Business planning requires adequate market research

New businesses are most vulnerable to failure during their early years of trading. One of the causes of failure is poor or inadequate market research. Research and planning are critical to ensure that a new business idea is viable. Many entrepreneurs get so excited with their new idea and get carried away and set up a business without testing its viability. The risk is that they may end up trying to sell a product that people do not need, or selling it to the wrong people. The inevitable result is business failure and bankruptcy.
Many entrepreneurs fail to access loans or investment to support their projects because their business plans show clearly that market research was not carried out. One important question that financiers ask when looking at a business plan is, “Is this a business idea that can make money? “ The answer to that question will need to be supported by evidence gathered from market research. Business analysts are aware that many entrepreneurs write their business plans capriciously, and will try to present their ideas very optimistically. To counter that, analysts evaluate entrepreneurial business plans indiscriminately, looking at evidence to support the assertions and projections being presented.
What you need most in business are customers. Nothing else is more important. You must ask yourself who needs or wants your product and how much are they willing to pay. Market research will give you an idea.

Market Research and Analysis
Information gathered from market research will provide the input required in the section of your business plan that deals with market analysis. This section needs to describe the market size, trends, customers and the competition in your market.
A good starting point is to discuss the market environment in which your venture’s products and services will be offered. An analysis of the market size is required. Critical to the analysis is a description of the relevant target market for your particular product or service, and its size. This should take into account what share of the market you intend to control, in competition with others already in that market, or expected to enter it. For example, if your venture intends to manufacture shoes, your relevant market will not be the 12 million pairs of feet that make the country’s population, but will be made up of only those people with a taste for your particular type of shoe, and are willing and able to pay the price you require. The rest of the population that is outside your target market specifications is not a relevant market to your venture for now. Market research will tell you how many potential customers for your product there are in any market, enabling you to decide whether they are enough to make your business viable.
When you have defined the relevant market size, you then need to discuss the past and expected future trends, and how they affect your venture. Trends include changes in demographics, such as the population size, growth, density and distribution. In new business planning, the important discussion will be on how the trends will affect the growth of your relevant market, which will also affect your project’s potential profitability. Other relevant trends to discuss in the business plan include the country’s economic growth, wages and salaries as well as changing consumer needs. The facts and figures presented should support your project’s prospects for success. It may be necessary to show how your company will cope with uncertainties resulting from an unstable economic environment. All data should be believable and verifiable as most analysts do check such information as part of their project screening process.
Regarding customers, the market analysis should define the key customer groups and their numbers. The figures should support the assertion that the customer base is large enough to make your project profitable.
Competition needs to be defined in terms of key competitors, their sizes, market share and expected future prospects. Your analysis should show how you will be able to withstand the competition and achieve your target market share. Some entrepreneurs omit the competition in their business plan, hoping to impress to the financier that their project faces no competition and will therefore thrive. However, most analysts will become doubtful as there is no business project worth doing that faces no competition. Analyzing competitors will demonstrate to the analyst that you have done your research, and you have a realistic perception of your project’s operating environment, you are well prepared and therefore have a greater chance of succeeding.

Sources of Market Information
Sources of market information range from publicly available data to complex market information compiled by professional market research firms. For a small or medium sized venture, some information can be gathered from the entrepreneur’s own research. Inexpensive methods of market research include searching newspapers, business journals, magazines, the internet and the libraries of trade and industry bodies for secondary information. Primary data can be gathered through questionnaires, interviews with potential customers, observation of customers’ buying patterns and even asking for relevant information from existing business operators. For smaller projects, one may produce a product on a small scale and test it in the market to gauge customers’ responses as well as viability potential. The source of market research information should be included in the business plan so that the analyst can check and confirm where necessary.

Phillip Chichoni is a business planning consultant who works with small and medium sized entrepreneurs. Your views and comments are welcome, please email chichonip@yahoo.com

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2 Responses to “Business planning requires adequate market research”

  1. Of course, what a great site and informative posts, I will add backlink – bookmark this site? Regards, Reader.

  2. Great post,

    It all begins with “truth” as I discuss in my blog http://nosmokeandmirrors.wordpress.com/2009/12/11/third-part-of-truth-motivation-are-you-willing-to-go-the-extra-mile-like-chic-fil-a/

    Thanks for the thoughtful post

    Mark Allen Roberts

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