A Guide To Conducting A Market Analysis And Why It's Important

With the modern consumer empowered to make buying decisions independently, it’s more important than ever for businesses to adapt their marketing strategies to meet their prospects where they are. To do this, both aspiring and established entrepreneurs need to have a deep understanding of their industry, target market, consumer behavior, and the competition. Market analysis provides a way to gain this kind of information and much more.

Market analysis involves four essential steps. These include industry analysis, defining the target market, competitor research, and pricing and sales forecasting. While it’s time-consuming, market analysis helps businesses minimize risk, improve personalization, among other benefits.

Read on for details on what market analysis is, how it compares to market research, the steps involved, and the different ways it can benefit your business.

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What Is Market Analysis?

Market analysis refers to a qualitative and quantitative evaluation of a market segment within a specific industry. It seeks to determine the characteristics of a market, emphasizing both size and value, consumer segments and their buying patterns, the economic environment, the competition, and other relevant factors.

Market analysis is often carried out before starting a business to size up potential markets. However, it’s not uncommon for established businesses (especially those operating in dynamic markets) to conduct it yearly as a means to keep up with fast-changing consumer needs.

Regardless of why you do it, you’ll want to be thorough when conducting market analysis because it informs critical business decisions. Some of the most critical questions you’ll want to address when assessing any market segment include:

Who am I looking to sell to? What are their buying habits?
What’s the size of my target market? Is it lucrative enough to sustain a profitable business?
What’s the current state of the industry and its outlook?
How much are my potential customers willing to spend on what I’ll be selling?
Who will be my competition? What are their strengths and weaknesses?

Keep in mind that these aren’t exhaustive. You can add as many prompts as the nature of your business, and its environment necessitates. The point is to learn as much as you can about the inner workings of the market you’re looking to enter.

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Is Market Analysis the Same As Market Research?

Market analysis and market research are often confused, and understandably so; they’re both processes businesses use to assess their economic environment. However, they don’t necessarily mean the same thing, and distinguishing the two is critical to understanding the steps involved in each process.

Having already defined market analysis, let’s first define market research before we get to the differences. Market research is the process of assessing a specific market and the consumers in it to find answers to one or several specific questions. With the definitions so close, it’s easy to see why the two terms are often confused.

So what are the differences?

While market analysis and market research are typically carried out to give businesses a better understanding of their economic environment, the latter is more specialized than the former.

Market analysis has a broader scope and usually comes first. Businesses use it to understand the market in a broader context (i.e., the size, possibilities, entry barriers, competition, and other political, social, and economic factors). Later on, they use market research to zero in on a specific market segment, focusing on consumer characteristics and behaviors.

The bottom line?

While there may be overlaps between market analysis and market research, the former is broader in scope and usually comes first. It’s mainly geared to giving companies an idea of the market structure and the competition.

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Market research, on the other hand, is narrower and more focused, usually on customer-specific intelligence. In other words, businesses mainly use it to understand better their existing and potential customers, intricate market details, and the competition.

How to Conduct Market Analysis

Now that you are no longer confusing it with market research, let’s review the steps you’ll need to follow to carry out market analysis successfully.

Analyze the Industry

Industry analysis is arguably the most critical step in the market analysis process because it gives you an in-depth understanding of your industry and its direction. Ideally, you want to invest in an “attractive” industry, where there’s:

Low competition
Minimal entry barriers
Low initial capital outlay requirements
Bright growth prospects

Essentially, industry analysis involves analyzing the broader industry (as opposed to your niche) based on metrics such as the current size, entry barriers, lucrativeness, emerging trends, and growth potential.

One of its main benefits is that it helps understand the prevailing market conditions. With this knowledge, you can make projections for demand and supply in the industry, which gives you an idea of what to expect in terms of financial returns.

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Another advantage of industry analysis is that it reveals the leading players of the economic sector you’re looking to enter, helping size up the competition. It also gives insight into the costs of entering and thriving in the industry, helping you budget more effectively. Most importantly, it’s an effective way to determine whether there’s potential for profitability or the industry has reached a saturation point.

Indeed, a detailed look into the industry as a whole can be a great way to familiarize yourself with its inner workings and possibly discover untapped potential.

But to realize these benefits, you’ll need to use the right assessment methods. Two of the most effective ways to analyze an industry include:

The Competitive Forces Model (Porter’s 5 Forces)
The Broad Factors Analysis (PEST Analysis)

Let’s take a brief look at each below:

The Competitive Forces Model (Porter’s 5 Forces)

First popularized by Michael E. Porter in 1980, Porter’s 5 Forces model remains one of the most effective tools for industry analysis. Drawing from industrial organization (IO) economics, it identifies the five forces that determine the attractiveness (or the lack of)of any given industry.

These forces include:

Competitive rivalry
Potential of new entrants
The bargaining power of suppliers
The bargaining power of customers
The threat of substitution

According to Porter’s model, these five forces dictate an industry’s competitiveness, consequently determining its profitability. Thus, you could say that this analysis tool helps explain why some industries are more profitable than others.

The terms “attractive” and “unattractive” are generally used to describe both ends of the profitability spectrum.

In an attractive industry:

There’s a low threat of new entrants
Both buyers and suppliers have weak bargaining power
There isn’t much threat of product substitutes
Industry competitors don’t have an intense rivalry

As you’d expect, an unattractive industry has the opposite of the above characteristics.

The Broad Factors Analysis (PEST Analysis)

PEST is an acronym for the Political, Economic, Socio-cultural, and Technological components of the broad factor analysis model. This market analysis model is often used in environmental scanning to inform strategic management efforts and is one of the most effective industry analysis tools.

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You can use PEST analysis to get an understanding of the various macro-environmental factors affecting the industry. These factors can be broadly categorized as economic, political, technological, or socio-cultural. Reviewing them and how they shape the industry can give insight into its current trends and where it’s headed in terms of potential for profitability.

Define Your Target Market

In this step, you’ll be looking to gather as much detail as you can about your ideal customer and the size of the available market for your products/services.

Doing this will allow you to gain insight into your target customer base’s needs and buying behavior, allowing you to figure out how you can position your business to capitalize on unexploited market potential. It’ll also help you determine your general market’s size and the specific segments you can realistically target when strategically positioning your business.

For an exhaustive examination of your target market, your analysis needs to capture two essential elements. These include:

Estimating the market size
Market segmentation

Here’s how to go about each:

Estimating the Market Size

The term market size denotes the number of potential customers for your product/service within a given market and the total sales revenue you may generate from them. To estimate its size, you’ll need to divide your the market into three major categories:

The Total Available/Addressable Market (TAM): TAM refers to every consumer in the world who would buy what you’re selling if there were no competing brands. In simpler terms, it means how much of the global market a single company would gain if it operated with no competitors (AKA the total demand for a product/service).

The Serviceable Available Market (SAM): SAM means the TAM share that you can target and acquire. For instance, if your products or services were only available in French, your business’s SAM would be a portion of the TAM that speaks French.

Serviceable Available Market (SOM): Also known as a company’s share of the market, SOM denotes the portion of the SAM that you can realistically secure for your business. It’s realistic because it’s usually based on the practical limits of your business model.

Dividing your target market into these three categories is critical because it gives your marketing efforts a sense of direction and focus. As a startup, you’ll want to build your market strategy around the Serviceable Available Market (SOM).

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Market Segmentation

Market segmentation provides a way to gain insight into the consumers’ characteristics in your target Serviceable Available Market.

By allowing you to divide your market into consumer groups with shared needs, lifestyles, and interests, market segmentation puts you in a better position to identify high yield market segments. In doing so, it helps you determine the potential for profitability in your target market.

When performing market segmentation, be sure to capture the following details:

Demographics: Define your target customers in terms of education, race, sex, income, age, and other relevant factors.

Location: Where do most of your target customers live? At the very least, you need to understand their region, country, state, county, and city.

Psychographics and Behavior: In analyzing psychographics, you’ll be looking to understand your customer’s mindset. What drives them? What’s their personality? What do they love/hate most? Do they have unmet needs? How do they react to marketing messages for similar products/services to yours? What influences their shopping habits most? These are all questions you’ll need to address.

Trends: Detail how often consumer behavior changes in your target market and what often triggers changes.

Get to Know the Competition

Market analysis can never be complete without sizing up the competition. Beyond identifying competing businesses, you need to understand their:

Product pricing
Financials
Products’ strengths and shortcomings
Customer care standards
Intellectual property
Business risks and opportunities
Company culture
Marketing tools and methods

SWOT analysis can be an excellent tool for this purpose, and you’ll want to use it on both direct and indirect competitors.

Based on your findings, you can determine whether you can find ways to:

Leverage their weaknesses to create value for your business
Find ways to neutralize their strengths through a differentiation strategy, or
Brace yourself for any threats they may pose to your business

Figure Out Your Pricing and Project Your Sales

The last step of market analysis involves setting the right price for your products and projecting your profit margins. Before you can make sales forecasts, you need to set your prices, so let’s tackle pricing first.

Beyond pricing your products/services higher than they cost to make or deliver, you’ll want to consider the kind of massage your prices send to potential customers.

More often than not, consumers associate steep prices with quality. But while that may imply that setting your prices high can help attract customers, it only works if you can match steep prices with exceptional product quality and customer experience. If you can’t, the alternative would be to price your products lower than the competition and ensure that your brand message reflects that you’re selling cheaper options to other similar products.

After figuring out your pricing, try to leverage what you learned through industry analysis to develop a sales forecast. Be sure to keep your forecasts realistic because you’ll use it as a benchmark for your actual sales going forward.

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What’s the Point of Conducting Market Analysis?

With the bulk of work involved in market analysis, you might be wondering whether the benefits are worth it. The most known benefit of market analysis is that it gives to-be entrepreneurs a better understanding of their target customer base and the competition, which helps them create a more targeted marketing strategy. That is when it’s part of a business plan.

But this isn’t the only benefit of conducting market analysis.

Let’s take a look at the other not-so-obvious ways carrying out market analysis can add value to your business:

It helps reduce business risk. Having a clear understanding of your market is one of the handy ways to minimize business risk. It means you’ll have an understanding of changes in market trends, the leading industry players, and what it takes to succeed in your niche. This knowledge is invaluable for reducing risks because it means you’ll make more informed business decisions.

It helps create personalized products or services. Since conducting market analysis gives you a greater understanding of your target customers, it puts you in a better position to tailor your products or services to their needs. When your products or services are personalized to address your customers’ specific needs, they’ll be easier to market, and that’ll reflect in your sales numbers.

It helps keep up with dynamic markets. When running a business in a fast-changing economic environment, being strategically positioned to spot emerging trends and leverage them to create new opportunities for your business is key to success. Through market forecasting (a core component of market research), you can gain this competitive edge.

It helps plan business operations more effectively. A qualitative and quantitative review of the market allows business owners to leverage projected market trends and characteristics to get an idea of future earnings through its forecasting component. Having this kind of information is critical to running a successful business because it makes it easier to budget ahead.

It provides business evaluation benchmarks. While you can always use financial numbers to evaluate your business’s success, you need performance benchmarks to gauge how well your company is doing relative to other similar entities in your industry. By allowing you to size up the competition, market research provides these benchmarks.

It can be a great way to learn from past mistakes. By dissecting historical data, market analysis can help you understand why and how certain industry anomalies or operational mistakes adversely affected your business’s performance in the past. You can then use the results of this analysis to work on what went wrong then so you can avoid repeating the same mistakes in the future.

Final Thoughts

That does it for our discussion on market analysis. In a nutshell, we’ve covered what it is, how it differs from market research, and the four steps involved. Hopefully, this information will help you avoid blinds spots when setting up your business, put you in a better position to outmuscle the competition, and help you deliver personalized products/services to your customers. All the best!

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Sources

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A Guide To Conducting A Market Analysis And Why It’s Important

What Is Market Analysis?

Is Market Analysis the Same As Market Research?

How to Conduct Market Analysis

Analyze the Industry

The Competitive Forces Model (Porter’s 5 Forces)

The Broad Factors Analysis (PEST Analysis)

Define Your Target Market

Estimating the Market Size

Market Segmentation

Get to Know the Competition

Figure Out Your Pricing and Project Your Sales

What’s the Point of Conducting Market Analysis?

Final Thoughts

Sources