Market Analysis For Launching A New Company
This is the second article of our detailed marketing research process review series. After the first step, the exploratory research, we ended up with a list of things we should investigate and clarify during marketing research. The first and most obvious thing is the market itself. This research stage can be notionally divided into market analysis and competitive analysis. In the first part, we will focus on market analysis steps.
Any market, whether you sell rocket launchers, cars, pillows, or lollipops, is a complex space with various dimensions. It, as an entity, has a number of characteristics that are quite measurable. The result of such measurements can usually be heard in conversations in phrases akin to “The market is shrinking”, “The market is overheated”, or “The market is on the rise”. In this article, we will explain, how to conduct the market analysis and how the results will impact your business.
Market size is composed of market volume and market potential. Market volume represents all the sold products in a specific market. It depends on the number of customers and the demand level. The market potential represents the highest value of the demand, that the particular market can reach. Opposite to real market capacity, it takes into account all the potential customers. The bigger market gives more opportunities, but also more potential competitors. Also, more competitors mean more rival products to outrun and stand out of.
So, let’s take a look at our example with a high-tech cervical pillow. The latest data reveals that the world market for such pillows is valued at almost $4 billion in 2020 with projected revenue of $5 billion for 2025. The annual growth rate shows a stable 5+% from 2017 to today. Almost half of the market share is in North America and combined with Europe’s share, it equals over two-thirds of the whole world market of orthopedic pillows. Sounds big, but is it? Let’s compare it to the worldwide bedding market’s revenue in 2020 was about $74 billion. So the market for specialized orthopedic products is only 5.4% of the bigger related market.
Let’s figure out, just for the sake of example, how big your market can be. Your high-tech pillow costs $100, which is way more than average pillows for $30-50, which makes it not an ordinary purchase. Therefore, it is worth focusing on people with an average and above-average income. Your production site and office are located in a city with a 1 million population. 35% of the population are adults and 40% of them fall into the middle or upper-middle income category. Hence, the estimated market capacity of your city is 1M×0.35×0.4 = 140,000.
Trends are the guiding hand of any market, and defining what your customer likes the most is significant. But in our case, the main trend we should take into account is that 2 of 3 adults in the USA are suffering from episodic or constant neck or back pain. According to the Hartman Group marketing research agency, the leading market trend of comfort products with medical features is that the same 2 of 3 adults in the USA are seriously concerned about their health.
Combining the information we get here with an approximate market capacity we figured in the previous stage, we can estimate, that 140,000×60%=84,000 – at least 84 thousand people can be interested in your offer.
Market growth rate
To analyze this factor, you need to get solid information about market development through the last years and extrapolate this data into the future. Or, to trust the opinion of professional researchers and use the information from industrial reports, like in our case. As was mentioned in the “Market size” section, the market for cervical pillows shows an average 5% growth rate. So, the indicators are promising.
Also, the crucial factor that should be taken into account, is what stage of development the market is in right now. Any market has a life cycle. Fresh new markets are full of opportunities and unshared space. Old markets are oversaturated, lack growth drivers, and stagnating. Analyzing the curve of the growth rate, you always can clearly see the explosive growth of the young market, driven by the hype (more or less in every market). Then the maturity period of prosperity, then the stagnation and fading away. Of course, some markets stay stable longer, than others. But eventually, any market will either die out or transform into something new.
The bedding market is old as the world, but the overall concern of a healthy lifestyle is quite new – only for the last 10-15 years. Orthopedic pillows appeared as a solution for people with health problems. Now such pillows are bought to prevent health issues in the first place. As a prediction, one can say, that in the nearest future orthopedic properties will be included as a usual feature in pillows ubiquitously.
Industry cost structure
Here you need to define, how the price of the product is formed exactly. Each step of existing or planned production, promotion, and distribution should be written down and analyzed. At this stage, you can clarify, which step you spend the most, which step can be or should be cheapened, or on which step you can afford to spend more.
For example, in our case of the high-tech pillow, it is made of 3 components: an injection molded rubber grid with a soft foam rubber base, and all that is wrapped in a microfiber pillowcase. Sounds simple, but if to think, each component requires a separate production line.
Foam rubber is the easiest one, you can just order it in large rolls and cut forms by yourself. For a clean cut, it is good to purchase or rent an industrial-type cutting machine. So, expenses on materials, cutting machine, and personnel. Special patented rubber goo, which the basis of your pillow is made of, obviously can’t be produced somewhere else. So you will need a stable supplier of chemicals, the machine, which will create the mold, and the employee, who will operate the machine.
But a pillowcase is just a piece of fabric, tailored in a particular way with a zipper. Not considering labels and stickers with laundry rules, the pillowcase can be tailored by any professional tailor. In that case, you don’t need to buy a sewing machine, hire a tailor, dealing with a fabric supplier. You can simply find a decent contractor and order wholesale tailoring of pillow covers because it can be way cheaper.
When the company will reach good selling capacities, you will open your own sewing workshop. But at the start, why waste limited resources when you can hire professionals with well-established production for a fair price? The same applies to the improvement of retail premises, the development of advertising campaigns, or market research. 🙂
This factor is a keystone. Is the market you are planning to enter even suitable to create profits? It is considered good practice to evaluate the market profitability with the Porter’s Five Forces model. It includes:
- Competition in the industry – how many competitors can you have and how many of them do you have to fight with?
We will get into this detail in the next article, the second part of the market analysis.
- Potential of new entrants into the industry – how easy for the new company to enter the market?
The easiness implies how fast one can produce/get the goods, and how fast one can set up promotions and sales. In our case, setting up the production line of cervical pillows isn’t a two-day action. New players can turn into resale, but that won’t create substantial competition, because resellers are limited by the supply of ready products.
- Power of suppliers – how diverse is the choice of suppliers, and how easy for a company to find or switch to a new supplier?
As we mentioned, our high-tech pillow is made of three pieces. If the rubber part of the pillow isn’t made of some exotic goo but of some widely used chemicals, it is not so difficult to find a new supplier of components. Another issue is the facility of access from the supplier to you. But, as we stated, the production site of our startup is located in a city with a 1 million population. So, the logistics and availability are developed enough, to meet all your supply needs.
- Power of customers – how high the demand is, how strongly customers could influence the price with their demand; how many customers there are in this particular market, and how significant each customer is.
If you are selling antiques to a dozen of collectors, each of them is crucially valuable for you. If you are selling some FMCG product to tens of thousands, the loss of a hundred customers could be not tangible.
- The threat of substitute products – how many companies are there, which can provide a substitute to your product;
Except for companies, that offer the same or common specialized cervical pillows, there are other huge rivals, who you can confront – shops, that offer the usual dull pillows, stuffed with cotton, goose feather, or whatever. People are usually busy. And despite the 61% of people, concerned about health issues, not everyone is concerned enough to make research and find a specialized pillow. Often, people don’t bother, give up and buy a casual pillow. To overrun the human natural urge of sticking to habit, you need to emphasize the advantages of your specialized product against the casual one.
If after analyzing your business idea/startup through this scheme and found out at least one of those items shows a strictly negative prognosis, you should reconsider your business model.
Start with exploring all the existing ways of distribution for your region. Direct sells from a store or showroom, placing an order by phone or maybe even mail, or what is more common for today, via the online shop. Any of them will do, but some are more convenient for your customers, and some – are for you. You need to find the golden mean.
The obvious solution for our pillow is to create an online shop. But then the question arises – should you create some showroom, or maybe cooperate with some shops with the drop-shipping model? In the next article, we are going to speak about defining the target audience, but, looking ahead a bit, you can define do you really need to create an offline store. When you are going to conduct focus groups and surveys, you can define, how much people tend to evaluate your product organoleptically. To be exact, by touch, by look, or even by smell, because some people don’t or do like the smell of rubber.
Where to find information
The main source of information for market analysis is the Internet. Public reports, ratings, numerous research agencies with free or paid content, and of course, the analysis of the most popular search queries. A big part of reliable information, useful for market analysis, can be found in government business statistics. Ministry of economics reports for industries, and official sociological and demographic statistics.
For example, one of the useful reports about the state of the cervical pillows industry, that we used for our imaginary startup, was created by a private research agency. And even despite the full report costs almost $5000, even free samples provided useful information. But if you are planning to bet your money on your business, spending such an amount of money could be worth it. Of course, if it is provided by respectable specialists. It can provide fresh detailed information not only about the state of the market and trends but also about your direct or indirect competition. Analysis of which will be the topic of our next article.
“Marketing research” series:
- Exploratory research
- Study your market (you are here now)
- Competitive analysis
- Define your customer – Create a buyer persona
- Formulate the unique value proposition
- Define communication channels with a potential client
- Define your marketing strategy
- Test your product and strategy
- Implement PDCA methodology