Before you can prove the viability of your start-up idea, you need to find out how many customers would be interested. You’ll probably have a minimal budget to start with, and while you can omit many things when starting out to keep costs down, you can’t omit customers.
So, you need to understand your market and find out how many people would potentially buy your product or service. Here are the four steps to take:
STEP ONE: Calculate the market size
This is a key figure that will be an integral part of your business plan and represents the whole scope of the venture. Start with desk research looking into published secondary data online or in public libraries.
Use this to understand who you’re selling to. You want to avoid an over-enthusiastic appraisal as this could have dire consequences down the line. There are two approaches:
- Top down analysis: calculate the whole total market and then estimate your share as a percentage. This is often too optimistic so should be combined with
- Bottom up analysis: estimate potential sales to calculate an overall figure. This should take into account where you can sell products, how well comparable products are selling.
STEP TWO: Analyse target market
When you have the market size, you need to find out its value. Here are three rules to follow to help decide whether a particular market segment is worth including:
- Measurability – judging whether the estimated number of customers you can sell to is large enough to make it worthwhile.
- Accessibility – if you can’t reach the customers who will buy your product, then they’re no use to you. You need to figure out how you will reach them, depending on their age and other factors.
- Its size – if the market size is too big then you may not be able to compete against larger, established companies. If it’s too niche, then you may not be able to generate enough sales to keep going.
STEP THREE: Divide the market into different types
Market segmentation is an important step. It gathers different consumers of similar backgrounds and tastes into groups, which then makes it simpler to tailor a product or service to them.
There are various ways to split consumers into groups, including demographics, such as their age, marital status and income. Psychography goes one step further and divides individuals into social groups based on lifestyle and personality traits.
Examples include:
- Yuppies: Young Upwardly Mobile Professionals.
- Bumps: Borrowed-to-the-hilt, Upwardly Mobile, Professional Show-offs.
- Jollies: Jetsetting Oldies With Lots of Loot.
To find the psychographics of current customers you can talk to them, use surveys and questionnaires to find out their motivations and whether they value price or quality first. Alternatively, you can use your website analytics, which will tell you what has motivated someone to buy a product.
STEP FOUR: Identify your competitors
You may feel you’re the first one to come up with your particular business idea, but it’s likely that there are plenty of rivals already in existence. And they’ll all be targeting your potential customers.
Understanding the competition is very important when it comes to working out the size of your market and the viability of your business. You may find that your competitors are very expensive, for example, or are using outdated tech. This can help you position your offering to beat these problems and attract customers.
However, if they’re all doing well, then it’s a tougher battle. You may have to extend your research to find a niche that you’ll fit in. Think about the following things during your research:
- Why are some competitors successful/unsuccessful?
- What are the prime motivations for customers?
- What are the costs involved?
- Are there any industry mobility barriers?
In theory, analysing the best businesses in your sector will explain just why they are successful. You can then apply this to your business. By following these four broad steps you should be able to work out the market potential for your start-up.
For more advice on starting your own business, talk to the team at Turner Little. You can contact us here.
About Turner Little
Founded in 1998 in Yorkshire, UK, Turner Little is a specialist UK and offshore company formation, banking and corporate services provider. Our services include company formation, UK and offshore banking, asset protection, credit correction/repair, trademarking and trusts. Other services include Internet services, mail forwarding, wills and probate. Turner Little’s vision is to offer the best possible service, together with market leading products.
