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The Need for Market Research

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Too often people decide to start a business without actually doing any market research to determine the feasibility of doing so. Unfortunately, people tend to rely on emotion instead of reason when determining the feasibility of starting a new business. While the need for a business plan is obvious, there are some steps you may want to take before beginning that plan. This is true if you are looking to start a new business, purchasing an existing business, entering a new market or offering a new product. 

Before you even begin to start putting a business plan together, you need to spend some time looking into the business you are considering acquiring or products you are thinking of selling. Doing so will help to eliminate those businesses and products which will not be financially viable. In other words you want to ensure your business is not only likely to succeed, but also will supply you with a healthy bottom line. 

One of the most common mistakes made by people starting a new business is that they base the demand for a product or service on their personal experience and beliefs. Instead, they need to conduct some initial research to determine if there is in fact enough demand to warrant the start up of a new endeavor. A quick analysis of the potential business will help to steer you away from those non-performing ventures.
Here’s an example: You hear from friends that “widgets” are hard to find in Prince George. To you this sounds like there’s potential for a new business in town that sells widgets. Your friend seems to know what they are talking about and if they can’t find a place that sells widgets, then you bet that there aren’t any places in Prince George that do, so this would make a great business. 

Now, before you start counting all those green backs, you need to take a quick look to see if Prince George does indeed need a store that sells widgets. Your goal is to prove that Prince George has an undersupply of widget sellers, not to undertake a bet a previously mentioned. This is business, not pleasure. 

First, take a look through the phone book and Internet, and make a list of all businesses in the Prince George region that sell widgets. If you only find one or two, you can expect the market to be very small and limited, or has a high cost of entry, before you can sell widgets. Either reason means that you will likely have a tough time being successful in the market. 

If you find no existing competitors, or you find a large number, then you may want to take a closer look at those competitors. You need to determine if selling widgets is their core business or if they sell other products and services. It wouldn’t be the first time that a business sold a product at a loss in order to bring in additional business. If this is the case with your widgets, then you may want to find another product.
Let’s just say that after this initial look, you still believe there is room in Prince George for your new business. Your goal now is to determine how large your potential market is. Once again you need to get some hard numbers around how many actual widgets you are going to be able to sell, either on a yearly basis or in total. Remember, just because you think people or businesses will buy widgets, doesn’t mean they will. This is the part where you have to be honest and diligent. Again, this is business, not pleasure. 

For example, if every household needs a widget you first need to determine how many households there are in the Prince George region. In that case a quick calculation will tell you there are approximately 120,000 people living in the region. This can be translated to a total of 30,000 households based on an average of 4 people per household. If every widget has a lifespan of 5 years, you can then calculate your maximum yearly sales at an average of 6,000 per year or 23 widgets per day (5 day week). If your gross margin is $10 per widget, you’re only left with $230 per day to cover all expenses, including your salary. Unfortunately this is the best case scenario. In real life, people may not want or need your widgets, may already own one, or the one they do own lasts longer than 5 years. Thus, it is very likely that your customer base is smaller than it looks at first glance. You either need to find another product or business, or look at ways of increasing your market size. If the latter is the case, then I certainly see the formulation of a business plan in your near future. 

While this example only looks at selling to retail consumers, there are also business to business and business to government markets to look at. However, there are far less of these in the Region than there are retail consumers, thus you need to do even more homework before moving to the business plan phase. 

Remember, there are numerous factors to look at when selecting a business or product. However, the most important ones include relying on facts, not guesses, and using sound decision making techniques versus emotion and wishes. 

-Myron Gordon owns TMSG Management Services Group, which provides management and financial services to growing businesses.


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