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The purpose of the market analysis is to help you better understand the dynamics involved in selecting and targeting customers for your product.

To conduct the market analysis, you need to consider and then describe the key factors that affect your marketplace. Each of the following five steps of the market analysis covers a different market facet relating to the customer:

1. Market issues

Consider the issues that may affect your market’s customers and offerings. Many of these issues will be revealed by conducting an environmental (or, PEST) analysis and an industry analysis. Both of these focus on the high-level drivers of change in a market—the key trends and players—and how they impact the fundamental supply-and-demand relationship in a marketplace. Are there broad trends or industry structures that create particular opportunities or threats for your business?

2. Market segments/target customer

Evaluate various aspects of the market and identify the most attractive target customers or segments. In the Early Market, it is especially important to focus on defining the ideal customer, as it is hard at this stage to define general criteria along which to segment the market. Rather than risking excluding any parts of the market, focus on defining a target customer on the basis of the needs you can meet. Later you can look at defining market segments.

3. Needs and demands

Highlight any gaps you see in the current market—that is, any circumstances where customers are going about their business (either as consumers or as a business) in a way that is slower, less effective, or more expensive or inconvenient than if they had your product. Use the methods described in the article Market Research Techniques to identify these unmet needs

4. Switching costs

Weigh the difficulties and costs involved for potential customers to switch from their current supplier/solution to your offering. Examine key elements such as whether your potential customers are locked in to a long-term contract with existing suppliers, and whether there exists a deep technology or organizational integration with your competitor(s). The presence of these will create barriers for customers to change suppliers.

5. Revenue attractiveness

Consider the elements that affect pricing power and profit margins (the most relevant will be covered in the industry analysis). Remember to evaluate the revenue attractiveness in light of your business model. Many successful companies (for example, Google) have created an attractive revenue stream by combining their technology advantage with an innovative business model.

The market analysis plays an important role in clarifying the factors that affect your potential target customers and their ability to move from one vendor to another. A careful market analysis will help you better plan who to target first, and how to craft your offering.