36 Questions for Startup Entrepreneurs – Market Analysis Part 1


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This series has been written for Startup Entrepreneurs and is designed to help provide some information and structure to help them with the planning of their enterprise. In this second part of this six part series, I want to look at market analysis.

One of the key questions any potential investor will ask is what is the Market opportunity.  Not only is it important to be able to answer the question but just as importantly you NEED to know whether there really is a market for your product or service.

I have split Market Analysis into two parts – in Part 1 we will cover Segmentation, Market Growth Rate and Trends.

Part 2 will cover Profitability, Market Size and Key Success factors.

Lets get started with Segmentation. Segmentation You should attempt to segment your market to try to understand where there is likely to be real demand for your product/service.  Here are some areas you should consider:

  1. B2B or B2C?  Are you selling to a business or a consumer market?  This has huge implications for your whole sales and marketing strategy.  If you can sell to both markets you need to have a clear strategy about how you will address these two markets separately.
  • SME or Enterprise?  If you are in the B2B space, is your customer a small or medium size business or a large scale enterprise?  The sales cycle will be longer for the latter but there ought to be more scope to make a sale as they will have larger budgets and cash resources.
  • Niche or Broad? Does your product/service have a narrow focus, on a particular sector for instance or are you going for a broad market?  If you are adapting a niche strategy you can emphasis the uniqueness and focus of your product and perhaps adopt a premium pricing strategy as a result.  If you are adopting a broad approach, you may have to compete on price against an established low cost market leader.
  • Geographic.  Is your solution a local solution or are you going for a national or global market?  If the latter two, you can harness the internet to reach a wider audience.  If your primary market is local, then you will need to focus on channels which are more suitable to local business which may include mobile applications and/or more traditional media routes.
  • Demographic.  Does your product/service serve a particular gender, racial, religious, generational group?  The more you can specify your target market the clearer you can focus your sales and marketing message and your channel to market strategy.
  • Product/Service Evolution?  Can you adapt your product/Service to serve more than one market?  This may mean having a consumer “lite edition” and a larger scale (and more expensive) “enterprise edition”.

Market Growth Rate It is important to evaluate whether there is a growth market for your product or service.  Even if the overall economy is stagnant or even in recession (defined by two successive periods of negative growth across the whole economy) there are always going to be winners and losers, there are always going to be growth markets.

  1. Historical Data.  This is a simple, but not necessarily reliable method of evaluating a growth market.  Take the historical growth rates in the market over the past years – as many as you can get data for – and extrapolate them into the future.  The risk here is of course that past performance per se is no guarantee of future performance.
  • Growth Drivers.  In any product/service market it is possible to evaluate what drives the growth and therefore use these drivers as an indication of future sales.  For example, a population with a high growth rate will become within the next 10-20 years a population skewed towards the younger generations.  For a second example, the Baby Boom generation is a demographic bubble passing through the western nations’ demographics.  If you can provide products and services for these demographic groups, you can out grow the average growth of the market.  These indicators are not all generational.  For another example you could track the growth of complementary products as a proxy for your own market.
  • Product Adoption Curve.  It is possible to be too early into a market as well as too late.  If you are too early, while you may have the best product or service, you will be unable to sell many units as there will only be a few early adopters and there may not be the necessary infrastructure to support your business. This is particularly true in the technology sectors where early video sites and solutions were hampered by the lack of band width to cope with their offerings.  Smart phones needed a 3G network to be able to make the most of their data services.
  • Product Lifecycle.  While the adoption curve looks at market factors, the product lifecycle looks at factors specific to the product.  This has a series of phases starting with early adoption, mass adoption, maturity and decline.  Seen as a curve, the highest growth comes when the product moves into the mass adoption phase.
  • Price Pressures.  Sales growth is important but if your profit per item sold is declining then you are likely to struggle to grow your business.  One of the most significant factors is the level of competition.  Other factors include market saturation, the existence of substitute products and a decrease in brand loyalty.  Michael Porter’s Five Forces model provides a structure for evaluating the profitability of the market assessing, buyer power, supplier power, barriers to entry, threat of subsitute products and rivalry among firms in the industry.
  • Lack of Growth Drivers.  You may need to face up to the fact that there are no growth factors in your market.  In this case you have done well to establish this before spending a huge amount of money setting up your business to serve such a market.  Remember, if you build it, they will come….does not apply in business.

Trends It is worth taking a closer look at Trends as these can be broken down into several factors and should be analysed separately and in specific relation to your product or service.

  1. Industry Dependent Trends.  This needs to be understood in detail and will be by your more experienced competition.  A good example of this applies to computing where the application of Moore’s Law – that computing power doubles every 18 months has been a staple factor of doing business in the sector for 40 years.
  •  Regional Trends.  These can be international regions (Europe, North America), intra-national regions (South Eastern US Seaboard, North East of England) or they may be on an even smaller scale within a US State or an English county.  The answer can only be determined by the nature and scale of your business.
  • Macro Economic Trends.  The credit crunch affected all businesses because it impacted companies ablility to access capital from banks and market confidence.  Governmental interest rates have affected different countries in Europe in different ways – the same interest rate was seen as too low in high growth Germany and too high in low growth Spain for example.  While it is possible to work through these factors, you need to consider them nonetheless.
  • Changes in Price Sensitivity.  Customer behaviour within a market can change over time.  At an early stage in a market’s development, the demand for an innovative product or service can lead to sales with a high price point and profit margin.  As the market matures, the readiness of customers to pay a high price will erode and prices will fall.  The initial high price also encourages competition to enter the market which itself leads to changes in market pricing (Michael Porter’s Five Forces).
  • Demand for Variety.  Products and services evolve over time and customers continually demand such evolution.  The variety within a product/service market will define its complexity and unit cost.  Higher variety means greater unit cost – lower variety means greater standardisation and lower unity cost.  Such variety also impacts the stability and predicability of demand and utilisation of resources.  All these impact profitability.  It may be in a standardised market, a new entrant can offer greater variety and consequently take market share from the complacent encumbents.  This is not static and the trending element of this is crucial – is the market becoming more or less standardised.  Understanding this factor of the market is an important aspect of market analysis and deciding whether to enter a particular market.
  • Service and Support.  The after sales element of a market can either be a cost and drag on profits or can be a substantial business opportunity which may or may not be part of the product/service offerings of encumbents.  Any market analysis should evaluate this and the entrepreneur should decide how this is likely to impact his business.  Do not miss the opportunity to learn from other markets and bring in best practice into your market.  This also often has the advantage of being recurring annual income – another business advantage not to be missed.


That is the first three factors for Market Analysis.  In the next post, Part 2, I will cover Profitability, Market Size and Key Success factors

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