Before you start a business, it’s a good idea to analyze your market and your competition to make sure your ideas are viable. First, you have to carry out market research for your small business. To be successful, you have to find enough customers. A market and competitive analysis identifies potential customers and competitors.
If your analysis shows that there’s not enough interest in your products, you can modify your business plans. If another company is doing the same thing, you can change your sales strategy. Examining your market and your competition reduces your risk and makes it more likely that your business will prosper.
Define your target market
Your potential customers have a geographic location and certain characteristics. They could be local, regional, national, or international. Once you’ve decided where your customers are located, you can determine their characteristics. These demographic characteristics can include age, income, gender, education, and type of employment.
A potential customer will make a purchase if they have the following three characteristics:
- A Need. They need the product or service you’re offering.
- Access. They can access the location of your business or find your website.
- Ability to pay. They can pay the amount you’re asking.
Your target market is the part of your potential customer group that satisfies these three criteria. If it’s large enough to support your business, you have a solid footing.
Who is in your target market?
By defining your target market in terms of customer location and characteristics, you know who you’re looking for. Now you have to find out whether there are enough people who fit your criteria. A great place to start is with the SBA (Small Business Administration) source of market statistics. It includes census data and is a valuable market research tool for small businesses.
The statistics tell you how many people live in your local sales area or region. They also provide insight on where your orders will be coming from if your business target market is national in scope. They give you an idea of income levels, ages, and education. You’ll be able to see whether there are enough potential customers.
Census statistics and similar consumer information can tell you whether potential customers can access your products or services and whether they can afford them. This type of information can’t tell you whether they need to purchase what you’re selling. To get hard information on the need for your specific products or services, you have to ask potential customers yourself.
Who needs your products or services?
How easy it is to find potential customers who will answer your questions depends on your type of business. If you’re selling to other businesses, networking groups such as your local Chamber of Commerce can help. If you’re in retail, mailings, emails, or telephone surveys may be a better bet. The SBA has local offices and partners who are a good resource. When you know how many potential customers need your products or services, you can make reasonable sales projections.
Traditional methods of carrying out market research for small businesses include surveys, focus groups, and interviews. Avoid using too many people you know, but friends, acquaintances, professional contacts, colleagues, and suppliers can be sources of participants in your small business research.
Make sure everyone knows you’re starting a business and want feedback. Offer compensation such as cash, gifts, or other valuable considerations for their time. Present your business and ask whether they would buy from you. Then ask why or why not. Keep questionnaires and surveys simple. If you do in-depth interviews, it should be with people who have extensive knowledge of your business sector.
Matching your business to the market
Your market analysis checks that your target market has enough members who need your products or services and can afford to buy them. If that’s not the case, you have to change your business concept.
You may find that tweaking some details of your plans will attract more business. You may also find that changing some aspects of your products or services can make them more attractive to your potential customers. Once you’ve identified your market, you have to analyze the competition to make sure your potential customers buy from you and not from the competition.
How can you compete?
Successful competitors have a USP (Unique Selling Proposition) and an associated competitive advantage. A USP that’s difficult to duplicate makes you stand out from the competition. A competitive advantage gives your business an advantage over competitors in one specific area. If you can base a USP on your competitive advantage, it’s hard to duplicate and helps make your business successful.
In practice, there are many possible USPs and many types of competitive advantage. Below are some of the most common.
1. The Lowest Price
To use this as a USP, you have to consistently have the lowest price for what you offer. This is an effective USP if it’s linked to a low-cost competitive advantage. It only works if your costs are actually lower than those of the competition. Then you can sell cheaply and still make a profit. If you don’t have a low-cost competitive advantage, your lowest price USP is going to make you lose money.
Quality can be a USP if you can easily demonstrate that you have the highest quality. Usually, quality is based on characteristics such as longevity, the use of higher-quality materials, or the design and look of the product. Your claim to the highest quality must be based on a characteristic important to your target market.
The best performance for a specific function is an effective USP. For example, if you could develop a secret way to make a smartphone battery last twice as long, that would qualify. If it can’t easily be duplicated and it’s valuable to the members of your target market, you can compete on it.
Service is a common USP in areas where this is important. It’s not enough to say that you have the best service. You have to come up with a specific way in which your service is the best, and it has to be hard to duplicate. Businesses using a service USP often have special training for staff or unique hiring practices that help create their USP.
While you have to identify possible USPs for your business, developing a strategy based on one of them depends on your competitors. You first have to know who they are and what they’re doing.
Identifying the competition
Ideally, you asked your potential customers who they buy from during your market research activities, but competitors aren’t hard to find. One idea is to pretend you want to buy the things you’re planning to sell. You’ll come across the competing suppliers just as your potential customers do.
To find more obscure competitors, start attending conferences and networking meetings in your industry. Your competitors will be there promoting their businesses. You’ll also be able to see what aspects of their products and services they highlight. They’ll have USPs and competitive advantages for you to identify.
Another source of leads for possible competitors is the business directory of the Chamber of Commerce. You can filter by industry, state, or other criteria to find the businesses that compete with yours. Online review aggregators such as Yelp can be a good source as well. You can specify the kind of business and the location to see who’s offering products or services similar to yours.
Analyzing competitor marketing
This step tells you which of your possible marketing strategies will be the most effective. First, collect all the information you can find on each of your competitors. Start with their websites, where you can find what product or service characteristics they’re emphasizing.
Your competitors may also distribute print advertising or run ads on local radio or TV. In each case, ask yourself what kind of customer they’re trying to reach and what the message is. The message contains the competitor’s USP.
Sometimes they may use more than one USP, depending on which group of customers the business is trying to reach. Marketing with different USPs to different market segments is an effective strategy if your customer base is large and diverse.
You’re looking for a USP that you can use successfully. This means it’s a USP that no competitor is using or one that’s already in use. The former is easier to implement because you’ll be selling to new customers. The downside is that perhaps no competitor is using it because it doesn’t work.
If you decide to use the successful USP of a competitor, you have to be ready for a fight. You’ll be trying to take their customers away, and they’ll react. Make sure you have a substantial competitive advantage to support your business in the effort to take over market leadership for that USP. The advantage of taking over an existing USP is that you know how well it works.
Strengths and weaknesses influence your strategy
Once you know which strategies your competitors are using and what their USPs are, you’re ready to finalize your own approach. A SWOT analysis of strengths and weaknesses can tell you what strategy is most likely to be successful for your business.
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. A strength in your business against a weakness in your competitor is an opportunity for you. Weakness in an area of your business where your competitor is strong is a threat to your business. You want to capitalize on opportunities and mitigate or avoid threats.
A good approach is to prepare lists of strengths and weaknesses for your own business and each of your competitors. Compare the lists and identify opportunities and threats. Opportunities point the way for your business marketing strategy and corresponding USPs. Areas where you see threats shouldn’t play a key role, and you should try to address such weaknesses to eliminate them.
Putting it all together
Your market research for small businesses allowed you to identify your potential customers. Your competitive analysis shows you how to market to some of those customers by making your business unique in ways they find attractive.
You may segment your market by dividing it into groups with the same interests and characteristics. That allows you to target the segments individually with specific USPs.
When developing this approach, you have to be aware of your SWOT analysis. Choose a strategic approach that plays to your strengths and your competitors’ weaknesses.
When you start operations, you want to know exactly who your customers will be and why they’ll be buying from you rather than anyone else.
Market Research FAQs
How do small businesses do market research?
Small businesses rely on customers from their target market to tell them what parts of their business work and what could be improved. Potential customers who don’t buy are particularly valuable as a source of information. They can detail why they didn’t make a purchase, and their feedback can lead to improved business practices.
What are the four types of market research?
Direct market research can be carried out via customer observation, focus groups, interviews, and surveys.
How do you do market research for a new business?
Because new businesses have few or no customers, they have to rely on secondary sources such as census data and statistics. They use secondary sources to identify potential customers then carry out surveys and research.
Why is market research important to a small business?
Market research reduces risk. You may think you have a fantastic idea for a product, but what matters is what customers think. Market research finds out what potential customers are likely to buy.