Whether you are writing your business plan for investors or developing it for strategic purposes, including the right market research is critical. In fact, your market research is often the deciding factor regarding whether you get funding and/or whether you’re able to grow a successful business. In this article, I’ll share why market research is so important, and tips for incorporating it into your business plan so you achieve more success.
There are four sections in your business plan in which you need market research, including: industry analysis, customer analysis, competitive analysis and your financial model.
The industry analysis section of your business plan details the market in which you operate. It should discuss the size of your market and trends that are affecting it.
Why is this important to investors? The market research you conduct tells investors the size of your market opportunity. If it is too small, even if you capture 100 percent market share, revenues and profits may not be enough for them to get a return on their investment.
Why is this important strategically? If your research shows that market trends are conspiring against you, you need to consider new markets to penetrate.
Tips to complete this section: Most industries have associations that publish research. For example, the National Restaurant Association conducts research annually that presents market sizes and trends.
The customer analysis section of your business plan defines the customer segment(s) you will target. Will you target women? Seniors? Small businesses on the West Coast?
Note that oftentimes you’ll serve more than one customer segment. For example, in a nonprofit business plan, one customer segment might be donors, while another might be the constituents you help or serve.
Why is this important to investors? Companies who can’t clearly articulate their target customers are rarely successful. Understanding your target customers gives investors confidence that you’re focusing your efforts properly, and will be able to gain market share.
Why is this important strategically? Your choice of target customers greatly effects your marketing strategy and cost of acquiring customers. For instance, it’s hard to launch a viral social media campaign to seniors.
Tips to complete this section: One way to better understand your customers is to analyze your competitors’ websites. Certain tools like Quantcast can tell you the demographic profiles of customers visiting them. Likewise, if your target customers read certain magazines or industry journals, download the media kits of those publications, which are sure to include demographic profiles of their readers.
The competitive analysis section of your business plan defines the strengths and weaknesses of your competitors and identifies your areas of competitive advantage.
Why is this important to investors? If you are going head-to-head with strong competitors, and with little competitive advantage, your chances of success are small. If the opposite is true, investing in your company is much more promising.
Why is this important strategically? Launching or growing a business without competitive advantage is risky. By assessing your strengths and your competitors’ weaknesses, you can develop areas of competitive advantage that propel you to long-term success.
Tips to complete this section: Look at the social media accounts of your competitors. Look at the positive and negative things customers say about them. If they sell physical products, review the positive and negative comments on websites like Amazon.com to identify their strengths and weaknesses from a customer perspective.
Your financial model shows your financial forecasts and the amount and uses of funding, if necessary. As much as possible, your assumptions should be researched. For example, if you expect to hire a CIO, you should know the average annual salary of a CIO. If you expect to acquire customers, you should know the average dollar amount customers pay for a solution like yours and the average sales cycle (time it takes to go from customer awareness to closing the sale and receiving payment).
Why is this important to investors? If your company is not financially successful, the chance for investor returns is minimal. Likewise, if your financial model is poorly reasoned or includes unrealistic assumptions, investors will lose interest.
Why is this important strategically? If you do a poor job with your financial forecasting, you can run out of money and your company will fail. In addition, proper forecasting allows your company to create sales and profit goals on which your team can focus.
Tips to complete this section: If there are public companies in your industry, research them. Look at their financial ratios such as cost of goods sold as a percentage of sales. Likewise, research the amount of time it took them to grow to their current size, so you don’t over-estimate the rate at which you hope to grow.
In summary, having the right market research can dramatically improve both your strategic success and your ability to raise funding. It’s worth the time and money to research your industry, customers, competition and industry financials to craft a strategy that allows your business to thrive.