3 Part Market Research Papers (Vol 1)
By Kelly Lusson
Volume 1
The Purpose of Market Analysis
Introduction and Framework
I’ve been searching for a good analogy for the value of Market Analysis, and the first thing that came to my mind is a table puzzle. I often helped my grandmother to work on her puzzles, and we would always begin with the corner pieces and then fill in the remainder of the edge pieces. At this point, though we had the outside framework, it was still impossible to see what the picture would become. It wasn’t until the puzzle was half to three quarters complete that the image would finally come into view. Market Analysis is similar, in the way that you must gain information from a variety of different sources before a snapshot of the market (and related potential) becomes visible.
As I’ve thought about this analogy, I actually think a better representation is a 3 dimensional puzzle – those of you who grew up in the 90’s will remember the popularity of Puzz 3D, which offered thick foam puzzle pieces assembling to form popular buildings and landmarks. I personally had a Puzz 3D of the London Tower Bridge. This is the analogy I will use to describe developing a clear picture of the market, which ultimately bridges or spans the gap between you and your customers.
Before I discuss the fundamentals of a market analysis, I feel it would be prudent to quickly discuss the difference between Sales and Marketing. To many, these terms are synonymous. For the purpose of this article, to develop a market analysis is to gain understanding. Understanding refers to the “who, what, when, where, and how” of the demand drivers for a product or service. Therefore, the purpose of a marketing department is to develop and apply understanding. To sell a product is to persuade a buyer. With improved understanding (from marketing), the purpose of sales is to more effectively sell a product or service. Both constructs can operate independently, but obviously work best when applied in collaboration. With the aforementioned analogy, marketing is the process of building the bridge. Sales is the process of crossing it.
If you’re thinking about conducting a market analysis, whether in-house or with the help of a professional, I recommend organizing your research in three primary groups. In a first step, begin with a high-level, top-down snapshot to validate your areas of focus. Subsequently, I recommend supplementing your data with a more bottom-up analysis on competitors, in order to understand who you’re up against and develop a benchmark for your performance. Lastly, your “go-to-market” strategy will identify customer leads and determine your best approach. In this article, I will discuss the purpose and benefit of creating a high-level industry snapshot.
High-level Industry Snapshot
Purpose:
With a high-level industry snapshot, we want to understand the size, growth forecast, and geographic concentration of a specific industry or sector. This will allow us to validate our areas of focus, and will provide valuable direction for investment and allocation of resources. Also, if your product or services is sold to several different industries or sectors, this exercise may help you to determine which industries or sectors should dictate first priority over others.
Methodology:
You can accumulate high-level industry and sector specific information from a variety of sources. We typically use a combination of the following:
Direct Data Research: You may find valuable information in governmental records, census statistics, industry information bureaus, and regulatory agencies.
Subscription Databases: Identify business development databases and organizations, which have gathered information, related to the demand drivers for your product or service.
Public Company Reports: Identify the top public companies in your industry or sector, and review their SEC filings for key takeaways from the market research they’ve formerly conducted in your industry.
Industry and Trade Associations: Where you have 3 or more people with joint interests, you usually have an industry or trade association. These organizations are often able to collect large amounts of unbiased information, as they do not necessarily come from a sales standpoint.
Subject Matter Experts: From these industry and trade associations, you have individuals who have spent an entire career in a specific industry or sector. These individuals can provide a wealth of insight – even if they don’t have the information, they can often tell you where to look for it.
An Example from the Field:
We recently conducted a market analysis for a company who manufactures control valves, which are used in chemical processing plants. We began (via the above methodology) with a high-level snapshot of the total industrial valve market and then systematically broke our data down to individual control valve products. We were then able to find ballpark estimates for control valves within the chemical manufacturing sector, and distribution of potential within North America. Finally, we were able to drill down to the top 10 states where control valves are sold to the chemical manufacturing sector. The top three states were Ohio, Illinois, and Pennsylvania.
The company had brick and mortar stores in Ohio and Illinois. Each store had 7 employees. The stores in Ohio were outperforming the stores in Illinois by about double: $10 million in sales versus $5 million. In each and every sales meeting, the sales teams in Illinois were criticized for their lackluster performance. Leadership would say, “Look at what our reps in Ohio are doing! You need to step it up!” Our market research revealed that the market potential in Ohio was around $50 million, while the market potential in Illinois was around $12 million. Therefore, the stores in Ohio had about 20% market share, while the stores in Illinois had about 40% – sales performance in Illinois was actually better, despite lower sales!
This, of course, raised a large number of important questions:
Why do we have the same number of stores and employees in each state, when the market potential is nearly 5 times higher in Ohio?
What can we do to improve our sales performance in Ohio?
The market potential in Pennsylvania is similar to that in Illinois—why haven’t we invested in dedicated sales representatives for the region?
It is often possible to break this market data down to the county level, to determine the best location for stores or dedicated sales representatives. This provides valuable information for allocating your resources and investment to capitalize on the greatest concentration of market potential.
Compound Annual Growth Rates (CAGRs):
Up to this point, the information we’ve gathered has been largely historical. When we have as much information as possible on the geographic concentration of market potential, it is important to have a general outlook on the industry or sector. If we sell our products to 3 primary sectors, it would be helpful to know which of these sectors is projected to experience the most growth over a 3-year period. You will find multiple sources for Compound Annual Growth Rates (CAGRs) per industry sector via the sources I mentioned above, and I recommend collecting several samples and taking an average of the estimates you find.
You may be asking yourself, “Isn’t this a bit of guess work?” Yes of course! Nobody can predict the future. Stay with me here – we have a lot of puzzle pieces to gather before the image becomes more clear. You don’t need to label your assumptions as fact – recognize them for exactly what they are: small pieces of a big picture.
Should I purchase a report about my market online?
It depends. I have purchased online reports in the past to supplement the data I’ve collected from government, proprietary, subscription, and industry resources. Some have provided valuable insight, while others were not so helpful. The reason why: I believe that many of these reports are compiled via a large amount of extrapolation. In other words, the author has a few reputable data sources, and applies a set of assumptions to create an estimate of global market potential. It is important to remember that regardless of the information contained in the reports, your competitors have probably purchased them as well. We’re building a database of information, which will far surpass the content in these reports, but I find it can be useful to see how your competitors will think about and approach the market. Before purchasing, I would recommend speaking to a representative from the company selling the report, and requesting information about the primary sources.
In Summary
Market analysis is not rocket science. It can (and should) be conducted in-house on a regular basis. Depending in the product, industry, and potential customers, it can be very tedious and time consuming – particularly if the researcher doesn’t know where to begin. In my experience, many companies try to conduct market research in-house, only to become frustrated when the picture isn’t immediately clear. I would argue that they’ve only framed out the edges of the puzzle – it requires additional diligence to begin seeing the big picture. This is where a professional firm can help to fill in some of the gaps. There are situations where, despite the amount of information you obtain, you will have no validation to prove whether your assumptions are accurate. In this case, you may have stepped into uncharted territory. While this may feel overwhelming at the onset, it is important to remember: having more market information than any other company in your field is the ultimate competitive advantage.
In future articles I will discuss the following:
Volume 2: Supplementing your data with a more bottom-up analysis on competitors, in order to understand what you’re up against and develop a benchmark for your sales performance.
Volume 3: Developing a “go-to-market” strategy to identify customer leads and determine your best approach.
Please contact me at kellylusson@amarkconsulting.com with any questions or comments.