Great ideas are left by the wayside everyday because people aren?t sure if their ideas are worth the risk. They also aren?t sure how to go about finding out if their ideas are worth the risk. Though it is no doubt a tedious task, performing market research is the only way you can thoroughly assess whether or not your business idea could be a success. Moving forward with your idea hinges on your research and assessment of the competitive marketplace. It is a necessary step in the business process. So how do you actually do it?
Well, it's not as difficult as many people think. PartnerUp has compiled a five-step process that will guide you through the market research phase of you business. Follow these five steps and you will be well on your way to assessing the future profitability of your business.
When performing market research you must first do a quick and dirty evaluation of your business idea?s potential. Find five potential customers. They can be either people or companies, so long as they are truly representative of your target customers. Make sure each signs a non-disclose agreement, which prohibits them from sharing the information you give them and therefore protects your idea. Once that is taken care of, proceed to tell them about your product or service. Don't overload them with information, just give them what they need to decide if they would be willing to be a customer or not. Then ask them their opinions. Would they buy your product/service? If so, why? If not, what can you do to make it more enticing? Be sure to make it clear that you want their complete honesty.
If at least one of the people or companies said they would be willing to buy your product or service, then get moving and put together some preliminary market research. First type your idea, or variations of your idea, into any of the major search engines (Google, Yahoo, etc.). What you are doing here is determining if someone is already providing your product or service. Make a thorough list of each company that can be considered a competitor. Note it's Web address, location, product/service offering and pricing. Assemble this information on a spreadsheet.
Once the information is assembled, answer the following questions:
How many competitors are in the marketplace?
What do you think is the total sales per year for your industry?
How much market share does each competitor have?
Does it look like the companies in this market are making money (i.e. are they situated in big, beautiful buildings or in someone?s garage)?
It is not enough to say that since another company can sell it's product or service for a certain amount that you can sell for slightly less. That company could be improperly costing it's product or service, or it could be offering the product or service at a loss. So don't skip this step.
If you are providing a service, calculate exactly how much it will cost to provide it. Add together the direct labor costs, all of your overhead and any other costs you incur. Calculate overhead carefully. Account for phone lines, internet connectivity, computers, equipment, supplies, etc. Don't make the mistake of underestimating the cost of providing your service.
If you are offering a product, contact engineers and contract manufacturers and have them give you prices for designing and producing your product. Add this number to your total overhead and expense. Once you have a total, make an educated guess as to how many products you expect to sell. Divide the total number of expenses by the number of products you expect to sell. That will tell you at least how much you need to sell your product for in order to make a profit.
If you?re planning on selling your product or service through a retail outfit, call the company and find out who it's buyer is. Call the buyer and ask for a brief meeting. Large companies like Target, Best Buy or Macy?s are actually very approachable. They have hundreds of buyers whose job it is to find the hot new trends and items. So don't be afraid to discuss your ideas with them. If they're interested, tell them you are in the exploratory phase of you business. Then ask them a few questions. What are some rough guidelines regarding the sort of margin they expect? Do they expect co-op marketing money (which means you paying for a share of the marketing efforts)? Do they sell on consignment, or do they purchase products outright? This information should allow you to make a complete analysis.
If you're planning on selling your product or service through a sales force, find a few salespeople in similar but non-competitive lines of business. Get together with them so that you can ask them what sorts of commissions they make, how sales are handled and what they expect for a commission and final selling price for your product or service.
If you're planning on selling your product or service through direct marketing, call a few small to mid-sized marketing firms that specialize in direct marketing in your industry. Set up a meeting to hear about their qualifications. Ask questions and get their input on the cost of marketing your product or service. Tell them you are in the exploratory phase and want rough numbers. That way they will let their guard down and offer honest advice.
Now it's time to calculate all the variables. Add up the total cost of producing and offering your product or service, the selling cost (or the retailer?s margin expectation) and other expenses incurred. Now compare your cost to that of your competitors. If your product or service is more expensive, don't immediately panic. Your product or service may be distinct from that of your competitors, in which case people may be more willing to pay extra. If your product or service is the same as your competitors but is still at a higher price, consider it a red flag.
Now that you?ve thoroughly assessed the competitive marketplace, it's time to decide whether or not it is worth moving forward with your business. Your assessment may take you a week or more to complete, but in the end you will appreciate the effort put forth.
