36 Questions for Startup Entrepreneurs – Market Analysis Part 2



What are You Struggling with in Your Startup? 

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Welcome back for Part 2 of my Market Analysis post for Start Up Entrepreneurs.

The object of this series is to help Startup Entrepreneurs think through some of the issues in planning their venture.

If you missed Part 1 you can find it here.

In this post I am going to discuss Market Profitability, Market Size and Key Success Factors.

Market Profitability

The profitability of a market is both an issue of cause and effect.  The current competitors in a market define to a large degree the current profitability of the market but the entrepreneur has the ability to position his product/service offering to his best advantage to compete with the market encumbents.  Here are some of the factors:

  1. Market Factors.  Market profitability is defined by the relationship between market share and product quality.  If customers perceive that your product/service is of a high quality they will be prepared to pay more for it.  Equally, if you command a high market share, you will be able to dictate the price to your customers.
  2. Product/Service Characterisation.  When evaluating the profitability of the market, you should consider the characteristics of your business.  Consider the following factors; performance, durability, specifications, features, brand, reliability, quality of finish, serviceability.
  3. High Market Share/High Quality.  This is the best quadrant to be in.  You have a product/service which compares very favourably to the competition and a substantial market share.  Companies in this quadrant earn the highest ROIs.
  4. High Market Share/Low Quality.  These are undifferentiated mass market products where the overiding purchase decision is made on price and not quality.  You will benefit from being the low cost producer arising from the economies of scale which in turn come from the high market share.  Companies in this segment earn around mid-level ROIs.
  5. Low Market Share/High Quality.  Despite the low market share, the quality of products in this segment mean that customers are prepared to pay more for your product.  ROI is also in the mid-range.
  6. Low Market Share/Low Quality.  This is really where you do not want to be.  The negative combination of low quality and low market share mean that there is a low return on investment.  If you find yourself here you should consider either changing your strategy or leaving the market and reinvesting your assets and efforts elsewhere.

Market Size

The attractiveness of a market to an investor is often a matter of scale.  The bigger the bettter.  Establishing the market size can often be more of an art than a science.  Here are some factors to help you.

  1. Present and Future Sales.  The right place to start is to work out your future sales projections – how many units, at what price, to how many customers.  Without this you are unable to calculate your market share or to evaluate the reasonableness of your assumptions once the following steps have been completed.
  2. Government Data.  In most countries, there is Government data on the size of product/service markets which can be accessed.  Occasionally, this information will need to be paid for, but much of it is free.  Often however it will not give you the exact answers you are looking for so be prepared for some creative analysis.  For the UK, check out http://data.gov.uk/ for 5,400 free Government datasets.
  3. Trade Associations.  These bodies are more focused on the markets on which you may wish to compete.  As organisation funded by the market encumbents, they are keen to see their markets thrive and develop.  Both formal reports and informal conversations can prove very helpful and informative.
  4. Financial Data from Major Competitors.  If you can identify your major competitors in a market, you should be able to get sales and market data from their annual reports – both publicly and through companies house data (check out www.duedil.com for a free source of this data in very useful format).  If you compile these you can create an empirical data set which at least demonstrates the minimum market size.  If these companies are public, you may be able to obtain investment banking research on both the companies and the sector.  If you have a contact at the bank in question these can be obtained often at no cost.
  5. Customer Surveys.  Asking your customers or potential customers how much they spend in your product/service market is a good way to find out more empirical data.  You can do this inexpensively as an online poll with some form of competition or prize draw to incentivise people to contribute.  These will be subjective by their very nature.  More formal surveys can be commissioned but are expensive.
  6. Google. (Other search engines are available).  The internet is an amazing source of information which can produce some surprisingly useful results.  I would recommend trying a range of search terms to see what comes up and don’t limit yourself to the first 10 results as often lower ranked pages still have useful information.  You can use Google’s keyword tool to find terms related to your business.

Key Success Factors

As a new market entrant, an Entrepreneur should be evaluating how he is going to compete successfully in a market, whatever stage of development that market is at. In my view the key factor is to do it differently, to have a unique angle which differentiates you from your competition.  A me-too clone strategy is unlikely to be successful and less likely to attract the support of investors.  Here are six factors to consider.

  1. Access to Unique Resources.  These resources can be anything in the supply chain.  It may be raw materials, cost efficient manufacturing, low cost or high quality people.  You should think through the whole product/service process and ask yourself how can I do this better, faster, cheaper, to a higher quality, more simply.
  2. Ability to achieve Economies of Scale.  This does not necessarily mean trying to take on the market leader.  If you are at a relatively early stage, ask yourself what improvements can be made to reduce costs which are associated with higher volumes.  This may involve negotiating adjusted terms with your suppliers or changing your processes to make them simpler based on the higher volumes.  Moving to a production line process from a bespoke manufacturing model is a simple example.
  3. Access to Distribution Channels.  If you can find ways to sell your products/services in ways not available to your competition you will get one step ahead of them.  The trick here is not to think how you might replicate what they do but to try to come up ideas which are new and different which can disrupt the market.  Consider markets which are parallel to yours, can you use their channels in a different way to distribute your product/service.  For that channel the opportunity for incremental sales from an existing cost base should be an attractive proposition.
  4. Access to Technology. As a new entrant or a dynamic thinker, using the latest technology to get an advantage over your competitors has never been easier.  The amount of business related tools which are now available at historically low costs has never been greater.  Existing competitors may not be aware of new technolgical developments or too slow to adopt them.  Let agility and speed be your watch words here.
  5. Product Evolution.  Nothing stands still in business but companies often convince themselves that their favourable competitive position will continue in perpetuity.  By moving your product/service forward you can make your competitors look dated very quickly and make your product/service stand out in the market place.
  6. Passion and Persistence.  This should be the greatest weapon in the armoury of the entrepreneur.  Do not become complacent or give up too easily.  Your energy and drive will create momentum which larger, less dynamic companies will find very hard to replicate.

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