So, you have a great business idea. The question is, do other people agree? Market Research is a practice that helps entrepreneurs evaluate whether there is a market for their product or service. When you learn how to do market research effectively, you can develop a business strategy that mitigates potential risks and leverages possible revenue streams.
There is a lot of attention surrounding the business model canvas. However, the truth is that before you create a business plan, you need to do substantial market research. In this blog post, you will learn how to do market research for a startup. Firstly, we’ll cover the questions to consider as you conduct market research. Then, we will discuss the different types of market research and resources for administering them. The goal of market research is to help you fine tune your creativity and position yourself for success. So, let’s get started!
Primary and Secondary Research
There are two major categories of market research: primary and secondary. Primary market research comes straight from your potential customers in the form of surveys, focus groups, and other methods. You can get this kind of organic feedback from asking friends, family, and your social media platforms what they think about your product or service idea.
However, the bulk of your market research will be secondary. This involves gathering reports, statistics, and data. The reality is that secondary market research involves a lot of googling! There are eight steps that you want to be sure to cover in your market research. As a preview, here they are:
- Define the Industry
- Conduct Demographic Research
- Evaluate the Demand for Your Product or Service
- Identify Your Competitors (and their strengths and weaknesses!)
- Consider Your Suppliers
- Understand Buyer Power
- Determine the Threat of Substitution
- Consider the Potential Volume of New Entries
8 Steps of Market Research
1. Define the Industry
The first step of market research is to narrow down on your specific industry. Every industry has several niches, and you need to decide which one is right for you. Let’s use the example of a real estate business plan. Let’s say that I have purchase a single-family home and want to use it as an investment property, thus creating a real estate business. I’ve already narrowed down on my industry by purchasing a single-family home, but there are more decisions to be made. I need to decide whether I am going to use it as a fix and flip, buy and hold, or short-term rental.
2. Conduct Demographic Research
Once you have defined your niche in the industry, you can conduct demographic research for your business. In this stage, you need to consider your ideal customer. Where do they live? What locations can your business reach? When you understand the area where your products and services will be sold, you can leverage the characteristics of those cities and states.
It is also important to research economic indicators such as the income range and employment rate of your ideal customer. This will help you understand what you can reasonably charge for your product or service. (The U.S. Census Bureau is a great free resource for locating this information.)
Let’s look at our example of the real estate business plan. It is crucial to conduct demographic research for this industry before you buy a property, of course. Before buying a property, I take a look at the median income for that area. If the price of a property is more than two to three times the median income, I won’t buy it. Another thing I consider are the average rents for the area. I like rent to stay above 1-1.5% of the purchase price. I’ll also look at the job growth and housing supply, for instance.
[Related: Secret Price Factor for Investing in Real Estate]
3. Evaluate the Demand for Your Product or Service
Search high and low to determine if there is a demand for your product or service. If people don’t want to buy what you’re selling, no amount of marketing will make you profitable! Use tools like UberSuggest or Google Keyword Planner to see how many people are searching for your products and services, or something like them, each month. In addition, ask yourself the following questions:
- What problem do my potential customers have?
- How does my business provide a solution?
- Why would people pay money for my product or service?
One of the benefits of a real estate business is that there is always built-in demand! People need a place to live.
4. Identify Your Competitors
Do you want to be a competitive force to be reckoned with in the marketplace? Well, first you need to know who you’re competing with! You can identify your competitors by looking in the following places:
- The Chamber(s) of Commerce for your market(s)
- Local business directories
- Online searches for similar businesses
- Looking up patented products and services similar to yours
Once you have a good idea of your competition, you can segment them. For instance, in a real estate business I might face competition from some investors who concentrate on short-term rentals while others focus on commercial buildings like apartment complexes.
An easy example is a candle business. A candlemaker might face competition from some entrepreneurs who sell cheaply made, generic candles, some who sell mid-market soy-blend candles, and others who sell high-end, premium candles. Segmenting their competitors will allow them to identify and capitalize on gaps in the market. In this step, you can get a good estimate of what you can charge for your products and services.
In your research of competitors, take note of their strengths and weaknesses. You can mimic what’s working and create better solutions for what’s not. Through doing this, you can potentially poach some of their customers.
5. Consider Your Suppliers
What businesses, services, and people will you need in order to run your business? These are your suppliers. For example, in a real estate business plan some of these people include property managers and cleaning companies. In your market research, it is important to look into everything that you’ll need to make your business a success.
Now that you know the demographic and audience you’re going after, you can research suppliers in that area. The hope is that you will have a wide variety to choose from. This will allow you to secure the best service and the best rate!
Thomas is an online resource that connects industrial buyers and sellers. It can help you find suppliers for your industry. It also provides information on competitors!
6. Understand Buyer Power
Buyer Power is essentially supply and demand. You want the demand for your business to outweigh the supply (i.e., the number of competitors you have vying for your market space.) If you are okay with spending a little bit of money on your market research, marketresearch.com provides detailed reports on very specific industries!
In a real estate business, let’s say short-term rentals in a vacation destination, buyer power is high. Customers can choose from Airbnb, VRBO, local rental companies, and more. It’s important to understand buyer power so that you know how much you need to advertise on different platforms.
7. Determine the Threat of Substitution
In this step, refer to the customer problem you addressed in step 3. Are there any alternatives to your industry that they can purchase to fix their problem instead? This is different than analyzing competition because it looks beyond the scope of your industry entirely.
For instance, with a real estate business, the core problem people are trying to solve is shelter. If I rent out a single-family home, the only other substitutes people really have are still within my industry (apartments, other rental properties, etc.) If your product or service has a high amount of substitutes—say, a food or beverage service—you may want to consider new ways to stand out. How can your business provide more value than the substitutes?
8. Consider the Potential Volume of New Entries
In this step, you will answer two questions. 1: Is it easy for people to enter your business? 2: How many people actually are? Anyone can get into the real estate business, for instance. However, many people perceive that it’s harder than it is. The amount of real estate investors varies by location, so I need to target my research accordingly.
I live in Colorado. So, a quick Google search lets me know that there is a high volume of new investors in Colorado each year. This isn’t a deterrent—in fact, it could indicate potential. Another way to find the volume of new entries is to search growth in your industry over time. Reports from companies like the S&P 500 are beneficial for this type of research.
I hope that these tips on how to do market research have helped you develop a strategy for your business! Though it may seem overwhelming at the beginning, I can promise you that taking the time to do market research will be well worth it. A lot of the prep work in business is akin to digging trenches. It’s hard, burdensome labor. However, once the trenches are dug, the water can flow easily! Do the hard work now so that you don’t have to later. Stay tuned for more posts on the business model canvas, too!