Perhaps the most important part of your business plan and pitch from an investor’s point of view is your market analysis. They might love your product and be ready to bank on you as an entrepreneur, but the make-or-break question will always be whether the market opportunity exists to make money on their investment.

Market analysis might sound intimidating (and expensive!) but at its most basic, it’s simply a presentation of how you are going to make money, based on the reality of the market you’re selling to.

Even if you’re not going for investment, market analysis can help with everything from forward planning and progress evaluation to product development and marketing strategy. But how do you conduct a useful and thorough market analysis? Your data has to go well beyond the first stats that pop up from a Google search; you’ll need reliable figures, and you’ll need to know how to use them to show your business’s growth potential.

A good market analysis should show:

• The size of your potential market
• Information about your target customer
• What your customer currently spends in your market
• Trends, growth predictions and industry changes
• Barriers to market entry
• Gaps in the market
• Competitor information
• Your predicted market share

Identifying your market

When asked about their target market, inexperienced entrepreneurs often come up with the stock ‘it will appeal to everyone’ answer. But the truth is, no product or service appeals to everyone, and any investor will immediately dismiss such a claim. A business that identifies with laser-point accuracy its specific market and customer is in a far stronger position than a business whose approach is too broad. Your target market will be a subdivision of a larger market, and the first task is to identify this niche.

Market analysis covers your entire target market, both current and future. If you’re already trading, this is not just current customers, but also customers you might sell to in future.

Within your market niche, you’ll need to find data on your target customer. This doesn’t just mean demographics (age, sex, location etc.), but also more intangible information such as hobbies, buying habits, and most importantly, pain points – the things that annoy them that they will pay to fix, and that you can fix for them.

Where to start

Your first stop should be publicly available statistics on your target market. You might find useful information in government statistics; in the UK, you can start with the statistics section of the gov.uk website, or the Office of National Statistics. You can also look for commercial market research reports from companies such as Mintel, Ipsos Mori, Frost & Sullivan or Datamonitor.

Professional market research

If publicly available reports don’t give you the information you need, you could also consider paying for a market research company to conduct research for you. But this approach can involve high costs, which may be prohibitive for a start up company.

Current customers

If you’re already trading, your existing customers are an important source of information. As well as gathering sales and behaviour data from your web analytics, you could also use questionnaires and other feedback tools to gather data on customer pain points, pricing and competitors.

Minimum viable product

If you’re not yet trading, you can still gather information from customers by testing a minimum viable product – a stripped-back version of your product or service that communicates your core value and allows customers to give feedback. This could be a beta version of a new app or even as simple as gauging demand through an email signup page or crowdfunding campaign.

Researching the competition

Your market analysis should cover your competition and where possible show their market share, sales figures and recent growth. You should also look at what they’re not doing, the gaps in product or service you could fill.

What to do when there is no data

Competitors don’t tend to broadcast their sales data or customer complaint statistics to the world if they can help it, and you may find it difficult to get the information you want through publicly available sources. This means that competitor analysis can involve some guesswork, but if your guesswork is informed then it still has value. Alternative methods of getting information might include:

• Price comparison sites that can give you information on pricing, but also on services or products that competitors are targeting with offers.
• Review sites and social media – many businesses today have customer feedback out in the open for anyone to see, from review sites to their own public social media pages. Bear in mind that you won’t be seeing a full picture of competitor satisfaction from these sources, but intellegent analysis may point towards gaps in service or potential issues.
• Indirect business data – news reports, census data, population maps or business density data might offer indirect insights.

Presenting your market analysis

Industry overview

The market analysis section of your business plan should start with an overview of your industry, covering the following points:

• Size of the industry, for example total annual sales
• Size of customer base
• Details of how the market is moving – is it growing or shrinking?
• Trends, technology or changes in the law that may effect the industry
• Barriers to entry, including compliance requirements and regulations
• Growth opportunities
• Gaps within your market for new products or services

Competitors

Information on your competitors should cover:

• Market share
• Growth information
• Sales figures
• Recent trends and changes
• Strengths and weaknesses

Timescale

Is your business proposition time sensitive? Does it rely on being first to market with new technology, or anticipate changes to the law, or capitalise on an emerging market?

Market share

Your predictions on the market share you anticipate taking should be realistic. Your starting point should be how many customers you can reach and how many you predict will switch to you from your competition, but you should also consider what volume you can deliver, and what restrictions there might be on increasing your customer base.

Are you investment-worthy?

Remember that key investor question – what is the opportunity here? Your market analysis should demonstrate in concrete terms exactly what that opportunity is. It should answer the question of who will you sell to and what they will pay.

Market analysis is an on-going activity, not just something you do for your investment pitch. The right information will help you shape your company, plan for expansion and target new customers. Successful businesses know their market inside out. Make sure you’re one of them.