Whether you are starting a new business, growing an existing company, or just trying to recover from a pandemic, knowing your customers is vital to success. If you don’t understand your customers, you won’t know whether your product or service solves their problem or is something they actually will spend money on. And you won’t know whether your marketing messages and channels will be effective in reaching them.
Conducting market research provides key insights to help answer those questions. Yet, as I assist clients in developing business, marketing and financial plans, one of the most important yet often neglected steps is market research and analysis. Sure, doing effective market research requires some time. However, doing market research up front can save a lot of time, money and headaches later on.
What is market research?
Market research is simply the process of gathering, analyzing and interpreting data about your target market and the industry as a whole. It helps you identify and define your ideal customer, their problems, buying habits, potential market size, competition, overall industry trends and conditions
Market research generally consists of primary and secondary research. Primary research is the collection of direct first-hand information from your potential or existing customers. This is the type of research you should do when validating your business idea. Primary research includes interviews, focus groups, brand awareness and customer satisfaction interviews.
Secondary research essentially covers everything else. It includes internal sources of information such as financial statements, commercial sources such as industry reports and public/government sources such as census data.
Neither primary nor secondary research is better than the other, they simply serve different purposes. To get a complete picture, a mix of primary and secondary research should be used. When you’re first starting out, focus on conducting primary research to validate your business. Compare those findings to secondary resources such as industry trends and local market reports.
1. Identify your target market
Your target market is simply your “ideal customer:” someone who has the problem that you solve and is willing to spend money on your solution.
Ask yourself these questions: Who are they? What common traits do they share? These might be demographic traits such as age group, gender, income levels, or locations. Or they might be psychographic traits or groups of people who have similar interests or spending patterns.
In reality, your business may have several potential target markets, but it’s usually best to limit your analysis to two or three. This is what’s called market segmentation. You might end up with slightly different marketing messages for each market segment or even customize your product or service for each segment.
I would recommend that every business create a buyer persona or avatar for each target market. A persona is a description or profile of a person who embodies the key aspects of your target market and helps to convert your dry research into a living, breathing person.
2. Talk to your potential customers
Once you have identified your target market, you need to get out and actually talk to people in your potential target market. This is perhaps the most important step in the entire process.
Online surveys and other research can be helpful, but they are no substitute for actually talking to potential customers. You’ll gain more insight into your customers and how they make buying decisions by actually talking with them, preferably in person. That’s why participants in the Innovate ND grant program are now required to complete 90 potential customer interviews during the first three phases of the program.
You may be tempted to skip this step or take a shortcut by interviewing only family and friends. After all, it’s intimidating to talk to strangers, even for the bravest among us. Nobody wants to hear that her idea doesn’t really solve the problem or that the perceived problem really isn’t a problem at all. But isn’t it better to discover this information before investing a lot of capital in developing and marketing your product or service? This single step can mean the difference between success and failure.
Before you conduct your interviews, be sure to have several closed and open-ended questions ready to go. Interview questions can be broken down by the following categories: customer segmentation, problem discovery, problem validation, product discovery, product optimization and ending interviews. A great resource to help formulate your interview questions is The Ultimate List of Customer Development Questions, by Mike Fishbein.
3. Find out if your market is big enough
Once you have identified and validated your target market, you need to do research to figure out if your market is large enough to sustain your business. If there aren’t enough potential customers who are willing
to buy your product or service, then you may need to reconsider your offering.
To figure out if your market is big enough, use the attributes you defined in the target market step and then figure out how many people meet your demographic and psychographic criteria in your desired service area. Some helpful resources are listed at the end of this article.
If you are targeting an established market, you can do industry research based on how much people buy the existing offerings. In this case, you want to look for industry reports and read trade publications for your specific industry identified by the North American Industry Classification System Code (NAICS).
4. Document your findings
The final step is to document your findings. The form and shape the documentation takes will really depend on how you plan on using it. If you are seeking to secure funding from a bank or investors, you may need to write a more formal market analysis.
What are some sources of market data?
Finding market research data really depends on the market you are targeting and the industry you are in as defined by your NAICS code. Here are several free sources for market data:
- U.S. Census: If you’re opening a business in the U.S., the U.S. Census site is a goldmine of information. Check out the Census Business Builder to get not only population data but data on how much people spend in a given area on your type of business.
- Bureau of Labor Statistics: A great site for information on specific industries: hiring and expense trends as well as industry sizes.
- Consumer Expenditure Survey: Program provides data on expenditures, income, and demographic characteristics of consumers in the United States.
- Business Source Premier: Includes market research reports, industry reports, country reports, company profiles and SWOT analyses. (Available online through the Fargo Public Library)
- Reference USA: Offers detailed information on 14 million U.S. companies, making it faster and easier to find new business opportunities, research executives and companies, find news articles, locate addresses and phone numbers, conduct market research and much more. (Available online through the Fargo Public Library).
In addition, there are some excellent private subscription-based sources of data. Fortunately, the SBDC has access to several of these best in class tools (along with the expertise to help clients interpret and apply the data):
- Vertical IQ: Provides easy-to-digest industry insights, trends, financial metrics, and risks.
- Bizminer: Provides industry financial benchmarks and local market analysis.
- Esri Business Analyst: Provides a suite of GIS-enables tools and data for customer profiling and trade area market analysis.
- SBDCNet Business Snapshots: Includes a great collection of industry profiles that describe how industries are growing and changing, who their customers are, and what typical startup costs are. Check out their list of market research resources, sorted by industry.
The more you know about your customers the easier it is to meet their needs and to target them with appropriate messaging. Effective market research can help you avoid costly mistakes, both in the startup stage of your business and later on when making critical business decisions.
If you need assistance or have questions, please seek out help from the ND SBDC or another local SBA resource partner such as SCORE, the Women’s Business Center or Veteran’s Business Outreach Center of the Dakotas (VBOC).
Paul Smith is the Fargo Center Director of the ND Small Business Development Centers (ND SBDC). The ND SBDC helps North Dakota small business owners to start, manage and grow their companies through providing free, professional business advising services, technical assistance and training in a range of areas such as business planning, market research and financial analysis. Last year, the program assisted nearly 1,400 clients through nine service centers located across the State. The Fargo center is located in the NDSU Research and Technology Park.