Market Research
Whenever anyone starts a new business or venture, there is one thing that should always be on your mind, that 80 percent of new ventures fail in the first five years. The reason you should remember this is simple, it will remind you that if you don’t plan properly, all your savings that you’ve invested into the venture will go down the drain.
But there is also good news. Its not that hard to be part of the 20 percent that succeed. All you need is some planning, thats it, you don’t need a bigger brain, more money, and 101 hot girls. No, all you need is a good plan.
The most important part of a good business plan is, in my opinion, your market research. From your research you can figure out almost all other aspects of your business. The problem for me was that I could never figure out how to do a proper market research campaign. So for those of you out there that are finding it difficult to manage your research, here’s some helpful tips.
The key things to keep in mind when doing your research are these:
- What is your target market area?
- Approximately how many households are in that area?
- How much does each household averagely spend on your product per month?
- How many competitors are in your target area?
- What percentage of the market can you realistically hope to capture?
- How much will it cost you to set up?
- What will be your approximate monthly expenses?
- What is your break even point?
- How long will it take you to get there?
Now that we have a list, I think I can explain the concept better with an example.
Tony has been a gardener for the last 10 years, and now he feels its time to start out on his own. Tony is a shrewd fellow, and he’s read enough books to know that he has an 80 percent change of failure in the first 5 years. But he also understands that with enough planning, he can easily be part of the 20 percent that succeed.
Tony decides that he will start out working in his home town only. Its not a big town, we’ll call it HappyVille, and its got a population of about 50,000. Tony first enquires at his local munincipality and finds out that there are approximately 5,000 households in HappyVille. He then checks his local business directory for competitors, and finds out that there are 25 garden service companies in his town. He phones around a bit and finds out that his potential competitors service approximimately 2000 households a month, and each household will pay about 100 dollars a month. So now he knows that its a 200,000 dollar market. Tony has asked around, and he knows that there is still a fair amount of demand amongst households that still don’t have a garden service, so he’s fairly confident that in 1 years time he can be servicing 100 households a month, he hopes to make 75 percent of that from new customers, and capture the other 25 percent off competitors. So in 1 year he is confident that he can control about 5 percent of the market, in dollars that would be approximately 10,000 dollars a month.
Now Tony has to figure out the costs. In this case, he can work quite well from his home, so he doesn’t have to worry about rent. His initial costs would be about 1,000 dollars for the equipment (This isn’t anywhere near an exact figure), and he needs a down payment for a pickup truck, that will set him back about 1,000 dollars again. Now the monthly costs. The payments on the pickup will be about 150 dollars a month, and he needs to hire some help, so thats going to be another 1000 dollars a month. Since he’s working from his house, he’ll pay 200 dollars a month to himself for rent. Other costs will come to about 200 dollars a month. So his initial expenses come out at 2,000 dollars, and his monthly expenses will be about 1,550 dollars.
His break even point will be the point where he’s neither made money or lost money, so here’s how it plays out. Right at the start, he’s down by $2,000. He figures that in his first month he might be able to capture 0.1 percent of the market, in dollars thats $200, so he’ll be down $3,350. By the second month he should be able to capture about 0.3 percent of the market, in dollars thats $600, so he’ll be down $4300. By the third month he should be on his feet, and he figures he can have 1 percent of the market captured, in dollars thats $2,000, so he’s now down $3,850. Fourth month comes around and he’s on a roll with 1.5 percent of the market, in dollars thats $3,000, so by now he’s only down $2.400. By the fifth month he’s got 2.2 percent of the market, in dollars thats $4,400. By this time, Tony calculates that he will not only break even, but he will have made a profit of 450 dollars.
From this simple research Tony figured out that he will need about 10,000 dollars to hold him over for 5 months till he breaks even. And he knows that if he can attain his goal of capturing 5 percent of the market in 1 year, he could be making a good bit of money every month.
Now he can put this all on paper, and start looking for finance, but thats for a different post.
Simon
(The figures in this post are not meant to be exact figures. I live in South Africa so I have no idea how much things cost in the US. Please bare that in mind)
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