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Let the market speak!

A market analysis is a study of the market area and of probable future patterns. It should include the current state of the market, and the nature and extent of competition. The purpose of the analysis is to make it possible to develop more accurate, that is, more fact-based sales forecasts.

The first and most logical step in whether or where to start a business is to conduct a market analysis. For a retail business, a few general locations should be chosen for detailed analysis to identify where the opportunity is greatest.

A market analysis is a study of the market area and of probable future patterns. It should include the current state of the market, and the nature and extent of competition. The purpose of the analysis is to make it possible to develop more accurate, that is, more fact-based sales forecasts. The method is to identify the pattern or trend of sales over the past and to use this information to project or estimate sales for the period ahead.

Another important issue is how much it costs in selling effort to produce a given volume of sales. It involves two types of costs: advertising costs, and salaries and wages paid for selling. If the business requires sales-people in the field, as a manufacturer might, information on reimbursable travel expenses should be included.

A study of the competition should be included in any market analysis. The competition may be local and well defined, or quite generalized, depending on the nature of the business and of the market. Trade associations and other data-gathering agencies, both governmental and non-governmental, are sometimes helpful in this area. A good deal of the information about competition, such as estimated sales, pricing policies, advertising and promotional costs , services offered, performance of sales personnel, must come from direct investigation, business by business.

Of interest also are whether there are businesses entering and leaving the competition recently, and changes in the competitive structure through product mix or services offered. If there is a lot of flux in the market, we need to look into the causes, and whether they are favorable to our entry.

When evaluating a location, be sure to investigate whether there any plans for proposed changes that may have an adverse effect on the future of the business. Urban revitalization programs, changes in highways and streets, flood-control programs, changes in zoning ordinances, could all severely impact what looks today like a favorable location.

The number of people within the market area and the amount of disposable income they have are important market factors. For many kinds of businesses, the total population is less important than certain segments of the population. A business selling hearing aids, for example, will be interested only in persons who have hearing difficulties, which would generally imply an older demographic.

General population figures are obtained from Federal, State, and local government sources. The Federal census gives not only total population figures but also breakdowns that are useful in many business situations. For most of the larger cities, census figures are further classified by sections within the city, called census tracts, on the basis of certain population and economic characteristics.

Business population figures may be available from numerous sources. The Yellow Pages of the telephone directory and the city directory are local sources that are immediately available. Chambers of commerce, trade associations, and State and Federal government agencies can often be helpful.

Many trade associations report the results of research on consumer expenditures. Other sources of data on income include planning commission offices, employment offices, and utility companies. Many newspapers research and report on building permits and demographic trends, especially in newly developed areas.

A much broader yet vital part of the market analysis has to do with what might be called the general state of the market, that is, overall economic conditions of the market area and of the country. These may be widespread movements such as national cycles of prosperity and less favorable times, or they may be purely local conditions.

Perhaps the prospective entrepreneur favors a particular area, near home for example, and is merely looking for a specific location. It can still be very useful to investigate a couple of other areas, in case the opportunity in the favored area is particularly less than in other neighborhoods. The possibility must always be recognized that the nature and /or direction of the industry, or the competitive situation may prove unfavorable in all the areas investigated.

Options then are to wait for conditions to become more favorable, or to “cast a wider net” geographically or in terms of business niche chosen. In any case, finding out at the analysis stage makes it much easier to optimize the opportunity chosen.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.