Start-up business plan essentials: Sizing up the relevant market
Are there enough customers for your start-up? We look at how to measure your potential market to help you prove the viability of your business idea
The size of the market you intend to get into is a key figure that will be used by anyone reading your business plan, yourself included. That figure represents the total scope of the opportunity ahead and is the starting point in shaping your marketing strategy. Now, in principle, this is not too difficult.
Desk research will yield a sizeable harvest of statistics of varying degrees of reliability. If bread is your business you will be able to discover rapidly that the consumption of bread in Europe is £10bn a year. But bread is a very broad industry. The industry-wide definition of bread includes sliced and unsliced bread, rolls, bakery snacks and speciality breads. It covers plant- baked products, those that are baked by in-store bakers, and products sold through craft bakers.
Assessing the relevant market, then, involves refining global statistics to provide the real scope of your market. If your business only operates in the UK the market is worth over £2.7bn, equivalent to 12 million loaves a day, one of the largest sectors in food. If you are only operating in the craft bakery segment, the relevant market shrinks down to £13.5m; this in turn contracts still further to £9.7m if you are, say, only operating within the M25.
This is the hurdle that nine out of every 10 business plans fails to cross. Entrepreneurs like to think big, but a business plan based on attacking the £10bn European bread market, rather than the much smaller near £10m market for craft bread products they are really going into, will lack all credibility.
How to measure your market and build it into your business plan
Customers have different needs with different levels of intensity. Everyone has safety in mind, but you will be more concerned about that when you chose an airline than when you buy a pen. That in turn means that you need to organise your marketing effort so as to address those individual needs; however, trying to satisfy everyone may mean that you end up satisfying no one fully.
The marketing process that helps us deal with this seemingly impossible task is market segmentation. However not all market segments are equally attractive, or perhaps even worth tackling.
These are four useful rules to help decide if a market segment is worth building into your business plan.
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- Measurability. Can you estimate how many customers are in the segment? Are there enough to make it worth offering something ‘different’?
- Accessibility. Can you communicate with these customers, preferably in a way that reaches them on an individual basis? For example, you could reach the over-50s by advertising in a specialist ‘older people’s’ magazine with reasonable confidence that younger people will not read it. So, if you were trying to promote Scrabble with tiles 50% larger, you might prefer that young people did not hear about it. If they did, it might give the product an old-fashioned image.
- Open to profitable development. The customers must have money to spend on the benefits that you propose to offer. One of the fastest growing market segments comprises occupants of retirement homes, but there is not much evidence that they have the cash to spend on new products and services, however worthwhile or desirable.
- Size. A segment has to be large enough to be worth your exploiting it, but perhaps not so large as to attract larger competitors.
Segmentation is an important marketing process, as it helps to bring customers more sharply into focus, classifies them into manageable groups, and allows you to focus on one or more niches. It has wide ranging implications for other marketing decisions. For example, the same product can be priced differently according to the intensity of customers’ needs. The first- and second-class post is one example, off-peak rail travel another.
It is also a continuous process that needs to be carried out periodically, for example when strategies are being reviewed.
How to divide up your market: Customer types
Here’s several ways by which markets can be segmented:
This approach divides individual consumers into social groups such as ‘Yuckies’ (young, unwitting, costly kids – who are still at home at 30), ‘Yuppies’ (young, upwardly mobile professionals), ‘Bumps’ (borrowed to-the-hilt, upwardly mobile, professional show-offs) and ‘Jollies’ (jetsetting oldies with lots of loot).
These categories try to show how social behaviour influences buyer behaviour. Forrester Research, an internet research house, claims that when it comes to determining whether consumers will or will not go on the internet, how much they’ll spend and what they’ll buy, demographic factors such as age, race and gender don’t matter anywhere near as much as the consumers’ attitudes towards technology.
Forrester uses this concept, together with its research, to produce Technographics market segments as an aid to understanding people’s behaviour as digital consumers. Forrester has used two categories – technology optimists and technology pessimists – alongside income and what it calls ‘primary motivation’ (career, family and entertainment) to divide the whole market. Each segment is given a new name: ‘Technostrivers’, ‘Digital Hopefuls’ and so forth.
This process recognises that different people can get different satisfaction from the same product or service. The classic marketing story used to explain this is that of toothpaste companies which target those motivated largely by health emphasising clinical benefits, while whiteness as cosmetic appeal is pitched at another group. Lastminute.com claims two quite distinctive benefits for its users. First, it aims to offer people bargains that appeal because of price and value. Second, it offers the benefit of immediacy.
This idea is rather akin to the impulse buy products placed at checkout tills, which you never thought of buying until you bumped into them on your way out. Whether 10 days on a beach in Goa or a trip to Istanbul are the types of things people ‘pop in their baskets’ before turning off their computers is another question.
This form of segmentation arises when different locations have different needs. For example, an inner-city location may be a heavy user of motorcycle dispatch services, but a light user of gardening products.
This groups together commercial customers according to a combination of their geographical location, principal business activity, relative size, frequency of product use, buying policies and a range of other factors.
This segments markets using more than one variable. It can give a more precise picture of a market than using just one factor.
Specifiers, users and customers
When analysing market segments you should also keep in mind that there are at least three major categories of people who have a role to play in the buying decision, and so whose needs have to be considered in any analysis of a market.
- The user, or end customer, will be the recipient of any final benefits associated with the product.
- The specifier will want to be sure the end users needs are met in terms of performance, delivery and any other important parameters. Their ‘customer’ is both the end user and the budget holder of the cost centre concerned.
- The non-consuming buyer, who places the order, also has individual needs. Some of their needs are similar to those of a specifier, except they will have price at or near the top of their needs. A particular category here is those buying gifts. Once again, their needs and those of the recipient may be dissimilar. For example, those buying gifts are as concerned with packaging as with content. Watches, pens, perfumes and fine wines are all gifts whose packaging is paramount at the point of purchase. Yet for the user they are often things to be immediately discarded.
For more help on understanding your market and creating a business strategy, check out our other start-up business plan essentials: Testing your business idea, Understanding your customers, Understanding your market, Tailoring to different audiences, Preparing for change and growth and Preparing for the oral presentation.
Business Plans for Small Businesses, published by Crimson Publishing, is available to buy now.