Who will buy?
By now you have probably narrowed down your shortlist of ideas. You may know which market you want to enter; you may have got your eye on a product that you think has potential.
Your potential product may have a vast market, a tiny market or somewhere in between. You can reduce your risk of misjudgement by trying to work out where it falls in the spectrum of demand. There is a philosophy, which many technology businesses adopt, that you can come up with a first stab at a product, known as a ‘beta’ version; see if anyone wants to buy it and gradually refine and polish in an iterative process until you have a finished product in a clear marketplace with good demand. That’s always possible, but you can still reduce your risk and lower the costs and time taken to get your product to market, if you first carry out some crystal-clear thinking about who the product is aimed at and why that person will buy it.
This applies even if you are going to use an online platform (see p. 14) that will market for you, leaving you to focus on your production process, improvements to your service levels and building your reputation through online customer reviews.
If you are planning to launch your business in a big way with ambitious plans for growth, establishing that there is a market, and a substantial one, will be a very important element of any plan that you put together to interest potential investors and backers in your ideas. Market statistics and analysis will make up a significant part of your plan.
A final point is that it is much easier to persuade people to purchase something they already want; educating a market to buy your product if the market has expressed no great desire for it can be a long haul.
Who will buy?
Knowing which market and which product is only the start of the work you need to do before you will be able to begin selling. First, you have to research the market. You are not simply looking for lots of statistics to blind potential backers. You need the details to help you to plan your business strategy.
It would be a mistake to assume that you have an equal chance of selling to every customer in your market. If it is that sort of market, it implies that you are looking for volume sales. In turn, this suggests a market that is very sensitive to price levels and in which it is difficult to sort out one product from another. If this is the sort of business you are planning, think carefully. Few small businesses have the resources to make a success of this.
Basically, you should be looking for a niche in your proposed market that allows you to charge a reasonable price and so maintain reasonable profit margins. To achieve this, your product needs to be clearly distinguishable from the competition (called product differentiation).
The purpose of your research at this stage is to look for that niche. This process is called market segmentation. In everyday language, it means looking for a group of customers within your target market that has common characteristics, tastes and features. If you can find such a group, it allows you to tailor your product to meet its particular needs. Your search for a market segment need not be confined to the UK – extend your horizons and see if you can identify a market segment running across Europe or even the world. The world has shrunk in the Internet era and even small businesses can sell worldwide. Moreover, an international customer base can be a big advantage if UK growth is depressed and can benefit if sterling is low against other currencies.
Once you have sorted out the groups, you must look at the competitive position. Are there already suppliers to that group of people? The existence of competition does not mean that you should not try to enter the market, but it does mean that you need to be able to offer customers some additional benefit in your service or product, and it must be a benefit they want.
For a small firm, a strong attraction of using this market segment approach to sales is that you may be able to achieve a dominant position in that segment. This could mean becoming the market leader, with its attendant advantages of selling more at a higher price (p. 186).
If your business is on a smaller scale (perhaps only yourself or a couple of employees), it still makes sense to look for a niche, because of the advantages of being able to keep your prices above rock-bottom.
There are several different ways of grouping people. You could group people according to where they live, what kind of work they do or what their hobbies are. Other interesting characteristics to identify include behaviour in purchasing. Is price the key factor, for example?
What makes a useful market grouping?
The fact that you can identify a group of people with similar tastes in your target market does not necessarily mean that you have unlocked a source of sales. To be useful, a market grouping needs to have certain characteristics. First, the segment needs to be big enough to give you the living you require. You must also be able to differentiate it from other groups, so that its size can be measured. Another necessary characteristic is that the segment must be easy to reach. If not, you will experience problems getting your message across or supplying the product because of location. Finally, the group must have common features that actually lead to similar buying decisions.
A step-by-step analysis to identifying market groupings
- Is your target market a consumer market? Or is it an industrial or professional market? If it is consumer, go to 2; if it is industrial or professional, go to 8.
- Look at family and personal factors. Would age, sex, family size or marital status form the basis of different groups?
- Is your product the sort that relies on supplying a local area? Location may be an important feature of a group.
- Look at social class. Could this be important for your product?
- Can you distinguish groups of potential customers on the basis of how much or how little they use or buy your product? Could your product be tailored to appeal to heavy or light users?
- Are there psychological or social factors at work? Could the product appeal to those wishing to ‘better themselves’? Is lifestyle important? Would prospective customers be likely to ‘follow the crowd’ or want to be seen as stylish? Could there be snob or prestige appeal? Would the product appeal to consumers concerned about the environment and climate change?
- Price could be a feature that distinguishes one group from another. Is there an element of value for money in a target group’s make-up? Some people go for the cheapest, no matter what. Most customers would say that they want good value for the money they spend. Now go to 12.
- What type of industry will you be selling into? You could specialise in one industry or profession (called vertical marketing).
- How big are the companies or businesses you are likely to sell to? Would you be interested in government contracts (see box that follows)? Size can mean different procedures in buying and frequency of purchasing. Can you create a distinguishing product benefit from the need to satisfy large, medium or small businesses?
- Will one group of potential customers require quicker or more frequent deliveries than others?
- Price could well create different market segments in industrial or professional users.
- Will one group of customers be looking for a higher level of after-sales care or maintenance? Could this be your distinguishing product feature?
- Consider what other categories might apply to your market. Each market will have its own specialised characteristics apart from the general ones listed above.
- Now look to see if there is a group with more than one of the characteristics listed above. This could define your target group.
What do you know about your likely customers?
To help you to understand your potential customers, and to help you sell to them, you need to know a range of information about them. If it is a business you are selling to, you need to have information on the organisation and buying policies. Investigate the other suppliers to your customers and acquire and analyse information on the products bought by them.
Databases are the key. Set up a database for information about your potential customers and gather and collate as much as you can within the legal limits allowed (p. 173). Interrogating databases will help you to target potential customers more effectively.
Why will they buy?
Before you can answer this question, you have to find out what your customer wants. What are the benefits and features of a service or product that your target group rates most highly? Research is essential (p. 30).
Once you have the framework of your customer needs, you can begin to vary your service or product with the aim of meeting those customer wants and needs more successfully than any other supplier. There are a number of ways in which your sales package (that is, your product/service plus a range of other sales features of your business) can be altered to achieve the desired objective. These include:
- Appearance: what material is the product made of? Does it look stylish? How about the colour? How is it packaged or presented? All these can be changed to match your target customer profile. If appearance is an important feature for your target group, it may be worth using a designer to help you to achieve this (p. 211).
- Delivery time: if speed or reliability of delivery is important to your potential customers, concentrate on how you can improve or stabilise your delivery times.
- Returns: an important element in persuading people to buy online is the ability for purchasers to return the purchased item without quibble and with confidence of getting their money back if they don’t like it.
- Maintenance: does your target market look for prompt attention to faults? Or frequent maintenance visits? Adjust your strategy to allow for this.
- Performance: identify the main requirement – for example, it may be speed, reliability or a low level of noise. This sort of consideration should be taken into account when you specify your product. If it is already past the specification stage, can it be altered?
- Quality: this is rather an ethereal topic, as quality can be subjective, existing in the eye of the beholder. Or it can be objective, for example the evenness of the stitching. You can create an impression of quality by building up the image or reputation of the product to suggest this (p. 121). The appearance of quality tends to depend on all the variables of a product: appearance, service, packaging, reliability, performance and so on. You might opt to comply with recognised quality standards, such as those developed by the International Organization for Standardization.
By adjusting your service/product in this way to meet the wants and needs of your target market, you are trying to establish that you have at least one unique feature that your competitors don’t. Use this as the basis of your selling message to persuade people to buy. Your target market will buy if you convince them that it meets a need, conscious or unconscious. If your competitors already meet these needs, it is difficult to see what additional benefit your product can offer, but usually there is something.
It would be a mistake to believe that buyers act in a rational way, comparing products and choosing their purchase on the basis of some organised assessment. Even in an industrial market, buyers are affected by a number of emotional factors, sometimes not openly admitted. These can include wanting to be like someone else, to be considered stylish or a leader, or to be liked. Your potential customers may also want the best, a change or to improve their personal standing. They may be trying to outdo the competition or to gain revenge on another person or business. So, if your product can’t be differentiated in practical benefits, can it be distinguished in emotional ways?
One possible way you could think about your target market is to consider how it would match up to the range of cars available. Each car model has tried to establish its own niche, and it is possible to categorise your target buyers by the car you imagine they might buy. For example, if your market is likely to buy a Ford Ka or Fiesta, you can picture them as young, wanting something cheap and cheerful and not minding the lack of comfort. If it is a Rolls-Royce, your customers are looking for the ultimate in prestige, comfort and specification.
A BMW is an executive car, indicating business success and achievement; the car is stylish and luxurious. And so on.
Once you have a mental picture of what your target group is looking for in a car, you might be able to use this picture to adapt your service or product to meet those same needs.
How much will they buy?
This is the third question that market research should help you to answer. You cannot plan your business unless you have some estimate of how much you are going to sell and when that is likely to happen. You need these data to help you to formulate your sales and cash forecasts.
The level of sales you can make over the years depends on:
- the market size;
- the market structure;
- the market share you can establish (and the competition you face);
- the market trends; that is, whether it is growing, static or declining;
- the investment in time and money to sell your product.
You need to be able to forecast how much you need to put in to get sales established and how long this will take. Many business failures occur because this is underestimated. And many businesses would not start at all if the development period was accurately forecast at the outset.
Market size
The first step is knowing the market size. This could be either its monetary value or the number of units sold. Beyond this you need an estimate of the market potential, which is unlikely to be the same figure as market size because it is unlikely that everyone in the market will buy your, or an equivalent, product. Obviously, if you have the figure for the overall market but have decided to concentrate your business resources on a particular market segment, your next step is to assess the size of that particular segment. Even then, this may not give you your estimated market potential (the amount of sales you stand some chance of being able to make over a period of years).
Market structure
This is the process by which a product is sold to the end-consumer. Market structures constantly evolve, and the world economy has undergone a rapid restructuring with the development of the Internet and mobile devices as tools to sell products on a global basis direct to end-consumers.
A key stage in selling used to be the role of intermediaries – businesses placed somewhere between the end-consumer and the end-producer. Intermediaries include agents, distributors and brokers. But the restructuring of the global economy has squeezed this sector as a distribution channel. Over the past 20 years, distribution has moved away from selling through all these channels: intermediaries, face-to-face and direct mail. Now the main channel is selling direct to customers, either online through platforms or your own web sites, by promotion via social media such as Facebook or Twitter, or direct through the mobile phone or tablet, for example, by using apps.
But not all markets can be reached by direct selling and, although a web site is fairly cheap to set up and easy for customers to use, do not underestimate the work involved in generating traffic to your site and then monitoring and fulfilling orders you receive this way. Small businesses may find that selling through others, or a chain of others, is still a lower-cost alternative. These can include online platforms, see p. 14.
If you sell through others, you have to pay them a cut of the price you receive from the end-user.
Market share
Unless you are supplying a completely new product or service, you are going to share the market with other businesses. To be in a dominant position (that is, the supplier of 25 per cent or more of the market) would be very rare for a small business.
To be able to forecast your sales you are going to need some idea of what share of the market your competitors have. You also need information about your competitors’ businesses and products to enable you to position and price your own offering. Knowing the market shares gives you a measure of how successful the other businesses have been.
Monopolies are unusual, but there may be a duopoly (two businesses supplying 25 per cent or more of the market each) or an oligopoly (three, four or five businesses dominating it). However, many small businesses are likely to face a fragmented supply position, where there are lots of suppliers and one business is unlikely to achieve more than 5 per cent of the market. This is particularly true if it is a new industry or market.
Measuring market share is one thing, achieving it another. But there are some ways of influencing the share you can seize. On the whole, it is helpful to build a reputation for good, consistent quality. For this to be translated into market share, a second influence is maintaining a reasonable level of marketing activity: social media messaging, PR, advertising, search engine optimisation (SEO) if you have a web site, and sales activity. A third influence is if your product is recognised as being ahead of the competition in performance, design or whatever.
Look at your competitors in a detailed fashion. The data it would be helpful to have include:
- What are the competing products and how much do they sell?
- How well have they done in the past few years?
- How is the company organised?
- How is its selling carried out?
- If it produces goods, how is it done and what are the facilities?
- Who are the main customers?
- What is the pricing policy and what sort of delivery is offered?
Market trends
Market size, market structure and market shares do not remain the same. What happens today may be totally irrelevant to what is happening in one, two or three years’ time. The usual method of deciding what is going to happen in the future is to look at what has happened in the past and project it forwards. This approach is fraught with dangers. At the very least, you need to adjust the figures for changes that may occur or are forecast to occur.
On a general level, anticipated changes in the economy can affect the buying patterns of individual markets. There may be changes forecast in tax or other laws that will influence purchasing decisions. New information may emerge on the effect of certain items (for example, health hazards).
On a more specific level, there may be changes caused by government or local authority policy. And so on. You need to look closely at your market to guess what changes will occur that might affect the market trends. In any conversations with people already operating in the market, remember to ask what likely changes they think are on the cards. You may be better able to take advantage of them as a new entrant with no constraints from existing products, methods of operating or overheads.
Investment needed in sales
You need to make realistic forecasts of how much you will sell, when you will be able to do it and what you need to spend on selling and promotion to achieve it. Inevitably, if you are starting your own business, you are optimistic, but do not let optimism blind you to the uncertainty of making sales.
If you are in any doubt, a rule of thumb is to double the length of time you expect it will take you to achieve a certain level of sales. In this way, you will organise sufficient funds to keep the business going until you reach break-even. The danger of this rule of thumb is that your business may not seem sufficiently attractive to lenders and investors. Keep a balance.
It might be possible to obtain a more reliable estimate of sales by carrying out surveys, online and face-to-face, though this is tricky for a small business.
How will you do the research?
There are a number of techniques for researching a market. The ways open to a small business are likely to be fewer than to a larger organisation, simply because of money. In many cases, it will be you, the owner, who does the research. The basic research methods for small businesses include:
- web research, studying competitors’ web sites and looking for market and industry information;
- conversations with customers, suppliers, competitors, distributors and ex-employees of competitors.
Web research
You have an enormous treasury of information at your fingertips on the Internet. Depending on your area of business, you may find useful information on government web sites, such as HM Revenue & Customs*, Department for Business, Innovation & Skills* or the Department for Environment, Food and Rural Affairs*. Government information for citizens, consumers and businesses is now being channelled through the www.gov.uk* web site. You can find links to all government departments from this web site. Increasingly government statistical data are being centrally produced by the Office for National Statistics* and many previously unpublished government data sets are now available through www.data.gov.uk
Conversations
A conversation can cover anything from a chat at an exhibition to a brief telephone call, to a long face-to-face discussion in private or an online chat. The main point is that you can pick up a lot of information simply by talking, including careful use of social media channels.
Whether you have started your business or not, good sources of information are customers, potential or actual. If you have access to a list, properly gathered and complying with the Data Protection Act (p. 173), you could carry out a telephone or online survey.
If your product is likely to be exhibited at trade fairs for the consumer, spend some time there asking about the market and product. Use a brief questionnaire to ensure that you ask the same questions so that the information can be analysed.
Interviewing competitors may sound an odd idea, but there is no harm in it and it can help you to understand what are common problems. If you come across any ex-employees of competitors, it is always worth a discussion, although you have to bear in mind that their view may not be entirely objective if they did not part with the business on good terms. And the information may be out of date.
Before you start your business, you could carry out some discreet research into how competitors organise their businesses by pretending to be a prospective customer. In this way you can gain some idea of the quality of the web offering, prices, the way queries are dealt with (online, e-mail or by telephone), selling methods or even how your potential competitors quote. It may seem unfair, but it is an unrivalled source of information and you may rest assured that once you are in business others will do it to you.
Summary
- Market research that is undirected is not very useful; it needs to concentrate on who will buy, why they will buy and how much they will buy.
- It is much easier to sell a product that meets some already perceived need rather than to try to educate a market to buy a new, perhaps revolutionary, product or service.
- Look for groups within your target market that you think you can sell to, either because no one is currently selling to them or because you can adapt your product to meet their needs.
- Use the step-by-step analysis (p. 23) to identify a suitable market group.
- Rational and emotional factors affect your target group’s willingness to buy. Research these and alter your product or sales approach to match.
- Knowing how much customers will buy is crucial to your business planning. You need to research market size, market structure, market share, the competition and market trends.
- Try to carry out your research in a systematic way so that it can be properly analysed. Use online and social media research, as well as conversations with those in the market.