Start-up business plan essentials: Understanding your market
How to size up your business opportunity and use market segmentation to tailor your efforts
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.
Measuring the relevant market
Now, in principle, this is not too difficult. Desk research (secondary data available in published form, accessible either online or via business sections of public libraries throughout the UK) 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.
Segmenting the market
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.
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.
1. Measurability. Can you estimate how many customers are in the segment? Are there enough to make it worth offering something ‘different’?
2. 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.
3. 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.
4. 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.
For more help on understanding your business’ market and creating a plan, check out our other start-up business plan essentials: Testing your business idea, Understanding your customers, Sizing up the relevant 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.