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Strategic Planning
How to Write the Market Analysis Section of a Business Plan
Free Market Analysis Kit
Ayush Jalan
- December 18, 2023
Say you’re planning to launch a new product or enter a new market. How do you know what will work and what won’t? How do you ideate strategies to survive and thrive in a competitive business environment? Luckily, market analysis helps answer these questions.
After all, stepping into the world of business without proper knowledge and insight can leave you vulnerable to uncertainties and competitive pressure. A robust market analysis can help you reduce risk and ensure profitability.
In this article, we’ll see what is a market analysis, why you should conduct it, and all the steps needed to do so.
What Is Market Analysis?
Market analysis is the qualitative and quantitative study of your external business environment. It gives a complete overview of your industry and its dynamics. With market analysis, you can predict how your industry will evolve and its effects on your company over time.
What Is the Purpose of Market Analysis?
Market analysis provides you with useful insights into what works and what doesn’t. It also helps you discover untapped areas in the market and strategize to stand out from your competitors.
Without the data from market analysis, you’re more likely to make decisions based on assumptions increasing the risk of potential failure. Market analysis plays a key role in identifying where your solution falls short.
It helps you answer the following questions:
- Who is your target audience?
- What are their buying habits?
- How much are they willing to pay for your solutions?
- What is the size of your target market?
- Who are your competitors?
- What are their strengths and weaknesses?
- What are your strengths and weaknesses?
- Which opportunities and threats are visible?
- What are the current industry trends?
How Do You Collect Data for Market Analysis?
Your market analysis is valuable only if you have factual data to back up your claims. For this, there are two broad sources you can use to collect data for market research: primary and secondary .
Primary market research: It includes all the information you can directly obtain yourself through:
- Market Survey
- Customer interviews
- Focus groups
- Prototype testing
Secondary market research: It includes all the data you obtain from third-party sources like:
- Research papers
- Government websites
- Observations from experiments
- Trade journals and books
However, the info you need might not always be readily available. In such cases, you can consider hiring a third-party data analytics company if you have the budget for it.
Although it can be expensive, this will enrich your analysis with accurate information. You can then use this info to gain a competitive edge over your rivals and capture a greater market share .
How to Do a Market Analysis?
Depending on the purpose and extent of your research, your market analysis can be lengthy and costly or brief and inexpensive. Regardless, there are seven steps involved in conducting a market analysis.
Step 1: State the objectives of your market analysis
Before you begin, specify the purposes of your analysis. It decides the scope of your research, keeps you on track, and helps you stick to your budget.
These are some of the reasons why you need to conduct a market analysis:
- To acquire a bank loan or investor funding
- To test a new product’s viability
- To gain a competitive edge
- To identify barriers to your growth
- To reduce uncertainty and risks
Step 2: Study your industry’s outlook
In this step, you describe the current state of your industry and make predictions on how it might change in the future. You can collect this data using metrics such as market size, projected growth, industry life cycle , and trends.
Through this data, you can understand how these changes will affect your product or service. This is especially important if you are applying for a loan or seeking funding . It also helps you forecast demand for your products to ensure profitability.
Step 3: Identify your target audience
Once you’ve outlined your industry, you identify the people most likely to buy your products and services. Even though your product might be suitable for everyone, there is a high possibility that not all of them will be your customers due to many reasons.
When you speak to everyone, you speak to no one. – Meredith Hill
To identify your ideal customer, you can gather data through surveys, focus groups, interviews, etc. Then, you can filter out the results based on demographics such as:
- Geographical location
Example: If you plan on setting up a fast-food restaurant, your ideal customer would be someone who:
- Lives in an urban area
- Has a busy lifestyle
- Travels long distances for work
- Dislikes cooking
- Falls between the age group of 12-45
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Step 4: Analyze your competitors
One of the factors that directly impact your business is competition. There are two types of competitors you will be facing in the market.
- Direct competitors: These competitors offer similar solutions as you do. For instance, Pizza Hut is a direct competitor to Domino’s Pizza since both sell pizza as their primary product.
- Indirect competitors: These competitors offer alternate solutions that act as substitutes for your solutions. For instance, Burger King is an indirect competitor to Domino’s Pizza since both sell fast food.
On top of identifying your competitors, you should also understand how they do business. You can do this by:
- Studying their marketing strategies
- Identifying their USPs
- Specifying how big of a threat they are to you
- Determining strengths and weaknesses
- Ideating strategies to leverage their weaknesses
- Providing better solutions than they do
Step 5: Calculate your market share
Your market share is the portion of the total market sales you’re responsible for. It’s part of the market that you make up. Calculating your estimated market share, also called sales forecasting , is an important step as it will define the viability of your business venture.
If your estimated market share is not big enough, chances are your business idea might not be profitable enough to pursue due to inadequate sales. You can forecast your market share using these metrics:
- TAM (Total available market): It represents the total demand available in the market. In other words, it is the maximum amount of sales or revenue the market has to offer.
- SAM (Serviceable available market): It represents the segment of TAM that you can obtain with your solution within your limitations. These limitations can be geographical location, business model , type of product, etc.
- SOM (Serviceable obtainable market): It represents the segment of SAM that you can capture after considering your competitors, customer preference, production capabilities, etc.
SOM is your estimated market share. Once you have calculated it, you can actualize it via suitable pricing strategies .
Example: You’re planning to set up a small pizza place somewhere in your city but you’re unsure whether it’ll be profitable. Through research, you forecast sales and gather the following data:
From the above information, you identified that your:
- TAM = $150 billion USD
- SAM = $166 million USD
- SOM = $700,000 USD
Step 6: Know the regulations and restrictions
Before entering a new market or starting a new business, you need to know the regulations and restrictions in your industry. Understanding these can help you stay out of legal pitfalls and inspire confidence in prospective investors. Some of the regulations you need to know are:
- Government policies
- Tax regulations
- Trade policies
- Employment laws
- Environmental regulations
- Security and privacy
- Protection of intellectual properties
Step 7: Organize and implement the data
Great job, you have completed the research part of the analysis. Now, it’s time to make sense of all the data you’ve gathered. Organize all the data and write a market analysis section to include in your business plan.
Follow this structure to organize and record your data:
- Market Overview
- Target market
- Direct competitors
- Indirect competitors
- Competitors’ strengths and weaknesses
- Competitive strengths and weaknesses
- Opportunities and threats
- Market share
- Projected revenue
- Regulations
Once you’re done writing the market analysis section, use this data to advance your strategic marketing process and devise a marketing plan.
Discover Blind Spots in Your Industry With a Market Analysis
You can’t scale a business on guesswork; you need reliable data to back every step you take in your business roadmap . As we saw above, market analysis is the perfect tool for this purpose. It helps you identify gaps in the market, overcome threats, and understand industry dynamics.
Conduct market analysis regularly to stay on top of industry trends and gain a competitive edge in an ever-changing business environment.
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About the Author
Ayush is a writer with an academic background in business and marketing. Being a tech-enthusiast, he likes to keep a sharp eye on the latest tech gadgets and innovations. When he's not working, you can find him writing poetry, gaming, playing the ukulele, catching up with friends, and indulging in creative philosophies.
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Step 7: Organize and implement the data. Great job, you have completed the research part of the analysis. Now, it’s time to make sense of all the data you’ve gathered. Organize all the data and write a market analysis section to include in your business plan. Follow this structure to organize and record your data: