This is the seventh part of our Smart and Simple Guide to starting a business. We've already covered ideas, business concept, funding, family, naming, branding and competitive research. And now we come to a topic that is at least as important as all of those and one that can prevent you from making critical mistakes that will doom your business. Market Research.
You hate it. I hate it. Everybody hates it, but it is crucial. Here's why.
One of the critical steps to business success is figuring out who your customers are and how to sell to them in a way that will make you a profit. By now if you have followed along on the first six steps of this guide you should have a clear idea of what you want your business to be – and that means you have also built a picture in your mind of who the customer is, whether you realize it or not.
But having a picture in your mind isn't good enough. You have to know clearly who they are and more importantly, how many of them there are, how you will reach them and how much they are prepared to pay you. Time to dig in and define your customer, your target market, your pricing and thus the foundation for all the financial information to come.
First off, WHO are your customers? You truly need to know this information by heart so you can make sure you can reach enough of these customers to create demand and so you can optimize your whole business operations to deliver your products or services to them. It is important to realize that defining a specific set of criteria for your customers is NOT limiting. Of course you'll take anyone as a customer who wants to be a customer. But it helps you define how to reach the best customers, how to market to them and how to be more effective and efficient.
Build a picture in your mind of who you visualize as your typical customer. Then try to generalize them. Does their age make any difference or not? Anything that doesn't affect how good a customer they might be should be removed. Conversely anything that DOES improve their likelihood to be a customer should be added or included. Here are some of the demographic factors you should consider in building this picture of your customer.
- Income level
- Buying habits
- Family status
- Location (region or city or neighborhood – and which ones)
- Ethnic group
You need to be as concrete and specific as possible. For example if you are thinking about starting a drive-through coffee bar at a corner headed toward a main highway entry point you need to figure out if the traffic are mostly commuters or are truck drivers or are people headed to go shopping. The profile of all three groups is very different and would affect the hours you are open, the coffee drinks you would offer, how you would present them and of course, the price. On the other hand maybe observation will lead you to believe you can take all three groups as customers. Even if you think that, figure out which is the commonest group that is most likely to buy the most coffee and select them as your typical customer. You can always broaden your offering later.
The risk of being too broad in your definition and trying to reach everyone is that you will fail to attract anyone and your business will already be struggling before you begin.
Before you lock in your customer profile it is important to understand HOW to research so that you can be confident in your decisions.
You need to be prepared to put in some serious time in at least two places. One is outside – in your selected location to scout out the people who are there and who pass by. You will also want to hit the street and visit all your local competition to see who their customers are and how they operate and price their goods and services. You may even want to go somewhere else – a location where you will NOT be but where there is already a business similar to the one you want to start. The other pace you will be putting in time is online.
Finding out about potential customers
- Hit the street, go to the area where you expect to operate and walk or drive around observing the people who are your potential customers. Make sure to take notes about how they fit into the demographic categories outlined above. And if you are planning a virtual business without a physical location, do the exact same thing in a virtual sense. Scout out the virtual landscape of people running businesses similar to the one you propose.
- Find a competitor that is located somewhere else or in a different virtual arena (if you are planning an online business). Research THEIR customers, pricing, operations, etc. Contact them and ask questions. If you can, reach out to their owner and ask for their perspective. Make it clear that you are not going to compete directly on their turf and they will quite possibly be ready to help.
- Do a comprehensive search online for your physical location and its demographics and business potential. Look for similar businesses that are for sale and ask the seller for information about their financials. Businesses that are for sale are far more likely to be willing to divulge this information than active businesses.
- Set up a survey – preferably online using a tool like Surveymonkey or Zoomerang and reach out to your customer base via email, facebook, forums, discussion boards local websites and more and try to persuade people to take your survey. Make sure you ask for all the demographic and pricing information you want to know as well as specific preferences around the products or services you intend to provide. Be prepared to make an offer to participants to encourage them – perhaps a coupon good for use during your first month of operation.
- Look up census data or other demographic information via the census bureau (http://www.census.gov/sdc/) or the local chamber of commerce, or even some of the big real estate listing sites.
Show me the Money
The next phase of your research is all about the money. Market size, potential revenue and pricing models. You should have a LOT of questions.
How big is the market? How much revenue do you think you can generate? See if you can find out how much your current competitors are generating. If you have no direct competitors either look at a similar market elsewhere and extrapolate or pick the most similar business you can find. Competitors often won't release this kind of information but you may be able to get their prices and a guesstimate of their number of customers to get a ballpark figure.
Is the market going to grow or shrink? If you think it will shrink then you should think about what you can do to turn that around or if there is a way to redirect your business idea to an area that isn't shrinking.
How much do people in the area spend on this product or service? If you have been able to put together a survey this is one of the most important questions to ask.
Are there enough potential customers available to you if you start up in this location (or online)?
Based on everything you have learned to this point about potential customers, your target customer, spending patterns, your existing competitors, how many sales can you make in a month, in the first month, the first three months, the first six months, the first year? Be realistic -this is not the time to just assume you can make good sales. If you don't have a compelling argument why you can make more sales than a competitor then it is unlikely you will be able to even match them, let alone beat them.
Once you have a potential sales number you need to estimate what you can expect in terms of revenue per sale.
Now research your competitors with respect to costs. Look at labor costs, location costs/rentals, utilities, advertising, cost of goods or services. If part of your competitive advantage is a lower cost then factor that in.
Otherwise do NOT assume you can do things more cheaply.
Are there any market trends that could affect these sales patterns and numbers?
Although it isn't US based and so can't give totally accurate information, this tool from Industry Canada (the SME benchmarking tool) offers industry-specific income statement and balance sheet data for small and medium sized businesses across Canada. This is fantastic basic starting point information for your area of business.
Once you have all these questions answered you are finally in a position to make a financial model and set prices. You are not going to be able to get away with a price that is out of line with your competitors unless there is a clear and obvious reason. Your best bet is to be able to offer the customer a clear better VALUE to them while still setting a price that gets you enough revenue to make a clear profit.
Part seven of a series- The Yahoo Smart and Simple Guide to Starting a Business.
- Part one: Is it time to start up that startup business? and Part 1- Goals, Values and Ideas and Resources for Goals, Values and Ideas
- Part two: Build a winning business right from the start and Part 2: Defining your business concept and Resources for defining your business concept.
- Part three: Funding, Fraternity and Family and Part 3: Ownership, Funding and Family and Resources for funding and ownership
- Part four: The Name Game and Part 4: Naming Your Business and Resources for naming
- Part five: How to Brand your Business on a Budget and Branding: First Impressions Matter and Resources for Branding .
- Part six: Keep Your Friends close and your Competitors Closer and Competitive Research and Resources for Competitive Research