How to do a market analysis for a business plan
Clarke Ricks
School of Business, Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
April 6, 2021
How to do a market analysis for a business plan
What is a market analysis?
A market analysis is a quantitative and qualitative assessment of a market. It looks into
the size of the market both in volume and in value, the various customer segments and
buying patterns, the competition, and the economic environment in terms of barriers to
entry and regulation.
How to do a market analysis?
The objectives of the market analysis section of a business plan are to show to investors
that:
you know your market
the market is large enough to build a sustainable business
In order to do that I recommend the following plan:
1. Demographics and Segmentation
2. Target Market
3. Market Need
4. Competition
5. Barriers to Entry
6. Regulation
The first step of the analysis consists in assessing the size of the market.
Demographics and Segmentation
When assessing the size of the market, your approach will depend on the type of
business you are selling to investors. If your business plan is for a small shop or a restaurant
then you need to take a local approach and try to assess the market around your shop. If
you are writing a business plan for a restaurant chain then you need to assess the market a
national level.
Depending on your market you might also want to slice it into different segments. This
is especially relevant if you or your competitors focus only on certain segments.
Volume & Value
There are two factors you need to look at when assessing the size of a market: the
number of potential customers and the value of the market. It is very important to look at
both numbers separately, let's take an example to understand why.
Potential customer?
The definition of a potential customer will depend on your type of business. For
example, if you are opening a small shop selling office furniture then your market will be all
the companies within your delivery range. As in the example above it is likely that most
companies would have only one person in charge of purchasing furniture hence you
wouldn't take the size of these businesses in consideration when assessing the number of
potential customers. You would however factor it when assessing the value of the market.
Market value
Estimating the market value is often more difficult than assessing the number of
potential customers. The first thing to do is to see if the figure is publicly available as either
published by a consultancy firm or by a state body. It is very likely that you will find at least a
number on a national level.
If not then you can either buy some market research or try to estimate it yourself.
Methods for building an estimate
There are 2 methods that can be used to build estimates: the bottom-up approach or
the top-down approach.
The bottom-up approach consists in building a global number starting with unitary
values. In our case the number of potential clients multiplied by an average transaction
value.
Let's keep our office furniture example and try to estimate the value of the 'desk'
segment. We would first factor in the size of the businesses in our delivery range in order to
come up with the size of the desks park. Then we would try to estimate the renewal rate of
the park to get the volume of annual transactions. Finally, we would apply an average price
to the annual volume of transactions to get to the estimated market value.
Here is a summary of the steps including where to find the information:
1. Size of desks park = number of businesses in delivery area x number of employees
(you might want to refine this number based on the sector as not all employees have desks)
2. Renewal rate = 1 / useful life of a desk
3. The volume of transactions = size of desks park x renewal rate
4. Value of 1 transaction = average price of a desk
5. Market value = volume of transactions x value of 1 transaction
You should be able to find most of the information for free in this example. You can get
the number and size of businesses in your delivery area from the national statistics. Your
accountant should be able to give you the useful life of a desk (but you should know it since
it is your market!). You can compare the desk prices of other furniture stores in your area.
As a side note here: it is always a good idea to ask your competitors for market data (just
don't say you are going to compete with them).
That was the bottom-up approach, now let's look into the top-down approach.
The top-down approach consists of starting with a global number and reducing it pro-
rata. In our case, we would start with the value of the UK office furniture market which AMA
Research estimates to be around £650m and then do a pro-rata on this number using the
number of businesses in our delivery area x their number of employees / total number of
people employed in the UK. Once again the number of employees would only be a rough
proxy given all business don't have the same furniture requirements.
When coming up with an estimate yourself it is always a good practice to test both the
bottom up and top-down approaches and to compare the results. If the numbers are too far
away then you probably missed something or used the wrong proxy.
Once you have estimated the market size you need to explain to your reader which
segment(s) of the market you view as your target market.
Target Market
The target market is the type of customers you target within the market. For example, if
you are selling jewellery you can either be a generalist or decide to focus on the high end or
the lower end of the market. This section is relevant when your market has clear segments
with different drivers of demand. In my example of jewels, value for money would be one of
the drivers of the lower end market whereas exclusivity and prestige would drive the high
end.
Now it is time to focus on the more qualitative side of the market analysis by looking at
what drives the demand.
Market Need
This section is very important as it is where you show your potential investor that you
have an intimate knowledge of your market. You know why they buy!
Here you need to get into the details of the drivers of demand for your product or
services. One way to look at what a driver is to look at takeaway coffee. One of the drivers
for coffee is consistency. The coffee one buys in a chain is not necessarily better than the
one from the independent coffee shop next door. But if you are not from the area then you
don't know what the independent coffee shop's coffee is worth it. Whereas you know that
the coffee from the chain will taste just like in every other shop of this chain. Hence most
people on the move buy coffee from chains rather than independent coffee shops.
From a tactical point of view, this section is also where you need to place your
competitive edge without mentioning it explicitly. In the following sections of your business
plan, you are going to talk about your competition and their strengths, weaknesses and
market positioning before reaching the Strategy section in which you'll explain your own
market positioning. What you want to do is prepare the reader to embrace your positioning
and invest in your company.
To do so you need to highlight in this section some of the drivers that your competition
has not been focussing on. A quick example for an independent coffee shop surrounded by
coffee chains would be to say that on top of consistency, which is relevant for people on the
move, another driver for coffee shop demand is the place itself as what coffee shops sell
before most is a place for people to meet. You would then present your competition. And in
the Strategy section explain that you will focus on locals looking for a place to meet rather
than takeaway coffee and that your differentiating factor will be the authenticity and
atmosphere of your local shop.
Competition
The aim of this section is to give a fair view of who you are competing against. You need
to explain your competitors' positioning and describe their strengths and weaknesses. You
should write this part in parallel with the Competitive Edge part of the Strategy section.
The idea here is to analyse your competitor's angle to the market in order to find a
weakness that your company will be able to use in its own market positioning.
One way to carry the analysis is to benchmark your competitor against each of the key
drivers of demand for your market (price, quality, add-on services, etc.) and present the
results in a table.
Below is an example of a furniture shop in France. As you can see from the table all the
actors on the market are currently focused on the low medium range of the market leaving
the space free for a high end focused new player.
