One of the key steps in starting a new small business is conducting market research.
It's not the first step, of course. Coming up with the right business idea takes that spot. But once you've settled on that, conducting proper market research comes in a close second.
Why is market research so important? Market research is critical to the success of your new business because you don't want to dive in blind. If you do, you might spend a lot of time and money pursuing a business idea that is unworkable because the market is too small, too competitive, or in a state of decline.
So how do you conduct market research for your new small business?
First, you don't need to spend a ton of money on market research firms. Most start-ups don't have the capital to spare for that. The good news is that you can conduct reasonably thorough market research yourself following these 5 simple steps:
- Step 1: Analyze the State of Your Industry, Including Trends
- Step 2: Identify Your Market
- Step 3: Conduct Competitive Analysis
- Step 3: Gather Additional Info As Needed
- Step 4: Apply Your Market Research Findings Intelligently
Of course, we'll go through each of these steps in detail below. It's a lot to cover, so let's get into it.
Related Reading: If you are still struggling to find that perfect business idea, check out my article on How to Start a Business When You Have No Ideas. It includes 9 great tips to help you come up with a business idea that is right for you (including how to come up with novel ideas, find untapped markets and trending businesses and much more). I also include an extensive list of business ideas that you can explore.
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The information contained in this post is for informational purposes only. It is not a recommendation to buy or invest, and it is not financial, investment, legal, or tax advice. You should seek the advice of a qualified professional before making any investment or other decisions relating to the topics covered by this article.
What is Market Research?
Before we tackle how to conduct market research for your new small business, it's important to understand precisely what market research is when it comes to small businesses.
According to Investopedia, market research is the process of determining the viability of a new service or product through research conducted directly with potential customers. Market research allows a company to discover the target market and get opinions and other feedback from consumers about their interest in the product or service.
While this definition works great for a mega corporation that wants to launch a new product line, I think for an individual entrepreneur who is just starting out, market research essentially consists of figuring out whether there is a decent market for your business idea (whether that idea is an amazing new invention or just opening up a new store around the corner).
In other words, I don't think you don't need to hire a fancy marketing firm to interview a bunch of focus groups to determine if your Ethiopian restaurant is going to be well received in your local neighborhood. Now if you are introducing a truly new product into the world, you may want to conduct more traditional market research, like surveys, interviews, focus groups, etc., so can gauge how potential customers may feel about the product. But for most aspiring small business owners, that's not going to be necessary.
Ok- so now that we've got the introductory stuff out of the way, let's get into the 5 steps.
Step 1: Analyze the State of Your Industry, Including Trends
The first thing you want to do is research the state of your chosen industry. What is its overall size? What direction is it heading? Is it trending in the right direction?
I like to use Google Trends as a starting point for determining this. Just go to Google Trends and type in your industry or business to see whether search traffic for that type of business is trending up or down.
That should serve as a pretty good barometer of how popular that type of business is currently and its trend over time. I also like checking out reddit forums that discuss the industry. There are tons of experts that regularly post on reddit and they are unfiltered with their opinions. You can gain some really great insider knowledge by tapping into their expertise.
This type of industry research should give you a high level overview of the health of your chosen industry and a sense of comfort if the research shows that the industry is large, robust and growing.
Step 2: Identify Your Market
After you have researched and analyzed the macro level data for your industry, you want to scale down and try to find your target market within that industry. In other words, you need to figure out who your actual customers are going to be and whether there are enough of them to support your business.
Try to imagine your target customer. Is the target customer male or female? Older or younger? Wealthy, middle class, or lower income? What do they do for a living? Some of the key demographics you may want to examine include the following:
- Marital or family status
If you have a clear picture of your business and its value proposition, it should not be hard to figure out who your target customers are. You may want to create customer “personas” based on your research that will help you categorize the key customer types that will be using your products or services.
Armed with all of this knowledge, conduct some research into the demographics of your target location (if you are opening up a physical location). See if there is going to be demand for your business based on who is living near it. I love city-data for this task. It's free and has tons of useful demographic information for a given city. It's a great place to start your market research.
For example, if you are opening a laundromat, you want to make sure that the renter to home owner ratio works (hint: you want more renters) and you don't want to open one up in an affluent neighborhood because most residents will already have a washer and dryer in their home or live in high end apartments that provide them in the unit or in the building.
If your business is going to be online, you can use social media channels like Facebook, Twitter, LinkedIn, Pinterest, etc. that are popular with your targeted customer base. Many of these channels allow you to purchase ads targeted to specific groups of people and also provide estimates on the potential audience size. They often give you this information before you buy the ad, so you can get it for free.
If you use this strategy across multiple social media outlets, you should be able to get a pretty good sense of the size of your target customer base.
Once you know who your customers are and the size of the target market, you may want to dive a little deeper into how your customers behave. These behavioral tendencies can include buying habits (are they mostly online shoppers, or do they prefer going to the store, are they cost conscious or are they willing to pay more for quality, etc.), needs, routines and other information that may help you target them better.
Social media is a great (and free) way to gauge customer tendencies – for example, it is easy to conduct a poll or survey on one or more relevant Facebook groups covering your chosen industry and gather some terrific data on preferences, buying habits, etc.
Remember to lurk for a bit on the Facebook group and get to know the group's norms. Contribute to conversations and provide value to the group before you start asking for favors. You don't want to come across as spammy.
Another great free strategy is to use Quora to ask questions relating to the business or industry. By asking the right questions, you can get really great insights into potential customer preferences and behaviors.
Step 3: Conduct Competitive Analysis
You also want to research the competition.
If you know you are going to be the only game in town, that's awesome. But in most cases, you will be facing some degree of competition. If you live in your target area, you probably know who your major competitors are going to be. But to get a more complete sense of the competition, you can go on Google.
Sticking with the laundromat example, you can simply type in “laundromats near me” (or whatever city you are researching) and Google will pull up a list of local businesses that match your search along with a map that has pins on where those businesses are located.
You can also go on Yelp and type in a similar search. Between the two, you should be able to get a very good sense of the competitive landscape in your area.
When your business idea is not centered around a brick and mortar establishment, your competition is likely going to be online. Competitive research is much simpler in that case. You simply need to type in your business idea on Google and see the top results.
Once you know who your competitors are, it's time to dig deeper. You should try to discover the following about each of your competitors:
- Find out what products or services they are offering
- How they are pricing their products and services
- How they are marketing their products and services.
- How they've designed their website
- What types of reviews they are getting (this is important info – you may want your business to solve any recurring complaints you see)
- What their refund policy is, and what other key terms they have in connection with their product.
- What are their strengths and weaknesses (some may focus on being the lowest priced, others may focus on offering great customer service, etc.). A more formal framework for doing this is called a SWOT analysis, which stands for strengths, weaknesses, opportunities and threats.
Getting a deep understanding of who your competitors are and what they are doing will help you create a roadmap on how to structure your business. It should also give you some great ideas on how you can exploit any gaps or weaknesses among your competitors.
Step 4: Gather Additional Data As Needed
When conducting market research, the more data you have at your disposal, the better. This article provides you some great places to get started, but if you want to conduct a really robust market research project, you should draw from as many quality sources as you can.
Luckily, there are tons of other market research resources out there. Check out this great list of market research resources provided by the SBA if you want to explore more options.
Of course, some of the more traditional (and hands-on) ways to conduct market research include surveys, interviews, questionnaires, and focus groups.
Seems like a bit of overkill to me if you just want to start up a standard business like a gas station or grocery store, but it can work well if you are coming up with a new business idea or product and want to test customer preferences, demand, etc.
Step 5: Apply Your Market Research Findings Intelligently
After you have done the hard work of conducting thorough market research, don't let that research stand idle.
Carefully pore over the results.
Try to find cracks in the marketplace that you can exploit. Can you be a price leader in your market? Should you go upscale and develop a high end product or service because no one else is there? Should you focus on convenience and better customer experience? Should you develop a product that solves a common complaint about products in the industry? All of these are legitimate areas to explore.
Your market research can be an amazing tool to help guide your business to success, so put it to good use!
So there you have it – 5 simple steps to conducting market research for your small business. Now keep in mind that conducting market research is only one step (although an important one) in setting up your small business.
If you want to a complete roadmap on how to start your business, check out my ultimate beginner's guide to starting a business. In that article, I walk you through every step of the process, from ideation all the way to launch. Definitely worth a read!