Any time you enter a new market, you’ll want to understand the ins and outs of that space. How many consumers exist here? What are their traits and characteristics? What does the competition look like? Learning this information is essential if you want to become and remain relevant to your target customers.
While it might seem overwhelming at first, analyzing a new market is simpler than you might think. Here’s our guide to conducting a market analysis for your business.
What is market analysis, and why does it matter?
A market analysis is a thorough review of your industry, target customers, competitors, and market conditions to determine whether your business idea is likely to succeed. It helps you identify demand, identify opportunities, understand potential risks, and make better decisions about pricing and marketing.
Market analysis versus market research: What's the difference?
Many people confuse market analysis with market research. In fact, part of a market analysis includes market research, which focuses mainly on building a strategy for your marketing efforts. However, a market analysis digs much deeper into various factors, like competitors and industry regulations.
There are two types of market analysis:
- Internal market analysis deals with how you do business.
- External market analysis involves how your environment or market affects your business.
These approaches are equally beneficial and depend on your needs as a business. You might even find yourself conducting both at the same time. This is similar to a SWOT analysis, which assesses your business’s Strengths, Weaknesses, Opportunities, and Threats.
Key components of a market analysis
Here are the key components of a market analysis:
- Industry overview: Consider your industry’s size, growth rate, current trends, emerging technologies, and any other factors that could influence demand.
- Target market: Outline demographic information about your target customer, including their age, income, educational background, location, and buying behavior.
- Competitive landscape: Consider your direct and indirect customers, evaluating what they do well and where they fall short.
- Pricing strategy: Research what customers pay for similar products or services and how your competitors structure their pricing.
- Market conditions: Consider how broader market conditions, like inflation, supply chain issues, or changing customer preferences, could influence demand for your products or services.
How to size your market: TAM, SAM, and SOM explained
One of the most important parts of any market analysis is estimating your potential customer base. Businesses often do this using these three metrics:
- Metric: Total Addressable Market (TAM).
What it means: The total revenue opportunity if every potential customer purchases your product.
Example: Every coffee drinker in the United States. - Metric: Serviceable Addressable Market (SAM).
What it means: The portion of the TAM your business can realistically serve based on geography or product offering.
Example: Coffee drinkers in St. Louis interested in specialty coffee. - Metric: Serviceable Obtainable Market (SOM).
What it means: The share of the SAM your business can realistically capture in the near term.
Example: Customers your coffee shop expects to attract during its first few years.
Your market analysis should focus on two main groups: your customers and your competitors.
Conducting your market analysis
Here are three steps you should take to ensure a thorough and accurate analysis of your intended market.
Establish the purpose of your market analysis
As with all business development efforts, it’s important to understand why you are conducting a market analysis in the first place. Perhaps you want to familiarize yourself with the regulations in your industry, or maybe you’re curious how your business compares to others in your market.
Ask yourself what issues or concerns you have, and make them part of your purpose to conduct a market analysis. That way, you aren’t blindly researching without an end goal in mind.
Here are some free resources that can help:
Identify your target audience and competitors
Your market analysis should focus on two main groups: your customers and your competitors.
You’ll want to know who your customers are and how many of them exist, and understand their buying habits and how much they’re willing to pay.
Competitive research helps you understand who your competitors are, as well as their challenges and successes, so you can tactfully compete and stand out from them. Recognizing both sides will help you form a more efficient business plan.
For a more in-depth evaluation of your competitors, consider using these findings to conduct a SWOT analysis. This will help you better understand their strengths, weaknesses, opportunities, and threats.
Gather and analyze market data
There are many ways to gather your market data, from state and local commerce sites to customer interviews and surveys. From there, find trends to understand where you might be lacking and where you might be succeeding.
Then, organize your findings into your market analysis using the following information:
- Size, growth rate, major customer groups, and other industry details.
- Target market and their needs, demographics, buying trends, size, and forecasted growth.
- Your expected market share percentage, pricing, gross margin, and discounts you might offer.
- The results of your analysis.
- How you will follow regulations and practice compliance.
AI tools that speed up market analysis
Artificial intelligence can’t replace market research, but it can help you analyze information faster and identify patterns you might miss otherwise. For example, AI tools can summarize industry reports, organize survey responses, and identify recurring themes in customer reviews.
These tools can also help you come up with customer personas, analyze website analytics, and identify emerging market trends. However, AI tools can produce inaccurate or outdated information, so you should verify any AI-generated insights against reliable data sources.
Common mistakes to avoid
Here are the biggest mistakes to avoid as you’re conducting market analysis:
- Relying on outdated data: Market conditions can change quickly, so use the most recent information available.
- Defining your target market too broadly: Trying to appeal to everyone can dilute your marketing efforts and lead to unrealistic sales projections.
- Ignoring indirect competitors: Businesses offering different products may still compete for the same customers.
- Using only one source of information: Combine government statistics, industry reports, and customer research to validate your conclusions.
- Treating it as a one-time exercise: Revisit your analysis regularly to account for changing customer needs and economic conditions.
Market analysis example for a small business
Let’s say you’re trying to start a neighborhood pet grooming business. You start by reviewing Census Bureau data to estimate the number of households with pets in the area. You also look at local economic reports to understand population growth in that area.
Next, you identify competing groomers and services, paying attention to their pricing, online reviews, and appointment availability. Conducting customer interviews reveals that many pet owners struggle to book evening or weekend appointments.
Based on this research, you decide to offer extended hours and online scheduling. You also know how to competitively price your services with other local businesses. This market analysis helps you validate customer demand and identify possible competitive advantages before your business even launches.
What to do with your market analysis
Your data won’t benefit you if you don’t put it into action. Once you gather all the information you need and organize it into a cohesive document, review it and find ways to reach the goals you set from the start.
If you conducted an internal market analysis to find ways to outshine your competition, translate your data into processes that might help you better compete. Maybe you found out where your competitors are lacking—take advantage of this information and execute. Brainstorm with your team and ask questions that lead to viable solutions.
Sean Peek contributed to this article.
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