• Occupation
• Education
• Needs
• Interests

During your research, you might consider creating a customer profile or persona that reflects
your ideal customer to serve as a model for your marketing efforts.

4. Understand your competition.

To be successful, you need a good understanding of your competitors, including their market
saturation, what they do differently from you, and their strengths, weaknesses and advantages in
the market. Start by listing all your main competitors, then go through that list and conduct a
SWOT analysis of each competitor. What does that business have that you don't? What would
lead a customer to choose that business over yours? Put yourself in the customer's shoes.

Then, rank your list of competitors from most to least threatening, and decide on a timeline to
conduct regular SWOT analyses on your most threatening competitors.

5. Gather additional data.

With marketing analyses, information is your friend – you can never have too much data. It is
important that the data you use is credible and factual, so be cautious of where you get your
numbers. These are some reputable business data resources:

• Bureau of Labor Statistics

• Census Bureau
• State and local commerce sites
 • Trade journals
• Your own SWOT analyses
• Market surveys or questionnaires

6. Analyze your data.

After you collect all the information you can and verify that it is accurate, you need to analyze
the data to make it useful to you. Organize your research into sections that make sense to you,
but try to include ones for your purpose, target market and competition.

These are the main elements your research should include:

• An overview of your industry's size and growth rate

• Your business's projected market share percentage
• An industry outlook
• Customer buying trends
• Your forecasted growth
• How much customers are willing to pay for your product or service

7. Put your analysis to work.

Once you've done the work to create a market analysis, it's time to actually make it work for you.
Internally, look for where you can use your research and findings to improve your business.
Have you seen other businesses doing things that you'd like to implement in your own
organization? Are there ways to make your marketing strategies more effective?

If you conducted your analysis for external purposes, organize your research and data into an
easily readable and digestible document to make it easier to share with lenders.

Be sure to retain all of your information and research for your next analysis, and consider
making a calendar reminder each year so that you stay on top of your market.

One must determine whether there really is a market for the product or service. Not only that,
one need to ascertain what--if any--fine-tuning is needed. Quite simply, one must conduct
market research.

Many business owners neglect this crucial step in product development for the sole reason that
they don't want to hear any negative feedback. They are convinced their product or service is
perfect just the way it is, and they don't want to risk tampering with it.

Other entrepreneurs bypass market research because they fear it will be too expensive. With all
the other startup costs you're facing, it's not easy to justify spending money on research that will
only prove what you knew all along: Your product is a winner.

Regardless of the reason, failing to do market research can amount to a death sentence for one’s
product
Market Research Methods
In conducting market research, one will gather two types of data: primary and secondary.
Primary research is information that comes directly from the source--that is, potential customers.
One can compile this information himself/herself or hire someone else to gather it for you via
surveys, focus groups and other methods. Secondary research involves gathering statistics,
reports, studies and other data from organizations such as government agencies, trade
associations and your local chamber of commerce.

Secondary Research
The vast majority of research you can find will be secondary research. While large companies
spend huge amounts of money on market research, the good news is that plenty of information is
available for free to entrepreneurs on a tight budget. The best places to start? Your local library
and the internet.

Reference librarians at public and university libraries will be happy to point you in the right
direction. Become familiar with the business reference section--you'll be spending a lot of time
there. Two good sources to look for: Thomas Net, an online resource that connects industrial
buyers and sellersBoth sources can be found at most libraries, as well as online, and can help you
target businesses in a particular industry, read up on competitors or find manufacturers for your
product.

To get insights into consumer markets, check out the Statistical Abstract of the United States,
which you can find at most libraries. It contains a wealth of social, political and economic data.
Ask reference librarians for other resources targeted at your specific business.

Associations
Your industry trade association can offer a wealth of information such as market statistics, lists
of members, and books and reference materials. Talking to others in your association can be one
of the most valuable ways of gaining informal data about a region or customer base.

Look in the Encyclopedia of Associations (Gale Cengage Learning), found in most libraries, to
find associations relevant to your industry. You may also want to investigate your customers'
trade associations for information that can help you market to them. Most trade associations
provide information free of charge.

Read your trade associations' publications, as well as those aimed at your target customers, to get
an idea of current and future trends and buying patterns. And keep an eye out for more: New
magazines and newsletters are launched every year. If you're not following all of them, you
could be missing out on valuable information about new products and your competitors.

Government Guidance
Government agencies are an invaluable source of market research, most of it free. Almost every
county government publishes population density and distribution figures in widely available
census tracts. These publications will show you the number of people living in specific areas,
such as precincts, water districts or even ten-block neighborhoods. Some counties publish reports
on population trends that show the population ten years ago, five years ago and today. Watch out
for a static, declining or small population; ideally, you want to locate where there is an
expanding population that wants your products and services.

If you're planning to get into exporting, contact the Department of Commerce's International
Trade Administration (ITA). The ITA publishes several thousand reports and statistical surveys,
not to mention hundreds of books on everything American entrepreneurs need to know about
exporting. Many of the reports and books are available for downloading immediately from the
ITA's press and publications department (ita.doc.gov). Here you'll also find information on how
to order printed copies, including archived publications

Maps
Maps of trading areas in counties and states are available from chambers of commerce, trade
development commissions, industrial development boards and local newspaper offices. These
maps show the major areas of commerce and can also help you judge the accessibility of various
sites. Access is an important consideration in determining the limits of your market area.

Colleges and Universities

Local colleges and universities are valuable sources of information. Many college business
departments have students who are eager to work in the "real world," gathering information and
doing research at little or no cost.

Finally, local business schools are a great source of experts. Many business professors do
consulting on the side, and some will even be happy to offer you marketing, sales, strategic
planning or financial information for free. Call professors who specialize in these areas; if they
can't help, they'll be able to put you in touch with someone who can.

Community Organizations
Your local chamber of commerce or business development agency can supply useful
information. They are usually free of charge, including assistance with site selection,
demographic reports, and directories of local businesses. They may also offer seminars on
marketing and related topics that can help you do better research.

Going Online
These days, entrepreneurs can conduct much of their market research without ever leaving their
computers, thanks to the universe of online services and information. Start with the major
consumer online services, which offer access to business databases. You can find everything
from headline and business news to industry trends and company-specific business information,
such as a firm's address, telephone number, field of business and the name of the CEO. This
information is critical for identifying prospects, developing mailing lists and planning sales calls.

If you don't have time to investigate online services yourself, consider hiring an information
broker to find the information you need. Information brokers gather information quickly. They
can act as a small company's research arm, identifying the most accurate and cost-effective
information sources.
To find information brokers, look in the Yellow Pages or ask the research librarian at your local
library. Many research librarians deal with information brokers and will be able to give you good
recommendations.

Consider market research an investment in your future. If you make the necessary adjustments to
your product or service now, you'll save money in the long run.

Market research generally involves two different types of research: primary and secondary.

Primary research is research you conduct yourself (or hire someone to do for you.) It involves
going directly to a source – usually customers and prospective customers in your target market –
to ask questions and gather information. Examples of primary research are:

• Interviews (telephone or face-to-face)

• Surveys (online or mail)
• Questionnaires (online or mail)
• Focus groups
• Visits to competitors' locations

When you conduct primary research, you’re typically gathering two basic kinds of information:

1. Exploratory. This research is general and open-ended, and typically involves lengthy
interviews with an individual or small group.
2. Specific. This research is more precise, and is used to solve a problem identified in
exploratory research. It involves more structured, formal interviews.

Primary research usually costs more and often takes longer to conduct than secondary research,
but it gives conclusive results.

Secondary research is a type of research that has already been compiled, gathered, organized
and published by others. It includes reports and studies by government agencies, trade
associations or other businesses in your industry. For small businesses with limited budgets,
most research is typically secondary, because it can be obtained faster and more affordably than
primary research.

A lot of secondary research is available right on the Web, simply by entering key words and
phrases for the type of information you’re looking for. You can also obtain secondary research
by reading articles in magazines, trade journals and industry publications, by visiting a reference
library, and by contacting industry associations or trade organizations. (Note: When you locate
the research you want, check its publication date to be sure the data is fresh and not outdated.)
One excellent source of secondary research data is government agencies; this data is usually
available free of charge. On the other hand, data published by private companies may require
permission, and sometimes a fee, for you to access it.

TAM SAM SOM - what it means and why it

matters

When doing their Market Analysis start-ups often refer to TAM, SAM, and SOM but what do
these acronyms mean and why are they useful to investors when assessing an investment
opportunity?

TAM SAM SOM definition

TAM, SAM and SOM are acronyms that represents different subsets of a market.

• TAM or Total Available Market is the total market demand for a product or service.
• SAM or Serviceable Available Market is the segment of the TAM targeted by your
products and services which is within your geographical reach.
• SOM or Serviceable Obtainable Market is the portion of SAM that you can capture.

Still confused about TAM SAM SOM? Let's take an example.

Let's say you are starting a fast food chain. Your TAM would be the worldwide fast food
restaurant market. Potentially, if you were present in every country and had no competition you
would generate TAM as revenues.

Sorry but that's not going to happen!

Let's be more realistic. You are starting your restaurant chain in two cities where the demand for
fast food can be estimated based on: the population, their food habits, and the revenues generated
by fast food restaurants in other cities having similar demographics.
That is your Serviceable Available Market: the demand for you type of products within your
reach. In other words if you were the only fast food in town you would generate revenues of
SAM.

Now you are probably not the only fast food in town...

So realistically you can hope to capture only a fraction of your SAM. Most likely you will attract
fast food aficionados living or working close to your restaurants and a fraction of the people
located further away that are willing to give your chain a try for the sake of fast food diversity.
This is your SOM.

Ok, now let's look at why and when they matter.

TAM SAM SOM, when do they matter and why?

Put yourself in an investor shoes. You need to deliver a target return to your own investors which
implies both de-risking the investment early (i.e. figuring with the minimum possible of capital if
the start-up has a market) and investing in opportunities which offer substantial upside potential
(i.e. huge market size).

The SOM and SAM help de-risking the investment while the TAM enables to assess the upside
potential.

The Serviceable Obtainable Market is your short term target and therefore the one that matters
the most: if you cannot succeed on a fraction of the local market chances are that you will never
capture a large part of the global market.

As an investor I expect you to have a realistic objective and I will judge you on your ability to
deliver that objective.

To be realistic your SOM needs to factor in:

• your product: people will want to buy your goods

• your marketing plan and the identified distribution channels: you have a clear plan to
reach a large portion of your target customers
• your SAM and the strength of your competition: chances are that you are not going to
take 50% market share within 6 months. Therefore your SOM needs to be a reasonable
fraction of your Serviceable Available Market.

For the investor the ability to reach your SOM means that he will not lose his shirt. In that
context SAM acts as a good sanity check to assess the likelihood of achieving the market share
implied by the Serviceable Obtainable Market and as a proxy for the short term upside potential
of your business.
If you can deliver SOM in time then you are capable and credible, and you might be able to
increase the market share and reach a more important penetration of the SAM which would
deliver a good return on investment.

And then comes the Total Available Market.

Once you have demonstrated your ability to penetrate a local market and de-risked the
investment, the investor can start looking at how you can expand and increase the company's
penetration within the TAM.