I’ve made plenty of mistakes in my business career. Some mistakes were hard to avoid, but one of the biggest and most expensive ones could have been dodged by simply doing a little homework.
I fell victim to a trap that plenty of entrepreneurs fall into every day: I fell in love with a product idea.
Back in the late 2000s, my team and I came up with what we thought was a great idea for a product. Tons of businesses would need it and it was going to be a huge hit!
Or so we thought.
What happened was that we all loved the idea of what this product could do. But, we neglected to do our homework and really understand the market that we were heading into. We ended up with a product that was searching for a market instead of first spending the time to figure out who our ideal customer was and building a product specifically for them.
We neglected to do our market research. Instead, we built a product first (that’s expensive!) and then started hunting around for the right target market (that’s usually the cheap part of product development).
Here’s what I learned from this experience, and what you can do to avoid the mistakes that I made.
First, what’s market research?
Market research is the process of learning about your potential customers. Who are they? What are their buying and shopping habits? How many of them are there? It sounds like a complex process for academics. But, it’s actually really simple.
Why you should do at least a little market research:
When you’re starting a business, getting to know your customers is one of the most important things you need to do. If you don’t understand your customer, you don’t know how you can help solve their problems. You don’t know what kind of marketing messages and advertising will work. You don’t know if your product or service is actually something your customers will spend money on.
Market research reduces risk
Please, don’t just do market research because someone told you to do it. Don’t just do it to fill in a section of your business plan. Instead, do market research to get to know your customers and prospects better. Do it because it will greatly reduce risk as you start your business. Do it because it will improve your marketing and sales process.
If it takes too long, you might be doing it wrong
When entrepreneurs tell me that they aren’t going to do market research, they usually say that it just takes too long and prevents them from actually building their business. That means that they’re doing the wrong kind of market research.
In fact, market research doesn’t have to involve tons of work. The amount of research you do really depends on the type of business you are starting, how risky your business model is, and who might be reading your business plan.
Detailed market research isn’t necessary for all businesses. I would argue that restaurants, for example, don’t need to do too much market research. Instead, restaurants should focus on the quality of the food and service. Is your food good enough that your customers will tell their friends? Are your customers willing to pay the prices you want to charge? Location is obviously important for this type of business, so that’s where I would spend my research time.
If you already know your customers really well, then maybe you don’t need to do as much market research. For example, if you’ve worked in an industry for a long time and are starting a new business serving that same industry, then you probably already know the market fairly well and don’t need to spend as much time researching it.
Does your business need market research? Answer these questions to find out:
- Are you serving a primarily local market?
- Does the category of business you are starting already exist?
- Do you have a plan for differentiating yourself from your competition?
- Do people spend enough on your type of business to support both you and your competition?
- Do you already know your industry extremely well from prior work experience?
If you answer yes to at least three of these questions, then you can probably get away with less market research.
If you do need to do market research—and I recommend that everyone do at least a little—here’s how you should do it:
1. Start by identifying your target market
Imagine that someone walks into your business, or picks up the phone and calls you. It’s your perfect customer: someone who has the problem that you solve and is willing to spend money on your solution. Now imagine the details about this person. Who are they? Can you describe them?
Ideal customers and common traits
This “ideal customer” is your target market. Now, your business might have several target markets, but it will usually serve you best to keep your list of target markets to two or three.
Each of your target markets should share common traits. These might be demographic traits such as age group, gender groups, income levels, or locations. They might be what are called psychographic traits, which are groups of people that like the same things or have similar interests. Or, your target market might be a certain type of employee at another company, such as a CTO or head of marketing.
Most often, target markets are blends of demographic and psychographic groups. For example, you might be developing a new type of shoe targeted at female triathletes. Or you might be opening a hair salon targeting urban, hipster men.
Creating multiple target markets for your company is doing what’s called “market segmentation.” This sounds complex, but all you’re doing is dividing your target markets up into different groups that you hope to sell to. Each market segment might have different characteristics and might buy your product or service for different reasons. You might end up coming up with different marketing campaigns for different market segments or even customizing your product or service for each segment.
2. Talk to your potential customers
Once you have identified your target market, or at least made a good guess at who your target market is, you need to take the most important step in this entire market research process. You need to get up from your desk, get out from behind your computer, and go outside. That’s right, you need to go and actually talk to people in your potential target markets. This is called primary market research.
Yes, you can do online surveys and other research, but that’s no substitute for actually talking to potential customers. You’ll gain more insight into your customers just by seeing their work or home environments, and get a better understanding of how they make buying decisions by actually talking with them than any survey will ever tell you.
Do this one thing, and you’ll be miles ahead of your competition. Why? Because most people skip this step. It’s intimidating to talk to strangers. What if they don’t want to buy what you plan on making?
So, don’t be like most entrepreneurs (including me!) and skip this critical step. It can mean the difference between success and failure.
One of the most popular methods for doing this kind of primary market research is to actually try and sell your product or service as if it currently existed. Talk to people who you think might be your potential customers. The more you talk to, the more you should start to see common themes in who your ideal customer is.
This process is critical because it might help you re-define your target market. Your initial assumptions might be wrong and that’s OK. Better to make mistakes early in the process before you’ve risked very much.
You might also learn more about how you should price your products or services, what the most critical features or benefits are, and what features your customers want.
Getting this step done early will help you refine your business model and make a clear impact on your future success.
3. Find out if your market is big enough
Once you have identified your target market and validated it by talking to them in person, you need to do research to figure out if your target market is big enough to sustain your business. If there aren’t enough potential customers to sustain your business and your competitors, then you need to consider changing your product or service offering.
For example, if your target market only has a few thousand potential customers, you either need to sell to them frequently or sell at a fairly high price to create a sustainable, profitable business.
To figure out if your market is big enough, you need to do some research. Use the attributes you defined in the target market step and then figure out how many people meet your demographic, psychographic, or location criteria. I’ve got some links to resources that will help you figure this out at the end of this article.
If you are targeting an existing market with established competitors, you do what’s called industry research. For example, perhaps you are building a new company in the market for sports drinks or the market for cell phones. In cases like this, understanding how much people buy of the currently existing offerings will give you the best sense of potential market size.
In this case, you want to look for industry reports and read trade publications for your industry. These publications often summarize the market size.
4. Document your findings
The final (and easiest) step in the market research process is to document your findings. How formal your documentation is will really depend on how you plan on using it.
If you only need to share your findings with your business partners and others in your business, then you can probably communicate fairly informally. However, if you’re looking for investors for your business, you may need to write a more formal market analysis and do a market forecast.
Presenting your market research
We’ve got some great resources on those topics. So, instead of re-hashing that information here, just check out the following articles if you need to do a formal presentation of your market research:
The single piece of documentation that every business should create is a buyer persona. A persona is a description of a person that hits on all of the key aspects of your target market. And, just like you might have several target markets for your business, you might have several different buyer personas.
Creating a buyer persona converts your target marketing information from dry research into a living, breathing person. For LivePlan, we’ve created a persona named Garrett who drives much of our product development. Garrett embodies the attributes of our ideal customer.
When we think about creating a new marketing campaign or developing a new feature for our products, we ask, “Would Garrett like this?” You can read all about the process we used to create Garrett in this article.
Hear more about market research and your target market with Peter and Jonathan on the twelfth episode of The Bcast, Bplans’ official podcast.
Where to find market research data:
Finding market research data really depends on the market you are targeting and the industry you are in.
Here are a few of my favorite sources for market research:
- U.S. Census: If you’re opening a business in the U.S., the U.S. Census site is a goldmine of information. Check out the Census Business Builder to get not only population data, but data on how much people spend in a given area on your type of business.
- CensusViewer: This free tool gives you access to U.S. Census data in an easy-to-use format that you can explore both visually on a map or in data reports for cities, counties, and entire states.
- Bureau of Labor Statistics: Another U.S.-centric resource, but a fantastic site for information on specific industries: hiring and expense trends as well as industry sizes. If your target market is other businesses, this is a good place to look for data.
- Consumer Expenditure Survey: If you want to know what people spend their money on, this is your source.
- MyBestSegments: This tool from Nielsen is a great resource for finding out what demographic and psychographic groups live in a given zip code or where the highest concentration of a given segment lives. While the most detailed data is not free, you can get a lot of great insights from the free version.
- SBDCNet Business Snapshots: You’ll find a great collection of industry profiles that describe how industries are growing and changing, who their customers are, and what typical startup costs are. You should also check out their list of market research resources, sorted by industry.
- ZoomProspector: This tool can help you find the ideal location for your business, or find new locations similar to where you already are for expansion and growth.