Great business ideas often hit in the spur of the moment. An idea strikes you while you’re taking a shower, or chatting with a friend at a bar.
It’s easy to get caught up in the excitement and go full-steam ahead, but how do you really know it’s a great business idea?
Market research is one of the first steps you should take, well before you invest a whole lot of time and money into development or manufacturing products. The most successful businesses tend to understand their market very well and position themselves to operate successfully in it.
Here are a few tips for doing your market research:
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Use primary and secondary research
There are two main types of market research businesses can use; primary research and secondary research. Here’s what they comprise of:
- Primary research – This is all the research activities you can conduct where you gather first-hand information. For example; focus groups, phone interviews and online surveys.
- Secondary research – This is all the research activities you can conduct where you gather public, commercial or internal data. For example; government records, data from research agencies, market data your organization has gathered in-house (if you already own a business).
Both types of data can be useful for your market research. While primary data can allow you to get more specific, micro-level data, secondary sources are good for analyzing market trends and potential size.
Clearly define who your buyer is
The best business ideas tend to solve a problem or fulfill a need better than what any other option on the market is offering. You need to have a clear idea of who your target buyer is that needs that problem solved.
Buyer personas are a great tool for clearly defining who your business idea will be targeting. These fictional “characters” are outlined with as much detail as possible so that you can even make an assessment of any subgroups. You’ll want to define demographic, geographic and psychographic points about your persona/s.
Doing this helps you to visualize your audience and determine who you should be researching and talking to as you continue with your market research.
Determine the size of the market
Determining the size of your market is critical. You and any partners need to understand how much business is potentially out there. If you’re going to pitch investors, this is something they absolutely will want to know. In fact, market size is one of the most basic measures that every VC or individual investor requires.
Market size is determined by the number of potential customers (those you defined in your buyer persona/s) or the number of transactions expected in a year. For example, if you are selling something that almost everyone uses (soap, toothbrushes, sunscreen…), then a forecast of transactions per year is appropriate.
If you’re going to pitch investors, an expectation will be to show projections out to three years. In doing this, account for organic growth and for any expected roll-outs into other geographic areas.
No startup should expect to gain 100% market share, which is why determining your niche or addressable market is important. Expecting to capture somewhere in the range of 1 – 5% of the addressable market usually suggests a realistic outlook.
Get data on your potential market size from:
- Census and Labour Bureau
- Local real estate data
- Local demographic information
- Surveys and focus groups.
Importantly, when you gather primary data you really want to understand whether there is demand for a solution like yours. Aim for a mix of participants to engage in market research activities. Ask open-ended questions so that people are free to give their own full answer. (HubSpot gives a great list of examples here).
Market saturation is a situation where the volume of a product or service has reached a maximum in its current state. One way to determine whether a market might be saturated already is to look at its growth. Any market that is fast-growing typically has room for new suppliers, but if it remains steady or has stagnated, it can be a sign that the market has reached saturation (unless your solution is radically different or solves problems that competitor’s solutions do not).
Conduct competitor analysis
A competitive analysis is the process of analyzing and categorizing your competitors’ relative strengths and weaknesses as compared to your own. You need to be able to make an honest determination: can we really compete?
Here are a few steps to go through:
- Determine who your competitors are. Remember that these might be direct competitors who offer similar products or services to the same target audience within the same areas, or indirect competitors – companies who are similar but perhaps targeting a different need or purpose.
You could start by listing any who you already know of, then search Google to find any others. Use specific keywords that describe your proposed company such as “project management software,” “marketing agency in Atlanta,” or “donut shop in Des Moines.” Look for the results that come up on the first two to three pages, as well as any paid ads.
Other ideas for determining your competitors include; asking target customers, looking at the advertisements in trade publications, checking social media and online forums, looking at member lists for trade associations.
- For each competitor look at points such as:
- Customer numbers
- Size and location/s
- Products and services
- Their USP (Unique Selling Proposition)
- Number of employees
- Websites and social channels
- Company history
- Financial reports
- Marketing messaging (website, social media, content, advertising, product copy…)
- Company reviews
- The audience they are talking to
- SEO – keywords, ranking, links and domains
- Brand awareness among target market.
Determine strengths and weaknesses for each of these points.
- Honestly compare with your own product or service and the resources you have available. For example, maybe you have some kind of proprietary technology that will make your offer solve the customer problem better. Maybe you have features that competitors don’t yet have.
Remember too, just because there are some big players in your market doesn’t mean that there’s no hope for you. Many startups have had success because they were able to be agile, to move quickly and solve a problem more efficiently than a behemoth competitor.
Test your idea
There are many ways to test a business idea without spending a ton of money on setup, coding or manufacturing. For example, we know of a local donut shop that started out by creating social media pages that showcased their marvelous creations. They got an inexpensive permit for a home kitchen and offered deliveries of their donuts. They also setup at local farmer’s markets and craft fairs. The popularity of their product first lead to renting space at a popular hotel, then moving on to a bigger stand-alone store once their business established a strong following.
With other types of products or services you may be able to setup a landing page to gauge potential interest (remember that handing over an email address doesn’t mean they’ll automatically buy!). Drive targeted traffic to the landing page to gather interest. We know of a monthly subscription box service that did this, converting about 18% of their initial email list into buyers later. Part of their secret was to keep up communication once people signed onto the list. They kept them updated with what was happening so people knew to expect a launch.
If yours is a technology startup, you can invite beta users to give you feedback, right from the first couple of features being coded. This helps you to get good feedback before you’ve gone too far into creating the product.
You may even be able to test inexpensively through an activity that you are going to do anyway. In his book 100 Side Hustles, Chris Guillebeau features Peg Donovan, an operations manager from Portland, Maine who makes at least $2k per month from her side hustle. Where she lives, IKEA is popular but is an almost five-hour round trip. Deliveries are expensive, often costing more than the item ordered.
Peg’s idea was to charge a delivery fee for picking up people’s orders. This way, she makes a profit while they save money on delivery. How did she test this? Simply by telling colleagues at work that she was going to IKEA and asking if they needed anything picked up. Several people did and her business was born.
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Market research is an essential part of setting up your business for success. It’s important to do and to do thoroughly, but don’t get so caught up in it that you end up with “analysis paralysis.”
Here’s a thought on that from SCORE:
“Once you start researching using free resources online, it’s so easy to get carried away. Set a timer for each research session to keep you on task and prevent you from getting overwhelmed.”
Be thorough and know the key data points, even if you’re not seeking investors. Lastly, if you feel like you’re too close and attached to an idea, seek a third-party mentor to help you sift through the data. It’s often helpful to have that third-party that has no “skin in the game.”