How to Prepare a Market Analysis For a Business Plan

By Amy Nutt

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Putting together a business plan can seem like a daunting task. In order to do a thorough job, you must take your time with each of the different components. One of the most important components of a business plan is the market analysis. The market analysis section of your business plan will help you understand the domain in which you plan to operate. More importantly, it will also help potential investors see that you know your market and have a plan that can work within its context. The following information will help you prepare this critical piece of your business plan.

Identify Target Markets

Preparing a market analysis begins with thinking about who your prospective customers are. Some of the factors to consider when deciding who will be included in your target market include:

  • Demographics such as age and sex, race or ethnicity, levels of education and income
  • Geographical location
  • Personality traits, attitudes, preferences and needs
  • Shopping habits such as frequency, loyalty and likeliness to purchase online

When identifying target markets, it is important to define a realistic and proper span. If your market analysis focuses on too extensive a segment, it may be difficult to reach (or prove you can reach) all consumers within it effectively. On the other hand, if your defined target market is too narrow, you may not be able to generate enough business to be profitable.

Getting Started

In your market analysis, it is important to be thorough and to describe your methodology for defining your target market. A good way to start is to ask yourself "who will potentially be a consumer of my goods and/or services?" Saying "everyone" will be too broad and make your job of narrowing down your focus more difficult. Instead, consider your potential market. This is the total number of people who could buy from your business. For example, if your concept is a local flower shop, your potential market might be anyone within an eight-mile radius. If you're also selling over the Internet and offering delivery, your potential market might expand to people who have credit cards and a reason to have flowers delivered in your geographic area.

Once your potential market is defined, it's time to start narrowing down. Now you must figure out how much of your potential market is also within your addressable market. You must ask yourself who within your potential market is likely to have an interest in your product. Going back to the local florist example, perhaps you include individuals of a certain age who have special occasions coming up. Perhaps you also include organizations such as churches and businesses that might have a regular need for flower delivery.

Finally, you etch out your target market from the addressable market. Identify who within your addressable market is likely to buy from you based on demographics, geographical limitations, personality traits and attitudes and consumer habits.

A Final Word

Though the competitive analysis section of a business plan typically follows the market analysis, it is a good idea to perform your competitive analysis before setting your target market in stone. This can help you define a target market that is actually attainable.

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