A great idea is not all there is to business success. How that idea is introduced to the market counts for a lot, too! Read here about the different steps to consider.
An entrepreneur’s analysis of the market for a new product or service can mean the difference between success and failure. In fact, besides building a significant competitive advantage, sufficient capital, a competent and effective team, a receptive market is another key indispensable component of a successful startup.
A market can be both a physical or virtual place where you can buy or sell services or goods. A good understanding of the market is a must-have for any entrepreneur. The philosophy of marketing was once summarized perfectly by Charles Revson, founder of the global cosmetic firm Revlon: “In the factory, we make lipstick, but in the marketplace, we sell hope”.
A thorough and credible market analysis can reduce business risks. It can be approached from a supply and demand perspective. On the demand side, the considerations may include:
1. Demand type
The type of demand determines how people connect to goods or services as consumers. There are three different types of demand: (1) product, (2) distributor and (3) producer demand.
The demand for a product or service could be driven by the end-user or consumer. A good example would be household or personal care items.
The distributor demand describes the demand for a product or service targeting those who are part of a larger value chain. A new packaging material, for example may target cargo handlers, logistics companies or fast food outlets. On the service front, a typical example are business models such as Software-as-a-Service (SaaS), also known as on-demand software.
Producer demand is perhaps the most common especially in economies that are dependent on agriculture or other extractive industries such as mining.
2. Estimating market size
To better illustrate how you estimate a more accurate market size, let us say an entrepreneur has recently developed a new insurance product for family cars and SUVs. Knowing the correct size of the potential market is critical especially at the planning stage and will save time and resources down the line.
Let us use the Kenyan market as an example. Before introducing the product and before formulating a go-to-market strategy, the entrepreneur should get an idea of how big of a market is to be expected:
Kenya is a country with a total population of about 46 million. Statistics show that 1 in 10 households owns a motor vehicle, which leaves a potential market of 0.1*46 million=4.6 million motor vehicles. The entrepreneurs then have to consider the number of public service vehicles (PSVs), which is around 1.8 million. This reduces the potential market to 4.6-1.8 = 2.8 million. About 40% of private vehicles are classified as “general cartage” (e.g. trucks, pick-ups), a final estimate of the potential market size will be 0.6*2.8 million =1.68 million vehicles. This would provide an introductory estimate. For a more accurate market assessment further detailing is needed.
3. Market growth rate
Considering the extent to which the market for a specific product can expand, is crucial when determining what market-entry decisions should be taken or when estimating the gestation period for a new business. Generally, startups in fast growing sectors tend to perform better than those in slow growing industries. Useful indicators of growth rates in an industry may be the levels of employment in a given industry or growth in imports (assuming the exchange rates are fairly stable).
4. Economic trends
Various other trends may also help making realistic decisions when planning a business. Recent examples include: policy shifts around climate change which tend to favor startups in the renewable energy sector. Healthy eating habits which are now encouraging activity in the organic foods space. Regulations such as the recent digital migration opened up a market for pay-tv services and auxiliary devices. Tax exemptions to investors in the tourism industry to help spur its growth are another example. Other trends such as a rise in disposable income fuel a demand for luxury and high-end products and services. The mobile money revolution is perhaps the most poignant example in sub-Saharan Africa. A good understanding of these trends helps mitigate some of the challenges inherent to start-ups.
Market analysis is also closely linked to product design, which we have written about before here.