The purpose of market research is to build an array of citable facts that bolster your value proposition. This section will discuss how to refine your raw market research into a focused message that strengthens your story. Good market analysis starts with a very broad picture and progressively narrows down the focus until a specific market niche has been identified.
The process of narrowing the focus of the market relies on identifying the demographics and psychographics of segments of the overall market.
Demographics are arbitrary descriptions used to create categories that break down an overall population into smaller segments. Demographics typically rely upon physical, social, and economic attributes to create the segments of the population.
Physical attributes are descriptors such as age or gender.
Social attributes are descriptors such as education levels or marital status.
Economic attributes are descriptors such as income levels or net worth.
Psychographics are terms that describe the psychological characteristics of the segments of the population as defined by demographics. Psychographics are primarily attitudes and values that define and influence lifestyles and purchasing patterns. Understanding the underlying motivations of how and why particular people make their purchases helps to create customer profiles.
DEFINING THE OVERALL MARKET
The overall market the broadest definition possible of any person or company that might conceivably purchase your product or service at some point.
Please note that the overall market is radically different from your addressable market. One of the most common mistakes made when writing a business plan is to develop it under the assumption that everyone and their mother will buy your product or service. Just because everyone in the whole wide world may one day buy your product or service does not mean it will happen relatively soon.
UNDERSTANDING THE VALUE CHAIN
The value chain is the process by which a product is manufactured and distributed to the consumer that benefits from using it. There are many different ways a value chain may be defined, but like all the other parts of your business plan, it is important to keep everything as simple and clear as possible. The value chain typically begins with where your product is created and concludes with the end user.
A common mistake when developing the value chain is to assume that the end user is the same thing as your customer. The nature of your market may require that your product pass through several intermediaries before it ultimately reaches the end user. Depending on how the end user of your product makes purchases, your customer may in fact be other companies that cater directly to the end user.
A general definition of your customer is whomever pays money to your company in exchange for a product or service. Depending on the market and how you design your business model.
EXAMPLE: You have devised a new type of portable MP3 player to rival the Apple iPod, and are building a company around the concept. Your market research and analysis indicates that the end user of your portable MP3 player usually purchases personal electronics at major retail outlets such as Best Buy or Target. Therefore, the value chain for your market would look like the following:
The value chain pictured above is only an example. How the value chain for your particular company will look depends upon the end user for your product/service, how your competition serves the market, and your business model for selling your product.
CREATING MARKET SEGMENTS
Once a clear picture of the value chain has been developed and the overall market size has been defined, use demographics and psychographics to break the overall market down into discrete segments. Market segments may be defined by average age, gender, income level, political outlooks, socioeconomic status, or myriad other descriptions.
EXAMPLE: To illustrate the concept of market segmentation, return to the portable MP3 player idea. Instead of going through retailers, you instead choose a business model built on direct sales through your company website. You have determined the size of your market to be 100 individuals. You can use demographics to break the market into smaller components. In the following diagram, the market of 100 individuals has been divided into groups based on age and gender:
By utilizing demographics, the overall market has been divided into eight segments based on gender and four age ranges, for a total of eight segments. Breaking a large market into smaller components allows you to develop a more detailed analysis of the market. Remember: how you define your market segments is entirely up to you. Whether you use some types of demographic data and not others, or use psychographics, or a combination of both, just make sure that how you define your market fits into the overall narrative of your business plan.
CHOOSING YOUR MARKET NICHE
Once the market has been segmented appropriately, the next step in the market analysis is to identify the market niche you intend to target initially. It is generally a good idea to describe your target market segments in greater detail than other segments of the overall market. Utilization of psychographics to create customer profiles is generally helpful. Understanding and clearly stating to potential investors how people within a particular market segment will purchase your product will strengthen your business plan when explaining how you intend to build a presence in the market.
WHAT MAKES A MARKET ATTRACTIVE TO INVESTORS
Generally when potential investors look over your business plan, they will be interested in determining if your market is attractive. The key determinants of an attractive market are the size of the market and its growth rate.
IF YOU REMEMBER ANYTHING, REMEMBER THIS…
Everything you find here is designed to help you write a better business plan. Take what you like, ignore what you do not. The most important thing to remember is that there is no single “right way” to write a business plan.