Components of a Business Plan: Market Analysis (Article 3 of Business Planning Series)

Business Planning - Market Analysis(This is Article 3 of a series in Business Planning. You can read the previous articles here: Article 1, Article 2).

In my previous articles on the Business Planning Series, I focused on the general aspects of why a business needs a business and marketing plan. I began describing the components of a business plan, in particular, the introduction, vision, mission and products and/or services. This third article focuses on the Market Analysis, the fifth section of the business plan.

5. Market Analysis

This section of the business plan is extremely important because through it the business will determine the focus of its sales efforts to position its offering successfully in the marketplace.

New entrepreneurs must gain an understanding of the meaning of the word “market.” Seasoned entrepreneurs spend a great deal of time analyzing their target market(s) to develop successful marketing strategies. Although the word market has the connotation of a shopping location where “people go” to purchase what they need, for the purposes of business analysis, a market is simply the group of customers or potential customers that will purchase the company’s offering (products or services). The market has two principal dimensions, dealing with the purchaser’s characteristics: (1) the location where the buyer resides or will perform the purchase, and (2) the characteristics of this buyer.

Business owners must define which customers the business will target so that they can then understand what those customers want or need, and how the business will communicate with these purchasers. For this purpose, it is critical that the business defines its geographic market and its demographic market. Specifically, the geographic market can be defined by examining where the product or services will be sold. This may include the place where the business is located and/or the location where the purchasers will go to buy what the business sells. The demographic market is defined by studying the characteristics of the purchasers who live or buy at the location where the business sells.

In addition, the business must define how it will promote its offering to the individuals who compose its market. It must also determine if the place where the business will be located (or the place where it will sell) provides a realistic sale opportunity. Factors like amount and type of traffic are critical. For instance, the business may find it relevant to assess whether its market consists of males or females, children, or elderly individuals; what is their average annual wages or even ethnic origin; and if any of these characteristics will impact the purchasing decision of those potential buyers.

For example, if the business is a shoe store: Will the business sell women shoes, men shoes and/or children shoes? The answer determines the “market segment” (a portion of the market) in which the business will focus. Interestingly, if the business sells children shoes, its customers will be the children, but its market will also include those who purchase the shoes for the children (like parents or adult family members with purchasing power.) The business owner must ensure that all of them like the shoes, especially those who will pay for them.

If the store is located in an area where the residents (and potential clients) have a higher income, it may be that the business could sell the shoes at a higher price. Therefore, the business may consider a pricing strategy that incorporates variable pricing based on the geographic location and the purchasing power demographics in that area.

If the business will sell a beverage: What type of beverage will it sell? Who will drink this beverage? What establishments will sell this beverage? If specific groups enjoy a particular beverage, like the “Malta” (a popular Hispanic malt beverage) then the business must focus initially on establishments that are open to selling to such groups or markets. Perhaps the business will identify establishments that have an ethnic section in their store, selling Asian and Hispanic products, as has been the trend with companies like Wal-Mart, Publix or Target. A similar approach could then be taken, for example, with the introduction of specialized organic or gluten-free foods and products, growing market segments. It is all about identifying where and how the products will sell and who will buy them.

If the business sells services, then the best market candidates will be a market that will need the particular services. For example, if the services consist of life insurance, the business owner will prefer a risk-averse client. If the relevant industry were banking, then the business would prefer clients who are in need of financial products and services, such as loans to finance the purchase of a home, a vehicle, a business, etc. A similar approach applies to other service providers, such as attorneys, doctors, publishers, or consultants, for example.

In addition to the above elements, the business must examine the economic aspects of the region where the business will be established. Some department store chains decide to expand their operations to specific areas if (and only if) economic parameters of the region favor their business model.

Internet-based companies must take into account the above factors, even when their “store” is located online. Businesses using an Internet strategy in tandem with their physical business will also have to make some calculated online sales and targeting decisions. Will they sell through their own webpage? Will they use portals such as eBay? Amazon? Facebook? Google? These are just initial considerations.

The bottom-line: A business may not sustain selling its offering to people who do not need it or cannot afford it. Therefore, market analysis is critical to the success of a business. It is an ongoing process.

Market information is readily available commercially, and it is sometimes accessible free of cost. The United States Census Bureau collects and makes available certain useful information for businesses (See http://www.census.gov). Additional information can be obtained from local economic development organizations and on the Internet, or by retaining consultants who specialize in researching and analyzing market information for the relevant business industry.

The next article in the Business Planning series will focus on Competitive Analysis.

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This article is based on material from the book “Does Your Compass Work? Practical Legal Guide for Florida Businesses,” Copyright © 2008-2015 Yasmin Tirado-Chiodini. All Rights Reserved. This article is provided under a Creative Commons License.

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About tiradochiodini

I am a attorney, entrepreneur and author blogging about business, law, entrepreneurship, writing, books and other subjects.
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One Response to Components of a Business Plan: Market Analysis (Article 3 of Business Planning Series)

  1. Pingback: Components of a Business Plan: Competitive Analysis (Article 4 of Business Planning Series) | The Tirado-Chiodini Post

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