importance of market analysis when preparing a business plan

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How to do market analysis for a business plan.

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When launching a business, having a clear business plan is critical for success. One aspect of the business plan, how to do market analysis, often eludes new business owners. Below you’ll learn how to identify your market, analyze competitors, read market trends, and more, to create a realistic market analysis for a business plan.

What Is Market Analysis for a Business Plan?

A market analysis is a comprehensive exploration of the target market a business wishes to enter. It aims to determine a company’s position in the market, develop marketing strategies, and identify areas where competitors lack or fail to effectively reach their target audience. 

A market analysis works for all types of businesses, be it a courier business or an organization business or a laundry business . Market analysis looks at a company’s strengths, weaknesses, opportunities, and threats to effectively capture market share and capitalize on growth opportunities. Whether you’re starting a business with $1,000 , launching a stay-at-home-mom business , or considering low-maintenance businesses with big returns, market analysis for business plans can build the foundation for long-term growth. 

7 Steps to Conduct Market Analysis for a Business Plan

Conducting market analysis for a business plan is perhaps the most foundational aspect of a business. Choose the wrong niche, and your business could be a flop; choose an oversaturated market, and you’ll struggle to break in. Here are seven simple steps for effective market analysis:

Identify Your Target Market

Identifying your target market includes describing your potential customers and defining the characteristics of your target market. This is also the stage to clearly define your objective and consider different industries to understand current trends, size, and scope. 

Target market and industry outlook analysis will demonstrate to lenders and potential investors that your business has a reasonable chance of success. It can also help you gauge potential sales and how to effectively reach the target market. 

Determine Market Size and Potential

To understand growth potential, it’s important to define your market size and potential. Market size is measured by segmentation, the process of aggregating prospective buyers into groups (or segments) with common needs. Assuming they will respond similarly to a marketing action, you can use this information to effectively build a marketing plan.

To understand market potential, consider the total market of your target industry, and calculate the market share of major players. Then, consider growth opportunities, new pain points, and potential revenue to gauge business potential. Discuss both market potential and market segmentation as part of your market analysis for a business plan.

Conduct Competitor Analysis

Once you have an industry and target market, it’s time to identify key competitors. Analyze their products, pricing, marketing, and distribution strategies. Consider their market share, presence, and offerings in terms of the pain points of potential consumers. Based on this, explore how to differentiate your business from the competition and enumerate key value propositions that stand out from competitors. 

Determine Market Entry Barriers

Identify any barriers to entry into the target market, such as high capital requirements, legal and regulatory restrictions, or strong competitor presence. Evaluate the challenges and potential risks associated with entering the market. This is the perfect moment to do a SWOT analysis – looking at the strengths, weaknesses, opportunities, and threats for your business positioning and those of your competitors. 

Analyze Market Trends

Market trends can change the landscape of a market over time. While some markets don’t respond to trends, many are highly vulnerable to changes, such as technological advancements. Understand industry trends that can impact your business launch and potential growth. Determine potential opportunities and threats in the market and its current trends to identify opportunities for growth and future demand for your product or service.

Outline a Marketing Strategy

Once you understand market trends, barriers to entry, market potential, and the target market’s pain points, you can develop an effective marketing strategy. A marketing strategy should utilize the right channels and messaging to reach your target audience. As part of the marketing strategy, consider brand voice, positioning, shared beliefs of your audience, and an emotional connection to build brand loyalty and stand out from competitors.

Summarize Findings and Projections

The final step of market analysis for a business plan is to put it all together in an actionable report. Consolidate your market research findings and projections into a concise summary. Highlight key insights, market opportunities, competitive analysis, and potential risks. Use charts, graphs, and data to support your analysis. Effective market analysis for a business plan should show and tell key market opportunities while addressing potential hurdles or threats. 

Clear market analysis will demonstrate value not only to investors or lenders but may provide additional insights into how to effectively market to the target audience and new opportunities to leverage for faster business growth. 

Key Takeaways and Best Practices for Effective Market Analysis

When conducting market analysis for a business plan, make sure to consider each of the following:

Conduct Focus Groups/Surveys

To truly understand your market and target audience, use focus groups or surveys to gather valuable insights. There are several free or paid sites to do this including HubSpot Free Online Form Builder, SurveyMonkey, SurveySparrow, Lucky Orange, and ProProfs Survey Maker. If you already have a mailing list of clients, you can send surveys out and offer entry into a giveaway or any other incentive. If you’re launching the business from scratch, consider paid surveys with a niched-down target audience for relevant findings. 

Gather Secondary Data

Use secondary sources like industry research reports, government statistics, and articles to supplement your primary research. Government and industry reports, in particular, can offer valuable insights and in-depth industry trends that can shape your market analysis with actionable data. 

Track Market Changes and Modify Strategies Accordingly

Market analysis for business plans isn’t a stagnant document. It must be updated regularly as the market shifts and the business grows. Update your SWOT analysis every three months, or more frequently, if needed, to address and build on marketing strategies and increase market share. 

Why Do You Need Market Analysis?

Market analysis for a business plan is the engine that drives business growth. It provides key data and insights. A great product in a vacuum won’t sell. By conducting market analysis, you’ll understand the industry, competitors, potential customers, and opportunities to fill unique targeted needs, capture a greater market share, and build long-term business success. 

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What are the benefits of conducting market analysis for a business plan?

Market analysis for a business plan means you can understand the current shape of the market and identify opportunities for growth or weaknesses in competitors’ offerings. It allows you to realistically predict business opportunities and analyze clients’ needs to build effective solutions. 

How can I conduct market analysis for my business plan?

Conducting market analysis for your business plan involves conducting direct market research and relying on secondary sources like industry and government reports. Together, these can give you a picture of your business plan’s strengths, weaknesses, opportunities, and threats and help identify the best course of action to build your business.

What are some common methods used for conducting market analysis?

Market analysis includes surveys, focus groups, and analysis of industry-wide trends, government reports, and competitors’ positioning within the market. Market analysis involves deeply examining your industry, objective, potential clients, and brand offerings. 

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Analyze your market like a pro with this step-by-step guide + insider tips

Don’t fall into the trap of assuming that you already know enough about your market.

No matter how fantastic your product or service is, your business cannot succeed without sufficient market demand .

You need a clear understanding of who will buy your product or service and why .

You want to know if there is a clear market gap and a market large enough to support the survival and growth of your business.

Industry research and market analysis will help make sure that you are on the right track .

It takes time , but it is time well spent . Thank me later.

WHAT is Market Analysis?

The Market Analysis section of a business plan is also sometimes called:

• Market Demand, Market Trends, Target Market, The Market
• Industry Analysis & Trends, Industry & Market Analysis, Industry and Market Research

WHY Should You Do Market Analysis?

First and foremost, you need to demonstrate beyond any reasonable doubt that there is real need and sufficient demand for your product or service in the market, now and going forward.

• What makes you think that people will buy your products or services?
• Can you prove it?

Your due diligence on the market opportunity and validating the problem and solution described in the Product and Service section of your business plan are crucial for the success of your venture.

Also, no company operates in a vacuum. Every business is part of a larger overall industry, the forces that affect your industry as a whole will inevitably affect your business as well.

Evaluating your industry and market increases your own knowledge of the factors that contribute to your company’s success and shows the readers of your business plan that you understand the external business conditions.

External Support

In fact, if you are seeking outside financing, potential backers will most definitely be interested in industry and market conditions and trends.

You will make a positive impression and have a better chance of getting their support if you show market analysis that strengthens your business case, combining relevant and reliable data with sound judgement.

Let’s break down how to do exactly that, step by step:

HOW To Do Market Analysis: Step-by-Step

So, let’s break up how market analysis is done into three steps:

• Industry:  the total market
• Target Market: specific segments of the industry that you will target
• Target Customer: characteristics of the customers that you will focus on

Step 1: Industry Analysis

How do you define an industry.

For example, the fashion industry includes fabric suppliers, designers, companies making finished clothing, distributors, sales representatives, trade publications, retail outlets online and on the high street.

How Do You Analyze an Industry?

Briefly describe your industry, including the following considerations:

1.1. Economic Conditions

Outline the current and projected economic conditions that influence the industry your business operates in, such as:

• Official economic indicators like GDP or inflation
• Labour market statistics
• Foreign trade (e.g., import and export statistics)

1.2. Industry Description

Highlight the distinct characteristic of your industry, including:

• Market leaders , major customer groups and customer loyalty
• Supply chain and distribution channels
• Profitability (e.g., pricing, cost structure, margins), financials
• Key success factors
• Barriers to entry preventing new companies from competing in the industry

1.3. Industry Size and Growth

Estimate the size of your industry and analyze how industry growth affects your company’s prospects:

• Current size (e.g., revenues, units sold, employment)
• Historic and projected industry growth rate (low/medium/high)
• Life-cycle stage /maturity (emerging/expanding/ mature/declining)

1.4. Industry Trends

• Industry Trends: Describe the key industry trends and evaluate the potential impact of PESTEL (political / economic / social / technological / environmental / legal) changes on the industry, including the level of sensitivity to:
• Seasonality
• Economic cycles
• Government regulation (e.g. environment, health and safety, international trade, performance standards, licensing/certification/fair trade/deregulation, product claims) Technological change
• Global Trends: Outline global trends affecting your industry
• Identify global industry concerns and opportunities
• International markets that could help to grow your business
• Strategic Opportunity: Highlight the strategic opportunities that exist in your industry

Step 2: Target Customer Identification

Who is a target customer.

One business can have–and often does have–more than one target customer group.

The success of your business depends on your ability to meet the needs and wants of your customers. So, in a business plan, your aim is to assure readers that:

• Your customers actually exist
• You know exactly who they are and what they want
• They are ready for what you have to offer and are likely to actually buy

How Do You Identify an Ideal Target Customer?

2.1. target customer.

• Identify the customer, remembering that the decision-maker who makes the purchase can be a different person or entity than the end-user.

2.2. Demographics

• For consumers ( demographics ): Age, gender, income, occupation, education, family status, home ownership, lifestyle (e.g., work and leisure activities)
• For businesses ( firmographic ): Industry, sector, years in business, ownership, size (e.g., sales, revenues, budget, employees, branches, sq footage)

2.3. Geographic Location

• Where are your customers based, where do they buy their products/services and where do they actually use them

2.4 Purchasing Patterns

• Identify customer behaviors, i.e., what actions they take
• how frequently
• and how quickly they buy

2.5. Psychographics

• Identify customer attitudes, i.e., how they think or feel
• Urgency, price, quality, reputation, image, convenience, availability, features, brand, customer service, return policy, sustainability, eco-friendliness, supporting local business
• Necessity/luxury, high involvement bit ticket item / low involvement consumable

Step 3: Target Market Analysis

What is a target market.

Target market, or 'target audience', is a group of people that a business has identified as the most likely to purchase its offering, defined by demographic, psychographic, geographic and other characteristics. Target market may be broken down to target customers to customize marketing efforts.

How Do You Analyze a Target Market?

So, how many people are likely to become your customers?

To get an answer to this questions, narrow the industry into your target market with a manageable size, and identify its key characteristics, size and trends:

3.1. Target Market Description

Define your target market by:

• Type: B2C, B2B, government, non-profits
• Geographic reach: Specify the geographic location and reach of your target market

3.2. Market Size and Share

Estimate how large is the market for your product or service (e.g., number of customers, annual purchases in sales units and $ revenues). Explain the logic behind your calculation:

• TAM (Total Available/Addressable/Attainable Market) is the total maximum demand for a product or service that could theoretically be generated by selling to everyone in the world who could possibly buy from you, regardless of competition and any other considerations and restrictions.
• SAM (Serviceable Available Market) is the portion of the TAM that you could potentially address in a specific market. For example, if your product/service is only available in one country or language.
• SOM (Service Obtainable Market / Share of Market) is the share of the SAM that you can realistically carve out for your product or service. This the target market that you will be going after and can reasonably expect to convert into a customer base.

3.3. Market Trends

Illustrate the most important themes, changes and developments happening in your market. Explain the reasons behind these trends and how they will favor your business.

3.4. Demand Growth Opportunity

Estimate future demand for your offering by translating past, current and future market demand trends and drivers into forecasts:

• Historic growth: Check how your target market has grown in the past.
• Drivers past: Identify what has been driving that growth in the past.
• Drivers future: Assess whether there will be any change in influence of these and other drivers in the future.

How Big Should My Target Market Be?

Well, if the market opportunity is small, it will limit how big and successful your business can become. In fact, it may even be too small to support a successful business at all.

On the other hand, many businesses make the mistake of trying to appeal to too many target markets, which also limits their success by distracting their focus.

What If My Stats Look Bad?

Large and growing market suggests promising demand for your offering now and into the future. Nevertheless, your business can still thrive in a smaller or contracting market.

Instead of hiding from unfavorable stats, acknowledge that you are swimming against the tide and devise strategies to cope with whatever lies ahead.

Step 4: Industry and Market Analysis Research

The market analysis section of your business plan should illustrate your own industry and market knowledge as well as the key findings and conclusions from your research.

Back up your findings with external research sources (= secondary research) and results of internal market research and testing (= primary research).

What is Primary and Secondary Market Research?

Yes, there are two main types of market research – primary and secondary – and you should do both to adequately cover the market analysis section of your business plan:

• Primary market research is original data you gather yourself, for example in the form of active fieldwork collecting specific information in your market.
• Secondary market research involves collating information from existing data, which has been researched and shared by reliable outside sources . This is essentially passive desk research of information already published .

Unless you are working for a corporation, this exercise is not about your ability to do professional-level market research.

Instead, you just need to demonstrate fundamental understanding of your business environment and where you fit in within the market and broader industry.

Why Do You Need To Do Primary & Secondary Market Research?

There are countless ways you could go collecting industry and market research data, depending on the type of your business, what your business plan is for, and what your needs, resources and circumstances are.

For tried and tested tips on how to properly conduct your market research, read the next section of this guide that is dedicated to primary and secondary market research methods.

In any case, tell the reader how you carried out your market research. Prove what the facts are and where you got your data. Be as specific as possible. Provide statistics, numbers, and sources.

When doing secondary research, always make sure that all stats, facts and figures are from reputable sources and properly referenced in both the main text and the Appendix of your business plan. This gives more credibility to your business case as the reader has more confidence in the information provided.

Go to the Primary and Secondary Market Research post for my best tips on industry, market and competitor research.

7 TOP TIPS For Writing Market Analysis

1. realistic projections.

Above all, make sure that you are realistic in your projections about how your product or service is going to be accepted in the market, otherwise you are going to seriously undermine the credibility of your entire business case.

2. Laser Focus

Discuss only characteristic of your target market and customers that are observable, factual and meaningful, i.e. directly relate to your customers’ decision to purchase.

Always relate the data back to your business. Market statistics are meaningless until you explain where and how your company fits in.

For example, as you write about the market gap and the needs of your target customers, highlight how you are uniquely positioned to fill them.

In other words, your goal is to:

• Present your data
• Analyze the data
• Tie the data back to how your business can thrive within your target market

3. Target Audience

On a similar note, tailor the market analysis to your target audience and the specific purpose at hand.

For example, if your business plan is for internal use, you may not have to go into as much detail about the market as you would have for external financiers, since your team is likely already very familiar with the business environment your company operates in.

4. Story Time

Make sure that there is a compelling storyline and logical flow to the market information presented.

The saying “a picture is worth a thousand words” certainly applies here. Industry and market statistics are easier to understand and more impactful if presented as a chart or graph.

6. Information Overload

Keep your market analysis concise by only including pertinent information. No fluff, no repetition, no drowning the reader in a sea of redundant facts.

While you should not assume that the reader knows anything about your market, do not elaborate on unnecessary basic facts either.

Do not overload the reader in the main body of the business plan. Move everything that is not essential to telling the story into the Appendix. For example, summarize the results of market testing survey in the main body of the business plan document, but move the list of the actual survey questions into the appendix.

7. Marketing Plan

Note that market analysis and marketing plan are two different things, with two distinct chapters in a business plan.

As the name suggests, market analysis examines where you fit in within your desired industry and market. As you work thorugh this section, jot down your ideas for the marketing and strategy section of your business plan.

Final Thoughts

Remember that the very act of doing the research and analysis is a great opportunity to learn things that affect your business that you did not know before, so take your time doing the work.

Related Questions

What is the purpose of industry & market research and analysis.

The purpose of industry and market research and analysis is to qualitatively and quantitatively assess the environment of a business and to confirm that the market opportunity is sufficient for sustainable success of that business.

Why are Industry & Market Research and Analysis IMPORTANT?

Industry and market research and analysis are important because they allow you to gain knowledge of the industry, the target market you are planning to sell to, and your competition, so you can make informed strategic decisions on how to make your business succeed.

How Can Industry & Market Research and Analysis BENEFIT a Business?

Industry and market research and analysis benefit a business by uncovering opportunities and threats within its environment, including attainable market size, ideal target customers, competition and any potential difficulties on the company’s journey to success.

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