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Our topic for this article is market analysis. This is Part 2 of 5 of our ongoing series on preparing your own marketing strategy.
Again, we will use the proposed furniture marketing business in discussing market analysis.
What is market analysis
Market analysis is the study of the quantitative and qualitative characteristics and dynamics of a specific market within an industry to determine its attractiveness for a particular business.
Key elements of market analysis
The industry – an overview
This is a general description of the industry you are planning to enter in. An industry is a group of companies having the same primary business activities.
The furniture industry is composed of companies engaged in the manufacture, importation, wholesaling, and retailing of furniture.
Target market segments
Target market segments are your potential ideal customers/clients.
In the case of the proposed furniture marketing business, these segments are the residential households and the business sector.
The demographic profile of the residential households includes their location, number of family members, total income level, and sources of income.
A household with a high income would normally prefer high-end solid wood furniture.
The demographic profile of the business sector includes their location, number of employees, annual revenue, and business category.
A company with a large number of employees would usually purchase generic office furniture to save on cost.
The psychographic profile of the residential households includes its values, opinions, interests, beliefs, and attitude toward a product or line of products.
A household which belongs to social Class A would mostly consider using branded high-end furniture that reflects their social and economic status.
The psychographic profile of the business sector is primarily based on the motivation, culture, and corporate values of the business owner or key managers.
A business which puts a premium on cost-saving will almost always purchase generic office furniture that is functional and modestly priced.
Market size usually refers to two values – the total number of units and the total sales value – that your target market segments can potentially buy.
These data may be obtained from a number of sources such as relevant government agencies, industry associations, and major industry players.
While data from the above sources may be inadequate to establish a clear market size, you may do your own calculations particularly of the value of the total market.
What I normally do is to take the average price of each furniture piece usually from the biggest furniture retailer.
Then determine how many furniture pieces each of the targeted household and business establishment will purchase in a given time frame. For example, one dining set every five years; or, one office desk every three years. You may be able to get also the purchase frequency from the retailer, from an accountant friend familiar with the economic life of office furniture, or from friends who can tell you how frequent they change furniture at home.
You may calculate the annual market value by multiplying the average price of the furniture by the purchase frequency factor and then by the number of potential household customers or business clients.
Market growth rate
The projected growth rate of your target market segments directly impacts the growth of your proposed business.
The simplest way of determining the market growth rate is to extrapolate historical data from secondary sources such as government, industry, and major players. However, the resulting figures may not be reliable enough considering the constant changes in the market.
Another approach is to consider the growth drivers in the industry. These growth drivers may include population growth, improvement in household per capita income, the rate of urbanization, business incentives offered by new urban centers, increasing awareness of sustainable development, adoption of new technologies, and others that can directly impact the industry growth.
An improved economic climate resulting in higher per capita income may drive households to buy better quality furniture; or, an increasing awareness to preserve the forests can motivate households to buy more fiberboard furniture. These developments would result in a positive growth.
In other cases, the impact may be detrimental to an existing product line resulting in negative growth. The growing use of laptops in offices in lieu of the desktops reduced the sales of the erstwhile computer desks.
Market trend refers to current and forthcoming changes in the market. These changes usually create opportunities or threats to existing and planned businesses.
The use of cheaper and more versatile wood substitutes has significantly reduced the price of furniture and has enabled manufacturers to easily come out with new furniture designs with creative finishes using different laminates.
Industry cost structure
The industry cost structure shows the various costs in the value chain of your proposed business.
In the case of the furniture marketing business, we assume that the proposed company will import all its furniture lines, wholesale it to trade channels, set up its own retail brick-and-mortar stores, and sell directly to corporate clients.
Its value chain will look something like this:
Imports Logistics → Operations → Distribution Logistics → Marketing & Sales → Customer Support
Each of these functions in the chain incurs costs. It is important then that you understand well the components and dynamics of these costs so you can be competitive in the market.
Th economy of scale is a popular concept here. Importing a big volume of furniture will save you a lot of cost in shipping, customs brokerage, handling, and inward shipping. Delivery in bigger bulk to distribution channels will result in significant savings in outward shipping and handling costs.
Looking at the value chain from another perspective, you can also determine where you can create superior value for your customers. For example, you can consider setting up regional depots as part of your distribution logistics that will enable you to cut down delivery lead time to far-flung markets while existing competitors deliver from a central warehouse. This setup creates additional value for customers by providing them with quicker delivery.
The value chain concept gives you an opportunity not only to analyze your cost structure (to save on costs) and but also to determine where you can create superior value for your customers (to be uniquely better in some ways). Both of these perspectives will provide your company with a competitive advantage. We will discuss competitive advantage further in the topic of strategy (Part 4).
Other marketing authors discuss additional elements under market analysis. These topics include competition, competitive analysis, barriers to entry, regulations, market profitability, distribution channels, and key success factors.
I will discuss competition and competitive analysis when we tackle organizational analysis in Part 3. This way, we can compare your proposed company versus your competitors.
Importance of market analysis
Conducting a market analysis enables you to:
- Get a clear grasp of your target market; know who and what you will be dealing with;
- Determine that the products you will be offering will fill real and continuing needs and you can market it in a profitable and scalable way;
- Have facts and figures to back up your financial projections particularly if you are seeking to fund your startup through loans or equities;
- Reduce risks of failure by learning more about opportunities and threats in the market and the industry;
- Review your written analysis periodically and update it based on new developments.
I am sure you can inject more creative and innovative ideas into this discussion. Please feel free to do so by sending me your comments.