Market research

WHY IS IT NEEDED?

Every successful business has knowledge on their consumers and especially their competitors. Therefore, before making any further steps considering the significant investments into the development of the product or service, your startup team should perform detailed market research. This includes the analysis of the industry, your competitors, their strengths and weaknesses as well as researching your potential customers that allows identifying market potential for your product or service. Why do you need to do that? This will help you to save a lot of time, energy and money. After carefully conducting this research you will be able to identify the opportunities for your startup to grow, monitor the competition in the market and be able to find your way into the new markets.

Once you come up with a business idea, have in mind that probably, there are at least 10 people in the world who got the same idea at the very same minute and at least 5 have tried to implement this idea. Likewise, you should remember that eventually customers find the ways to solve the problems they face with the alternative solutions and that is why you should carefully analyse the behaviour of your customers and know the industry.

HOW TO DO YOUR RESEARCH

One of the biggest mistakes a startup can do is to think there is “no competition” for their product. No matter how innovative the product or service, direct or indirect competitors that meets the customers’ needs most likely are already in the market. Competition can be defined as an alternative product or service that could satisfy the needs of the customer.

Starting entrepreneurs should not underestimate the importance of competitor analysis. Many startup companies highlight the fact that they could have saved a lot of money and time if they had conducted an in-depth market research.  A large percentage of startup failures happens when thinking, “My business idea is unique and if we create the product/service, the customers will find their way to us”. Good understanding of the marketplace realities can prevent from making costly mistakes later and improves your odds of success.

In order to find your place in today’s overcrowded market, startup company should know the industry, identify and analyse target customers and all the competitors that meet the needs of your customer. Research usually starts when formulating the questions your startup needs to know the answers to.

First, as your startup determines the customer problem it intends to solve, it has to distinguish the main customer segments to be addressed and analyse the main competitors already serving these customer segments with their value propositions. The table below is a valuable source of potential questions you could use when doing the market research. On the left side of the table more general questions regarding all the potential markets and customer segments are presented, whereas the questions on the right side of the table are more specific and orientated towards target market and target segment.

Potential MarketsTarget Market
  • What are all the potential markets for our business opportunity?
  • What is the size of this market (globally, nationally, regionally, and locally)?
  • Are these markets growing, declining or stable?
  • What is the competition in each of the markets?
  • What is the value of each of the market in sales per year?
  • What percentage share of each market could we achieve in X years?
  • How many customers are in our target market?
  • What is the anticipated lifetime of the market in years?
  • What are the key factors which drive demand and price in the market?
  • Who are the dominant sellers in the market?
  • What are their market shares by per cent, their competitive strengths and weaknesses?
Customer segmentsTarget segment
  • How can the market be segmented, e.g. by socioeconomic group, age, occupation, industry sector etc.
  • What are the customer segments?
  • Which of these are most attractive in terms of under-met need or aspirations, growth in size/spend and affinity with products?

 

  • Who are the target customers?
  • What is average spend per customer per transaction per year on the particular product/service that help to solve the problem?
  • What is known about these customers: what to they want, need, like, dislike?
  • How these needs are met at present and how well?
  • What dissatisfaction do the customers experience?
  • What are their buying criteria: what, how and from whom to buy?
  • What factors do they see as “Value for money” and “quality”?
  • What related purchases do they make, what are their listening, viewing, internet-browsing, reading, visiting habits?

Source: Rae, D. (2007). Enterpreneurship: from opportunity to action

When trying to understand the competition in your market it is worth to remember there are three types of competitors for your product or service:

  • Direct competitors – provide similar products/services or supply reasonably good substitute for your solution;
  • Indirect competitors – may not even do business in the same industry, but they compete for the same customers money. They provide substitutes outside your industry or target market, e.g. in the entertainment business cinema can be indirect competitor for bowling alleys and vice versa.
  • Emerging competitors – technologies are changing so rapid and the window successfully enter the market is getting narrow as never before. Thus, while analysing existing competitors it is equally important to look for the new, potential competitors that are planning to launch their startup in the near future. Observe new trends and technologies both in the industry and in your market.

Once the research questions are identified, you can decide how to gather the information that would help to find the answers. There are two main classifications of the research:

  1. Primary – when collecting original data, e.g. talking to industry experts and target customers; this can be implemented with the help of the questionnaire or focus group;
  2. Secondary – when finding the data that is collected by others (e.g. industry reports provided by trade associations, chamber of commerce).

Before investing a lot of time into the primary data collection, start with secondary research, simply using Google. By putting the right keywords in the search engine, you will be overwhelmed by the amount of the information about competitors and consumers of similar products. If you do not find the information about your competitors, most likely your search is too narrow and too straightforward. Do not limit the research by only looking at the competitors. Put yourself in the position of the consumer, try to find the way to solve their problem and see how adequate are the existing solutions.

Competitors’ annual reports, newsletters are also a useful source of the information. The more specific the information, the more difficult is to access it. A big variety of different markets analysis (of different countries) are already done and provide very specific information about a particular industry. Although you will be asked to pay for data, it is likely the benefit will be higher than the cost incurred.

Once you have gathered the secondary data about the market, you might consider analysing the market with primary data. It is always very useful to talk with the target market – both potential customers and the customers of your most direct competitors as well as the experts in the field. Your startup target market is a segment of the entire pool of customers that your try to get as customers. It is almost impossible to target all the customers, especially in the initial phases of the startup. Thus, you should carefully define your target market by thinking about such factors as age, gender, income and education level, occupation etc.

Usually such research is the eyes-opening experience. Some of the methods that can help you to collect primary data are the following:

  1. Surveys – designing your own questionnaire with the aim to gather the desired information. The answers can be collected online (e.g. on Facebook, surveymonkey.com), sending e-mails or in person. However, the response rate of online surveys usually is up to 15 percent and you might not get the exact group of customer you are looking for; interview with a person face-to-face allows to gather additional – nonverbal information, see the reactions to the questions, besides you can use open ended questions that can provide you with to the more in-depth information
  2. Observation research – it is important to determine the objects what to look for and collect necessary data by watching how customers behave e.g. what are the reactions of the customers when trying the new product of yours or your competitor;
  3. Focus group – this method enables you to identify consumers perception and thinking about the specific topic that is of particular importance for your startup (e.g. product, service, solution). This is done through planned and moderated discussion of deliberately selected and gathered people. Usually a focus group gathers six to eight potential customers who discuss the customers needs and types of products they would be interested in. They interact and influence each other during the group discussion on the specific idea.

One of the best tools that can help you to summarize the results of the market research is M. Porter’s Five Forces Model. This tool enables to analyse the attractiveness as well as profitability of the market. Fill in the model with the information/answers that are important for your startup.

  • Number of the competitors
  • Size of the competitors
  • Switching cost to buyers
  • Product differentiation between competitors
  • Growth rate of the industry
  • The barriers to entry the market (large or small)
  • Time and Capital requirement to enter
  • Government policies
  • Access to distribution channels
  • Technology protection
  • Number of buyers relative to sellers
  • Price sensitivity
  • Ability to substitute
  • Size of the order
  • Cost of changing to buyers
  • Number of substitutes
  • Price of the substitutes
  • Quality of the substitutes
  • Costs of changing to buyers
  • Number and size of suppliers
  • The importance of suppliers input to your startup
  • Uniqueness of the service
  • Costs of changing the supplier

Determine Your Own Competitive Position: BLue OCEANS

In the previous chapters, you were acquainted with the concept of Value Proposition, the central part of business model canvas that you are working on. After conducting the market research, you have a more detailed and clear picture of the market your startup is willing to enter. At this stage, it might happen that the primary value proposition of your startup needs to be reconsidered and updated with respect to the gathered data. Maybe the market is too crowded, it is too difficult to enter or maybe the number of substitutes is too big and it is not worth wasting time and making something very close to the existing solutions. At this point Blue Ocean strategy developed by W. Chan Kim and Renée Maubor­gne (2005) might be a helpful tool to rethink your strategy and try to find your place in the particular market.

The rationale behind Blue ocean strategy is that your company does not need to compete in a very crowded market that is called “red ocean”. Companies that operate in a red ocean they are involved in never ending race of competition when improving all the possible parameters of the product/service. The central element of the blue ocean strategy is value innovation. Instead of trying to beat competitors, company puts all the efforts towards a) minimization of the competition and b) creation of leap in value for both customers and the company itself. When following this approach startup can create, open up new markets with no competition. Value innovation can be created when company aims both to increase the value for the customer and to reduce the cost, thus to diminish the price. This is still the prevailing thinking, that the product can have only one of those features, either reasonable value at the lower price or higher value at the higher price. However, if your startup wishes to achieve an innovative and more promising competitive position, both elements must be present in the product/service.

So how to find your way to the blue ocean? The advice would be – identify, what is the most important for the consumer and start working on that! Your solution does not need to be perfect in every possible way. Sometimes it happens that a company invests lots of time and efforts to improve such part of the product that is not important for the consumer.

When building the new value important for your customer, four actions framework proposed by W. Chan Kim and Renée Maubor­gne (2005) can be applied: i.e. what to eliminate, reduce, raise and create in your industry. At this point, use the information gathered while conducting market, industry, consumer research. Answer, what are the factors that:

  1. are taken for granted in Your industry and should be eliminated?
  2. should be reduced below the accustomed industry standard?
  3. should be raised above the accustomed industry standard?
  4. could and should be created and introduced in Your the industry?

The answers to the first two questions will help you to find the way to reduce the costs, whereas the answers to the last two questions will help you to increase the value for the customer. Please, fill in the following Table of four actions framework when thinking about your startup:

EliminateRaise
  •  …
  •  …
  •  …
  •  …
  •  …
  •  …
ReduceCreate
  •  …
  •  …
  •  …

You might start wondering how you will get the customers for the new market you are creating and you need a big pool of them. Of course, you can focus on the existing customers of the similar products and try to take them over. However, it would be much more reasonable to think about non- customers as a potential source of growth. Following this approach, you can attract a large ocean of the customers that you or your competitors did not know to exist. The non-customers can be classified into three main blocks:

  1. Soon-to-be noncustomers are those who are not happy with the existing solutions and are searching for better alternative. They can be very good source of information and give you the ideas of what they are not happy with and what they want. Talk to those consumers and try to find the common aspect what unites all of them;
  2. Refusing noncustomers are people who for some reasons do not use or simply do not have enough money to use the existing products; these nonconsumers either ignore their needs or find alternative ways to solve their problem. These nonconsumers is a great potential for your startup as your future solution can be the one to meet their demand;
  3. Unexplored noncustomers are those who:
  4. a) They were never considered as the buyers of the products of the specific market as everyone thought they are the consumers and a part of the other market;
  5. b) They have not considered of buying the product of the industry at all.

If you will be able to find the reasons why this group of nonsonsumers never tried a product of your industry, you might find a gold mine and turn them into consumers. A good example of this is Airbnb for Business. After identifying the attractive housing features for business travellers, the company introduced additional product into the market, which is getting very popular among the companies.

THE RESULTS

After successfully completing this chapter you will have a big and clear picture about the market you wish to enter:

  • target market, customers;
  • competitive situation;
  • non-consumers who are new possible markets for your product/service.

In order to find your place in the competing market or trying to create your own, new market it is most likely you have to update the primary unique value proposition of your startup, based on the information you have gathered.

Final note – remember that market analysis is not a one time exercise. It is a continuous process that will have great influence on the success of your startup throughout its lifetime.