The market analysis process is complex, involving a lot of data and insight. This data comes from both inside and outside your company. It includes information about your products and services, data about your competitors, and information about your target customers, which often involves conducting research and even asking salespeople who interact with the end users.
A full, in-depth market analysis can take weeks or months and will vary based on where you are in the product life cycle, the type of product you sell (i.e., a toaster vs jarred pasta sauce), your target market, and many other factors. However, there are some key steps of market assessments that are important for nearly all companies to perform. A market analysis is the process for identifying whether you have positioned your product or service for success in the marketplace. A market analysis is typically conducted when developing or evaluating product strategy, facing a new competitor, or introducing a new product or feature. There are at least seven key steps to performing a market analysis. You need to identify the following:
- Unmet needs
- Which barriers to entry exist
- Size of the market
- Target customer
- Competitors in the space
- Current price points
- Distribution model
As with any project, process, or business plan, you need to start with the more strategic “whys” and finish with the more tactical applications. We recommend you start with the needs of the customer.
1) Identify unmet needs
Sales teams say that your products or services should meet an unmet need—or create one. The same applies to performing a market analysis. Does your product or service fill a need or create a new one? Both roles require informing the consumer you exist and educating them on the benefits of your product or service. Creating a need requires substantially more education for the consumer and arguably more resources as well. Regardless, step one is to determine what the marketplace need is and whether your product meets these needs. If you aren’t already manufacturing your product or you’re looking to refine your market position, you can also determine if there are other needs that your product or service could meet.
Not sure where to start? If you’re already in the marketplace, ask the customers you’ve already won over what they like about the product. If someone else is in the space, ask their customers. If nobody is in the space yet, then you need to identify your target market and ask them. You’ll end up refining your target as you get answers in each case. Be sure to collect as much information on the consumers giving you feedback as possible. This will allow you to build segments if you have enough data. This is one area where contacting a research contractor can help immensely.
2) Identify existing barriers to entry
Understanding barriers to entry can help with pricing, distribution, product updates, and more. If you have a product with low barriers to entry, it is much easier for rivals to come in at any time and develop a competing product. One way to differentiate yourself from competition (and even increase the barriers to entry for competitors who come after you) is to create added value in your product or service. If there are higher barriers to entry, you will likely have fewer competitors and less price elasticity because rivals aren’t chipping away at your margins. In fact, in the right situation, high barriers to entry can be a benefit. You may find that you are uniquely positioned to overcome barriers that the competition cannot. For example, you may have a factory already capable of manufacturing a product with minimal retooling or 2,000 retail locations ready to sell a new product. These situations mean you have a clear advantage to overcoming production or distribution barriers to entry.
Don’t know where to start? Break down the manufacturing and distribution process into its components. How hard is it to educate consumers on your product or service? Where are significant investments of time, money, or other resources needed? Do you have unique assets that will offset these investments?
3) Identify the size of the market
There may be a market for garlic-scented perfume, but how large is it? Launching a new product won’t do you any good if there are only a half-dozen potential customers. Understanding the size of your potential customer base, or the “size of the prize,” is critical to determining whether it’s worth pursuing your new product or service. Use trusted resources, such as industry association statistics or government data. Many research firms hire economists who can build models of industry size and seasonality based on the factors those data sources account for. Even trade journals will often calculate market size – often through subjective discussions with their user base. While some methods may give you a rough size of the industry rather than a precise one, you’ll still know if you’re working toward millions of customers or just a handful.
But market size isn’t the only consideration. Having a good forecast of the market can be a huge bonus. If the market for your product or service is currently small but growing, it may be a great time to get on board. On the other hand, you may be tempted to capitalize on a product that’s currently popular, but it could be a fad that’s waning or its market could be saturated with competition. This is where coming up with a differentiation strategy can be helpful.
Not sure where to start? Market sizing is rarely something you can calculate on your own. Start by searching online with keywords such as “What’s the size of the [PRODUCT] market” to see what resources are already available. Evaluate each source for credibility and thoroughness. If you get stuck, contact TraQline for help in evaluating, modifying, or creating market sizing and forecasts.
4) Identify the customer
As we discussed in step one, when you identify unmet needs in the market, you’re starting to identify the customer your product or service will help. There are three main ways to identify and understand your customer: demographic, geographic, and psychographic.
Demographic differences provide critical information. Consumers of varying generations, ethnicities, or genders may respond differently to competitor products or services. Their responses or preferences may lead to gaps your company can fill or help narrow the target market of your products or services. Understanding which demographics are purchasing which products/features and those demographics’ purchase drivers can lead to impactful messaging to target groups.
Understanding trends in a geographical area provides immediate insight into how the market is likely to behave within that area. In a brick-and-mortar environment, prices tend to vary by geographic location. Understanding those metrics allows companies to balance profitability with competitiveness. When used in combination with demographic data across your target markets, the resulting data can help you understand how consumers might behave if you enter a new geographical area. And with resources such as PRIZM, MOSAIC, or VALS, you can divide metropolitan regions into neighborhood level demographics, attitudes, and trends rather than providing uniform geographic blocks to study. Such granular data may highlight how marketing approaches that work well in one neighborhood can fall flat in another.
Psychographic data goes beyond the “who” and “where” of a market’s characteristics (demographics and geographics) and looks into the “why” behind a purchase—the consumers’ purchasing behaviors and reasons for purchasing. This data may not always be directly related to why they purchased a specific product, but can also examine their overall behavior, lifestyle, or attitudes toward certain concepts.
Psychographics help you build a robust picture of a customer who buys certain products or services and empower effective marketing to those customers.
Don’t know where to start? As in step one where you identified “needs”, your own customers are the best place to start. Identify the demographics of customers of an existing product. If no one is in the space yet, identify a product that is similar and test your product with these consumers. You may end up refining your target consumer as you get answers in each case. You can get psychographic data from marrying demographic data to behavioral data such as PRIZM, MOSAIC, or other behavior-to-demographic tools. You can also develop custom questionnaires, asking questions such as “On a scale of 1 to 10, please indicate the extent to which you agree with the following statements: I am a value shopper, etc.” We recommend using a research provider for this type of questionnaire. Skilled research providers will ensure your questions and the resulting answers are worded and analyzed appropriately.
5) Identify the competitors in this space
It should go without saying that, to perform a market analysis, you need to identify your competitors. This process is more involved than a Google search for other companies that provide similar products and services. You need to know information such as:
- which companies sell products and services that attempt to serve the same needs as you
- what is their share of the market
- what features of their products sell best
Calculating market share is not an easy task, and there are many ways to do it. But once you know the competition’s shares, you can dig deeper into the “why” and the “what”. Understanding your strongest competitors will help you break down how they market, to whom they sell, and most important, which markets are currently underserved.
Not sure where to start? There are many ways to collect a list of your competitors. Googling your product and searching shopping sites is only the beginning. Make sure you quantify what each competitor does best, so you don’t try to compete against someone who has cornered a niche that doesn’t matter to you. Using a market share provider who can comprehensively measure and understand your data is your best bet to accomplishing this important task. If you have behavioral data that pairs with that market share, you’re already ahead of the game. This information will allow you to measure demographics and behavior of your competition’s shoppers.
6) Identify the current price points
Many articles have been written on how to price your product. While it might seem more like a customer component of your competitive strategy, it’s also a key part of your market analysis process. Understanding price points that are currently on the market allows you to calculate profitability and determine if there’s room for another player in the marketplace. Understanding price across many products in the market may help you to identify areas where competition is weak, allowing you to gain a foothold in the industry.
The Harvard Business Review suggests using a positioning map to identify who is in the market and what price points they occupy. It will provide a nice visual that places you in the context of your competitors within your market. Additionally, you may find that certain price points are missing from your map, enabling you to scale features up or down to fit within this niche. This is a particularly useful approach for line reviews with retailers that are hoping to gain share in a market.
Not sure how to start? While the internet is a great tool for collecting price points, be careful. Web scraping can give you directional information, but cart and sales prices may be missing. Collecting point of sale data from the retailer or your own sales is a good step but may provide an incomplete picture of the marketplace. In some cases, you may be able to use a competitive product library to help build out a positioning map. Build your positioning map and footnote it with the appropriate features. Don’t forget to account for different prices on your map.
7) Identify the distribution model
A distribution model is not just about putting a product on a truck and distributing it to the retailer or end consumer—it also involves the strategy behind the process. These days, just about everyone is selling their brand online. Understanding strategically how you want to get your product or service to the customer is critical to ensuring you aren’t competing against yourself (or against your best retail partners). Many options are available, from direct distribution (cutting out the middleman as Purple mattresses or Warby Parker glasses have done) to more conventional distribution (manufacturer to wholesaler to retailer). There can be strategic benefits to direct distribution, such as reducing costs. But this may also mean you lose access to salespeople who can communicate the benefits of your product to consumers. One way to determine opportunities and identify best practices in the marketplace is to look at your competitors’ distribution strategies. What makes their strategy successful? Are there ways it can be improved upon? You may choose to follow a similar strategy or find an opening for a new one.
Don’t know where to start? The internet again provides a great place to begin researching and understanding the market’s distribution model, but you shouldn’t stop there. Key steps in this part of your market analysis process should include factoring in both brick-and-mortar distribution as well as different online verticals (such as direct-to-consumer, marketplaces such as Amazon and Walmart, and retail sites such as Bestbuy.com or Lowe’s.ca). From there, build a spreadsheet that lists the distribution of your top five to ten competitors and where you can buy their products. Include an option for online vs. brick-and-mortar. This process may require some “boots on the ground” to shop at retailers, but understanding this component will be well worth the time.
The market analysis process may seem overwhelming, but by beginning with a framework like the one provided, you will start to see where the pieces fit together – and more important – where they don’t. Talk to others who know your market and can provide insight. Do your research, either by using a research firm or diligently planning and researching on your own. Make sure you connect the dots – overlooking factors such as why key competitors are so successful or what unmet opportunities exist for distribution can be the difference between failure and success.