The Market for Your Products and Services
The Market section of your business plan is where you’ll describe both your customers and your competitors. It should give the “big picture” of the customer and competitive landscape. The more quantitative you can be, the better. Investors and lenders want to see that you’ve studied the market and you know exactly what you’re getting into.
Business Plan Outline for Market Section Should Include:
• Description of the Market
o Growth Rates and Key Trends
o Target Market (Including Location, if Retail)
o Size of Target Market
o Direct Competitors
o Indirect Competitors
Description of the Market. Begin your Market section with a brief overview of the global or national demand for your products or services, then quickly narrow it down to your specific target market. You want to establish the big-demand picture and then get into the demand you intend to serve.
The Global View
The Addressable Geography, or Local View
The Segmented or Targeted View
The purpose for including brief information about the global view is to establish that you’re entering a growing market. It’s always better to be swimming with the tide. Do your research and know the numbers. Make the point, and move on.
If you’re starting a retail or service business, chances are you’re going to have some geographical constraints. There will be a limit to how far someone can be expected to travel, or how far your people will travel to do business. Think about the boundaries for your business. Describe them and measure the size of your market. If people generally don’t travel more than 10 miles (or 10 minutes) to purchase products or services like yours, how many people in that region can you hope to serve?
Note: Web-based businesses don’t have the same geographical boundaries, and the emphasis shifts to the Sales and Marketing plan (Section 5).
Getting down to the targeted view, suppose you’re starting a retail business selling baby furniture. First you would define the size of the market in the U.S. for baby furniture, and the trend over the past five years. Next you would describe the geographical target and its size. You’re almost finished. Baby furniture generally falls into three categories: designer, middle-market, and budget. Most stores sell only one, or possibly two of these categories. You’ll need to further define and estimate the size of the market by the segments you intend to address. Ideally, you would include specific trends for those market segments. For example:
The U.S. market for baby furniture in 2008 was $X billion dollars, representing $88 per household on average and an annual growth rate of 8%. Data supplied by the real-estate broker representing our intended store location shows that consumers will drive up to 8 miles to shop at this location. There are 100,000 households within 8 miles of the shopping center. We will sell both designer and middle-market baby furniture, which together represent 72% of the market. This translates to a market potential of $6.336 million.
You could go on to describe the growth trends in the mid and designer segments. Also, you would want to comment on your demographics versus the averages. For example, an area surrounded by retirement communities certainly has less demand for baby furniture than an area comprised of first-time home buyers.
If you’ll be selling business-to-business services, you would follow the same formula. Look at the big-picture demand for your type of service and its trend. Next, address the serviceable area where you can reasonably expect to do business. Finally, look at the specific segments of the market you’ll address. In each step, do your best to provide data on the numbers or size of the market. Investors will want to know this information and they will expect you to have provided it.
When writing your business plan, include an objective look at your competition. Some business owners worry about providing such details to potential investors, thinking it might scare them away. While that’s always possible, the more common pitfall is creating the impression that you don’t know a lot about the competition. Therefore, don’t be afraid to include detailed information about the strength of your competitors. List both your direct competitors and indirect competitors.
A direct competitor is another business that serves the same customers as your business, and meets the same needs. For example, if you’re a tax-preparation service, your direct competitors are those tax preparers who address the same market segment that you do. You should know and include the number of your direct competitors. For the largest, most direct competitors, show that you know a lot about them, including how you will compete against them. Avoid dismissing them as a pushover and avoid demonizing them as if the entire world views them as bad or deficient. Rather, take an objective look at their business, acknowledge their strengths, and describe how you will compete. It’s not a weakness to have competitors—often, it legitimizes the demand for what you offer.
Indirect competitors are companies that market a similar or substitute product or service to the same customers you want to serve. For example, TurboTax software is an indirect competitor to a CPA in the tax-preparation business. Your business plan should acknowledge indirect competitors and their expected impact on your business.