When people grumble about how hard it is to write a business plan, they usually say it’s either the financials or the market research they find most overwhelming. Market research is hard for two reasons
- When there is a lot of information to sort through, it’s difficult to decide what’s relevant
- Where there isn’t enough information to sort through, it never feels finished.
Google “how to do market research” and you’ll get plenty of ideas about how to gather data, but almost no guidance on how to parse and interpret your findings. Or what to do if you can’t find any findings.
I’ll let you in on a little secret: market research isn’t overwhelming or difficult if you know what you’re looking for. If you want to research the market for your products, the first thing you need to know is exactly who the market is. That’s right; you need to know your ideal customer.
People find market research overwhelming because their work is unfocused. If your ideal customer is a 40-something single dad with a child under age ten, you don’t need to spend time figuring out how many working couples with teenagers might also buy your product.
Step one is to focus ALL your market research on finding out as much about your ideal customer as you can. Unless there aren’t enough of those people to keep you in business, you don’t have to research anyone else (at least not right now).
Once you’ve defined that person, it’s time to dive headfirst into all the data, statistics, news articles and surveys you can find.
The first thing you need to do is gather as much data as you can. Government census statistics, market surveys from large corporations, and municipal data sets are great places to start. If you have time, you can also run your own surveys or conduct interviews with potential customers to get their feedback on your product or determine their buying behavior. If you’re in Canada, start with Statistics Canada and then look for the stats web site of the province you live in. If you’re in the US, start with the Bureau of Labor Statistics before gathering additional information from your state government web site. Finally, take it down to the municipal level and see if your city has neighborhood-specific information (if that’s relevant for you).
Don’t worry yet about whether you’re gathering data you’ll eventually use or not. If you think it might be relevant, grab it. Create an Evernote folder to keep your sources organized.
Got a bunch of information? Here’s what to do with it.
- Once you think you have gathered enough data and you’re ready to figure out which statistics are useful for your business plan, take another look at your Ideal Customer narrative. Are they 43 years old? Great – you can set aside data that doesn’t relate to that age group (within about a 5-year range). Do they earn more than $50k per year? Scrap statistics for lower income households. Keep narrowing until you’re left only with demographic information that gives you insight into your ideal customer.
- Use that information to determine the market size of your ideal customer segment – that is, the number of potential customers who share mostly the same demographic characteristics as your ideal customer. If your ideal customer is a 43-year old married mother in Toledo Ohio, in a household where both parents work and their collective income is $80,000 per year or more, you should be able to use demographic data to estimate how many double income households with kids exist in Toledo. Then narrow that down by the percentage of total households earning $80k or more. Then narrow that down by the number of women between age 40-50.
- If it turns out that only a few people exist who fit that target customer segment – you either need to expand your market or change your business model. Assuming it’s the former, you can repeat this process for multiple customer segments.
Remember that you’ll never find the perfect data set that tells you everything you need. And sometimes, federal statistics will disagree with municipal statistics, due to differences in the data collection methodology. Get comfortable with this. Come to logical conclusions. Explain them in your business plan. This will be enough for most lenders and investors.
Deciding what’s Relevant
After your demographic market analysis, you should also look at your market’s buying behavior and other, more subjective characteristics. What influences them? How do they make buying decisions? Is this market segment growing or shrinking? How are they evolving?
This type of analysis can be tougher because it relies on you to interpret survey results that might not quite fit your ideal customer definition, or to draw conclusions from news sources with limited and sometimes biased information.
Industry surveys, market research reports (if you can get your hands on them – they’re expensive!) and news articles can give you clues into how your ideal customer behaves. But you have to be able to trust your sources.
Look for reports from media outlets that are known to be credible – think Harvard Business Review, New York Times, or your local news station. If you find a Google search result with a click-bait headline and no author, you need to do some more digging.
Try to find the author’s name and see what else they’ve written – do they appear to be a subject matter expert, or do they write on everything from health supplements to battery technology? If an article presents survey results, who sponsored the survey? I once saw a new story about a healthy eating survey, in which every single image had Kellogg’s products in the background. The small print indicated that Kellogg’s had sponsored the survey and unsurprisingly, the report focused on the health benefits of several specific ingredients found in Kellogg’s products. Yikes.
So before you allow confirmation bias to get in the way of using objective, credible sources to help understand your market, make sure you’re working with real information.
A little side note: Many people mix up market research with industry analysis. Market research is all about understanding your customers: how many of them might exist, how they behave, how much they’ll spend, and whether they make up a growing or a shrinking group.
Industry analysis is about how the other companies in your industry operate. It’s more closely related to competition. We’ll save that discussion for another post.
It’s Not Over when the Business Plan is Done
Market research is something you have to stay on top of. Doing it once for your business plan won’t help you in two years when your customer segments have changed, or some macro factor like the national economy or a federal election has affected the way they spend. While you don’t need to obsess over market analysis for too many hours when you write your plan (8-10 hours is more than enough), you should come back to your business plan from time to time and update the analysis.
The better you understand what your customers are doing, the clearer your path to reach them and the more likely you are to stand out among companies like yours.
Know your customers better than they know themselves. It sounds creepy – but it works!