How to do Market Research
A guide to why and how your small business can carry out market research.
This article is for educational purposes and does not constitute legal, financial, or tax advice. For specific advice applicable to your business, please contact a professional.
Market analysis is the process of gathering and analysing data about a specific market area. It determines whether or not there is a viable market for a product or service. Here is a guide on how to carry out market analysis effectively.
What is market analysis?
Market analysis is the process of gaining a complete and up-to-date understanding of a specific market ecosystem. In particular, it answers the following questions.
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Who are the current and potential customers for a product or service?
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Who is already active in this marketplace and what do they do?
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What are the key driving forces in the marketplace?
What is the difference between market analysis and market research?
Technically, the terms market analysis and market research can be used interchangeably. In fact, they often are but usually only by people not involved in either area.
For people who do work in the field, the term market analysis is generally used to refer to industry analysis. It looks at the overall landscape in the industry sector. This includes assessing the overall market volume and the characteristics of potential customers. It does not, however, focus solely on that.
Market research, by contrast, tends to be very much focused on customers. There are two types of research you should consider in your market analysis:
- Primary research: involving customers directly in surveys and interviews
- Secondary research: using publicly-available information to draw inferences about customer preferences
Market analysis will involve some level of market research. Market research can, however, be performed even when a company is not undertaking full market analysis.
Learn more about primary and secondary research in our guide here.
Why undertake market analysis?
The main reason for undertaking market analysis can be summed up in the expression ‘Look before you leap’. In other words, make sure that there actually is a viable market for your product or service before you commit to producing it.
Remember that in business, as in life, success often comes down to attention to detail. In the case of market analysis, note that your initial idea might be solid but needs refining for your product or service to stand a real chance of success.
Alternatively, your product or service might be great but your supporting business plan needs improvement. For example, people might love what you have to offer but not be keen on your pricing strategy.
It’s always better to find out about potential stumbling blocks in advance. Then be prepared either to address them or to change course. Abandoning a business plan after extensive market analysis may be disheartening. It is, however, far better than getting further down the line and then having to abandon it.
On a more positive note, time spent on research is never wasted. Even if you discover that you need to abandon your current plans, what you learn may spark another idea.
How to carry out market analysis effectively
There are many different approaches to undertaking market research. The following four-step approach is suitable for most SMEs. As you gain experience with market analysis, adapt it as you see fit.
Define your market
Before you can analyse your market, define what it is. This can be a challenge in itself. It can help to have a jumping-off point, and location is often a good one.
Even if you’re planning on operating purely online, there are still location-based factors to consider. For example, your customers live somewhere and that place has laws, so it is useful to know about them.
Once you’ve identified where your market is, find out how big it is and how it is structured. This means quantifying your potential customer base (demand) and any established competition (supply).
Ideally, look for indications about how this market could develop in the future. For example, if your market is based on a real-world location, look at demographics, local infrastructure projects and overall trends in the local economy. If you are looking at a non-geographical niche, look at social-media activity, industry statistics and stock-market data.
Analyse the competition (supply)
Find out what competitor products or services are already on the market. Then learn everything about them. Research their market share, price-point and distribution methods. Then find details of their customer demographics and why their customers choose them.
Additionally, look in detail at how your competitors run their businesses. This is often easy to do from publicly available information such as financial statements. Look for points of comparison and difference; how they might influence your ability to gain market share?
For example, if a competitor is much bigger than you, they might benefit from bulk-purchase discounts. They may already feed this through into lower pricing. Or if they don’t, they might have the option to do so. Knowing this in advance gives you the chance to look for ways to counterbalance this advantage.
Learn more in our guide on how to conduct a competitor analysis for your business
Analyse the potential customer base (demand)
Step 1 - Determining your total available market (TAM): This is everybody who could potentially buy your product or service.
Step 2 - Determine how much of this is served available market (SAM): This is everybody who already accesses a comparable product service.
Step 3 - Estimate your potential share of market (SOM): This is everybody you believe you can convince to buy your product or service.
In principle, your SOM can be bigger than the SAM. For example, you may be able to attract people not currently served in this market.
Once you have these broad figures, refine them as much as possible. For example, identify whether all your potential customers are buying the same products or services for the same reasons. If they’re not, segment them into homogenous groups.
Then carry on refining them until you have as clear a picture of them as possible. In particular, understand their purchasing motivators, buying habits and degree of price sensitivity.
Your final step is to look at how your customer base might develop in the future. The obvious consideration here is demographics, though there are others. For example, today’s cutting-edge technology often becomes tomorrow’s everyday gadget. This can have a ripple effect on customer behaviour.
Analyse the ecosystem
The final step is to analyse the external factors that could influence the market. These are summarised in the acronym PESTEL.
| Factor | Examples |
|---|---|
| Politics | Corporation tax, free trade disputes, anti-competition laws |
| Economics | Interest rates, inflation, employment rates, exchange rates |
| Social | Lifestyle trends, demographic data, consumer belief |
| Technological | Automation, cyber security, technology infrastructure |
| Environmental | Carbon footprint, climate change, natural resources |
| Legal | Industry relations, intellectual property, licences and permits |
Gather data for market analysis
The accuracy of any market analysis depends entirely on the quality of the data used in the analysis. There are three main types of data sources. These can be used independently or in combination.
1. Documentary data
As its name suggests, this is data gleaned from documents in the public domain (albeit potentially chargeable). These can be anything from press articles to company statements to official websites e.g. government websites.
2. Quantitative data
Quantitative data aims to answer a question in quantifiable (measurable) terms. For example, statistical data is quantitative data. As with documentary data, there is a lot of quantitative data in the public domain (again albeit potentially chargeable).
3. Qualitative data
Qualitative data cannot be easily quantified. It often relates to highly subjective topic areas such as an individual’s responses to or feelings about something.
For qualitative data to be useful, it has to be gathered from individuals who meet a very specific set of criteria. This often means that qualitative research has to be conducted on a bespoke basis. It also requires a relatively high level of effort to collect, curate and analyse this data.
This means that qualitative data tends to be relatively expensive to obtain. Qualitative analysis is therefore often best left for the last stage of the market-analysis process. In other words, only do this if all other results are positive.
Useful resources for carrying out market analysis
Frequently asked questions
In a crowded world, market research can give you that all-important competitive edge. It can help you narrow down your niche, reveal what customers think of you and how you can better connect with them. It can also inform your product development to ensure your products appeal to your target audience and meet their needs.
Market research offers valuable insights which allow you to hone your products and services. It may also give you a more complete idea of how people view your business.
More importantly, you can use the data gathered to inform your marketing strategy, making sure you hit the right target market through the best channels, whether that’s email marketing, traditional print media or social media.
Through quantitative market research you can glean reliable facts and statistics which you can use to make informed business decisions. Think surveys and questionnaires with multiple choice answers and close-ended questions. To make it worthwhile, you need to have a large enough pool of respondents to gather data from. This then needs to be analysed and collated in a way that makes it easy for you to make those business decisions.
Not all small businesses have the capabilities or resources to turn the raw data into meaningful insights. In this case, qualitative market research can be more useful.
Qualitative market research involves collecting data from customers through surveys, focus groups and face-to-face encounters. When conducting research of this kind, you’ll need to ask open-ended questions. This gives you a deeper understanding of customer actions, emotions and behaviours. It can also be useful for understanding what draws people to or repels them from particular brands, as well as what marketing messages really appeal.
Qualitative research can be harder to analyse than quantitative due to its nuanced nature. However, provided you handle the information properly, you’ll receive valuable insights which can be used to finesse your marketing campaigns.
Next steps.
Launching your business
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