A market analysis is a complex process, involving loads of data and insight. This data comes from both inside your company and outside your company. It includes data about your own products and services, data about your competitors, and information from those on the front lines (often conducting research and even asking salespeople who interact with the end users).
A full, in-depth market analysis can take weeks or months, and will vary based on where you are in the product life cycle, the type of category you sell, your target market and many other factors. However, there are some key steps to performing a market analysis that are important in most cases. A market analysis is the process for identifying whether your product or service is positioned for success in the marketplace. A market analysis is typically conducted when developing or evaluating product strategy, facing a new competitor, introducing a new product or feature. There are at least 7 key steps to performing a market analysis:
- Identify unmet needs
- Identify which barriers to entry exist
- Identify the size of the market
- Identify the customer
- Identify the competitors in this space
- Identify the current price points
- Identify the distribution model
In any project, process, or business plan, you need to start with the more strategic “whys” and finish with more tactical applications. Therefore, we recommend you start with the needs of the customer:
1) Identify unmet needs
In sales, they say that your products or services should either meet an unmet need, or create one. Naturally, the same applies to performing a market analysis. Are you filling a need or creating a new one? Both require informing the consumer and educating them on the benefits of your product or service. However, creating a need requires substantially more education for the consumer and arguably more resources. Regardless of which path you take, step 1 is determine what the marketplace need is and whether your product meets these needs – either created or identified. If your product isn’t already in production, or you’re looking to better refine your market position, you can also determine if there are other needs that could be met by your product or service.
Don’t know where to start? If you’re already in the marketplace, ask your own customers what they like about the product. If someone else is in the space, ask their customers. If nobody is in the space yet, then you’ll need to identify your target market and ask them. You will end up refining your target as you get answers in each case. Be sure to collect as much information on those giving you feedback as possible so you can build segments if you have enough data. Contact a research contractor if you need more help!
2) Identify which barriers to entry exist
Understanding barriers to entry can help with pricing, distribution, product updates, and more. If you have a product with low barriers to entry it is much easier for competition to come in at any time and develop a competing product. Creating added value in your product will help increase competitive barriers to entry in addition to helping you further differentiate yourself from competition. Higher barriers to entry mean that you’ll likely have less new competition and less price elasticity due to the fact that competitors aren’t chipping away at your margins. However, a high barrier to entry can be a positive for you if you are uniquely positioned to eliminate barriers to entry that others don’t have. For instance, if you have a factory already capable of producing a product with minimum retooling necessary, or 2,000 retail locations that you can use to sell a new product, you have clear advantage to overcoming production or distribution barriers to entry.
Don’t know where to start? Break down the manufacturing and distribution process into its components. Look at how hard it is to educate consumers on your product or service. Where are significant investments of time, money, or other resources needed? Do you have unique assets that will offset these investments?
3) Identify the size of the market
There may be a market for garlic scented perfume, but just how large is that market? Launching a new product won’t do you any good if there are only a half-dozen potential customers. Understanding the potential customers, or the “size of the prize”, is critical to determining whether it is worth pursuing or not. Utilize trusted resources such as industry association statistics or government data. Many research firms employ economists who can build models of industry size and seasonality based on the factors that go into these calculations. Even trade journals will frequently calculate market size – often through subjective discussions with their user base. While many of these methods may give you a rough size of the industry rather than a precise one, at a minimum, you know whether you’re working towards millions of customers, or just a handful.
But market size isn’t the only consideration. Having a good forecast of the market, while not critical, is a huge plus. For example, a product could be popular now, but its popularity could be waning or its market could be saturated. If the market is growing but currently small, it may be a great time to get on board. If it’s not growing and it’s a big market, it’s likely there are many competitors (since large markets are often saturated with competition). This is where coming up with a differentiation strategy can really be helpful.
Don’t know where to start? Market size is typically not something you can come up with on your own. Start by searching online with a term such as “what’s the size of the [PRODUCT] market” to see what resources come up. Evaluate each source for credibility and thoroughness. If you get stuck, contact a company like The Stevenson Company for help in either evaluating, modifying, or creating market sizing and forecasts.
4) Identify the customer
There are three main ways to identify and understand your customer: demographic, geographic, and psychographic.
Demographic differences provide critical information. Consumers of particular generations, ethnicities, or genders respond differently to competitor products or services. This may lead to gaps your company can fill or help narrow the target market for your products or services. Understanding which demographics are purchasing which products/features and those demographics’ purchase drivers can lead to impactful messaging to target groups.
Understanding trends in a geographical area provides immediate insight into how the market is likely to behave within that area. In a brick and mortar environment, prices tend to vary by geographic location, and understanding those metrics allows companies to balance profitability with competitiveness. Using trends of similar demographics across your other target markets can help you understand how consumers might behave in a new geographical area. Further, if you have the resources such as PRIZM, Mosaic, or VALS, metropolitan regions can be sub-divided into neighborhood-level demographics, attitudes, and trends, rather than providing uniform geographic blocks to study as a whole. Marketing approaches that work well in one neighborhood can fall flat in another.
What are psychographics? Psychographic data goes beyond the “who” and “where” of a market’s characteristics (demographics and geographics), looking into their reasons for purchasing and behaviors – the “why”. It may not always be related to their purchasing of the product, but their overall behavior, lifestyle, or attitudes towards certain concepts. Psychographics help you build a robust picture of a customer buying products or services and empower effective marketing to these customers.
Don’t know where to start? Just like when you identify the need, your own customers are the best place to start. Identify the demographics of customers of an existing product. If nobody is in the space yet, identify a product that is similar and test your product with these consumers. You may end up refining your target consumer as you get answers in each case. Psychographic behaviors can be obtained from marrying demographic data to behavioral data such as PRIZM, MOSIAC or other behavior-to-demographic tools. You can also develop custom questionnaires with questions like “On a scale of 1 to 10, please indicate how you agree with the following statements: I am a value shopper, etc.”. We recommend using a research provider for this type of questionnaire to ensure your questions and answers are worded and analyzed appropriately.
5) Identify the competitors in this space
It should go without saying that in order to perform a market analysis, you need to identify your competitors. This process is more involved than a Google search for other companies that provide similar products and services. You need to know information like: which companies sell similar products and attempt to serve the same needs as you, what is their ability to sell their products vs. all other competitors (market share), and what features of those product sell best. Calculating market share is no easy task and there are many ways to do it. Once you know the competition’s shares, you can dig deeper into the why and what. Understanding your best competitors will help you break down how they market, to whom they sell, and most importantly, which markets are being underserved.
Don’t know where to start? There are many ways of collecting a list of your competitors. Googling your product and looking at shopping sites is only the beginning. Make sure you quantify which competitors do best, so you don’t try to compete against someone that has a niche that is insignificant. Utilizing a market share provider that comprehensively measures and understands your industry is your best bet to accomplishing this important task. If you have behavioral data that pairs with that market share, then you’re already ahead of the game because you can measure demographics and behavior of your competitive shopper.
6) Identify the current price points
Many articles have been written on how to price your product. While it might seem more like a customer component of your competitive strategy, it is also a key part of performing a market analysis. Understanding price points currently being offered allows you to calculate profitability and determine if there’s room for another player in the marketplace. Understanding pricing across many products in the market may help you to identify areas where competition is weak, enabling you to gain a foothold in an industry held by a weaker competitor.
The Harvard Business Review suggests using a positioning map to identify who is in the market and what price points they occupy. This provides a nice visual that places you in the context of your competitors within your market. Understanding how and where your competitors operate helps you situate yourself within that map. Additionally, you may find that certain price points are missing from the map, enabling you to scale features up or down to fit within a particular competitive price point. This is a particularly useful approach for line reviews with retailers who are hoping to gain share in a given market.
Don’t know where to start? While the internet is a great tool for collecting price points, be careful. Web scraping can give you directional information, but cart prices and sales prices may be missing. Collecting point of sale data from the retailer or your own sales can be useful, but may provide an incomplete picture of the marketplace. Utilizing a tool which provides unbiased pricing (store walks/mystery shops, consumer purchase information or diaries) may be necessary. Build your positioning map and footnote it with the appropriate features. Don’t forget to account for different prices on your map.
7) Identify the distribution model
A distribution model is not putting a product on a truck and distributing it to the retailer or end consumer – the strategy behind it is. These days, just about everyone is selling their brand online and understanding strategically how you want to get the product to the customer is critical to ensuring you don’t compete against yourself (or against your best retailers). Many options are available, from direct distribution (cutting out the middleman, like Purple mattresses or Warby Parker does) to more conventional distribution (manufacturer to wholesaler to retailer). There may be benefits to direct distribution and reducing the cost of the retailer may be a key part of the strategy, but it may also mean that you lose access to salespeople who can communicate the benefits of your product. Analyzing your competitors’ distribution strategy and what makes it successful or unsuccessful may provide insight into opportunities (or best practices) in the marketplace. You may choose to follow that distribution strategy or open up opportunity for a new one.
Don’t know where to start? The internet again provides a great starting place for understanding the market’s distribution model, but it should not stop there. Factoring in online distribution like direct, marketplace (like Amazon and Walmart), and retail (Bestbuy.com, Lowes.ca, or Wayfair.com), as well as brick and mortar are key to the process. Build a spreadsheet that lists the distribution of your top 5-10 competitors and where you can buy their products. Include an option for online vs. brick and mortar. This process may require some “boots on the ground” to shop at retailers but understanding this component will be well worth the time.
The steps to performing a market analysis may seem daunting, but by beginning with a framework such as this one, you will start to see where the pieces fit together – and more importantly – where they don’t. Talk to others who your market and can provide insight. Do your research, either by utilizing a research firm or diligently planning and researching yourself. Make sure you connect the dots – overlooking factors such as why key competitors are so successful or what unmet opportunities exist for distribution can be the difference between failure and success.