“If we knew what it was we were doing, it would not be called research, would it?”

– Albert Einstein

If you’re like most business owners, you know your market or you wouldn’t be in business. You don’t need this chapter to set your strategy and tactics. Still, an annual fresh look at your market is a good idea, and this chapter might help you with that.

If you’re a new entrepreneur, just starting a new business, then this chapter is for you. It is about how to test, explore, research, understand, describe, and prove the potential of your market.

And in either case, if you have the business plan event that requires a market analysis as part of the plan, then this chapter will help you present your information for your target audience.

Yes, I do say that the lean planning principle of Do Only What You’ll Use means you do Market Analysis, Proof of Market, Only as Needed. But that point is about whether you proactively research a market you already know. And it’s about whether you have to describe or prove your market in a document or pitch for outsiders. I do believe you have to know your market very well to develop effective business strategy and tactics. And that’s what this chapter is about: knowing your market.

This chapter includes:

1. Market Information: Needles and Haystacks
2. Market Segmentation
3. Strategic Segmentation
4. Strategic Market Intersection
5. Evolution of Niches to Opportunities
6. TAM, SAM, SOM, and Potential Market
7. Stories Matter More than Numbers
8. Know the Industry
9. Market Analysis or Proof of Market

Always keep in mind that the point of information gathering is to help develop strategy and tactics. This is never information for information’s sake. It’s about business. Times have changed. What works in business information has changed too.

At one time, good business planning meant digging into statistics, buying market research, proving the potential of some given target market by having a market forecast validated by a brand name at the bottom of a table or chart, and defining a source. Valid sources were major market research firms, consulting firms, industry experts, and governments. Estimates were taken as if homework wasn’t completed. It was about finding the needle of information in the haystack.

Today, information is a matter of sifting, sorting, and digesting, figuring out what’s important, and giving it context. If the past was about needles and haystacks, today it’s finding the right needle in a mountain of needles. Are eggs bad for you? There’s data to prove it. Are eggs good for you? There’s data to prove it. One survey of small business owners concludes social media is important to less than a third of them; another survey proves social media is vital to more than two thirds. The difference is how the survey was designed, who was contacted, and how. Hint: The survey conducted over Facebook shows the importance of social media, and the survey conducted by mail proved the opposite.

Don’t get tunnel vision about data and research. Way too often I see people struggling to find information to fit their preconceived notions of what’s needed instead of accommodating what’s available. For example, I dealt with a person who was going crazy trying to divide businesses into categories of annual revenue, which is impossible, instead of just defining categories by numbers of employees, which is easy to find. Take what information is available, if it works and takes you to meaningful business decisions; not what information you thought you wanted.

For example:

• If you want to divide U.S. businesses into segments according to size, use the numbers of employees data the government offers; don’t insist on some other size factor such as revenues or office space.
• If you want to divide businesses into size using employee numbers, use the government classifications. The U.S. economic census divides employee numbers into the classifications shown below. It obviously makes no sense to decide to break the sizes into 1-15 and 16-20 when the government already uses a different classification.
• As you look for market information you’ll often find classifications established by somebody else, before you started looking. Be flexible. Use what’s available.

Few marketing concepts are more powerful than segmentation, which is about dividing a market into meaningful pieces. Divide a population by age and gender, for example, and you have a classic demographic segmentation. That’s obviously useful for businesses related to clothes and shoes. You might also want to look at married or single, and maybe married or divorced, and other possible variables. And you could also focus on one gender in one age classification and only those married or not, fixing on several factors at once. The illustration to the right shows the age categories tracked by the U.S. Census.

Divide a population by income and you have a different segmentation, sometimes called economic segmentation, useful for lots of businesses. Auto retailers, restaurants, travel agencies, and sellers of luxury goods, to cite a few examples, might set strategy and tactics based on this segmentation. The government tracks income by family.

The U.S. Economic Census divides businesses into categories based on numbers of employees, as shown in this illustration taken from the U.S. census site:

There’s also geographic segmentation, so you could cut a market into various regions, cities or neighborhoods. You’ve probably seen how large companies divide their markets into regions. And more local businesses often have locations in several cities, so their markets divide by city or store location.

You don’t have to divide a market into specific government-approved categories. You can redefine and guess when it works. Strategic market segmentation can be very valueable. For example, I was consulting with Apple Computers in its early years when the marketing department decided to segment the market according to usage types, as in the illustration here.

Segmentation by Type of Customer

The simple idea of dividing marketing into these segments helped the company develop better strategies for software bundling, hardware configurations, advertising, and channels of distribution. Computers for government, for example, are sold through channels different from home computers.

And some creative segmentation schemes are based on psychographics, which are collections of personalities, values, opinions, attitudes, interests, and lifestyles. I find the idea behind psychographics intriguing. Knowing that somebody drives a certain type of car can help you predict other seemingly unrelated preferences. So a man driving a pickup truck might be likely to wear cowboy boots rather than Birkenstock sandals; and a woman driving a Volvo station wagon is more likely to buy organic spinach than fried chicken. Or so it seems. I don’t like stereotypes so the idea makes me uncomfortable, but it seems to work for goods and marketing. I ran into the segmentation shown below in the marketing collateral of a shopping center.

Pyschographic Segmentation

The accompanying literature explained:

• Kids and cul-de-sacs were affluent upscale suburban families, “a noisy medley of bikes, dogs, carpools, rock music and sports.”
• Winner’s circle were wealthy suburban executives, “well-educated, mobile executives and professionals with teen-aged families. Big producers, prolific spenders, and global travelers.”
• Gen X and babies were upper-middle income young white-collar suburbanites.
• Country squires were wealthy elite ex-urbanites, “where the wealthy have escaped urban stress to live in rustic luxury. Affluence, big bucks in the boondocks.”

As in the computer example above, the underlying assumption is that these market segments help businesses decide about which products to offer where, and which message will address which population. Emphasizing luxury over practicality would presumably work better with country squires, in this segmentation, than with kids and cul-de-sacs.

Another Strategic Market Segmentation

In the first example I used in Set the Strategy, Have Presence focuses on business owners who know they want presence in social media but don’t have time to do it themselves. That strategy implies choosing specific slices of the pie related to small business, business owners, numbers of employees, and attitudes about and familiarity with social media. All of that is strategic market segmentation. The example in this illustration moves away from the narrow classifications into a more useful segmentation:

In this case the segmentation is not just about size, but understanding and approach. The most interesting target segment is the small business whose owner values social media, wants help, and has the budget to pay for it. So this is a more classically oriented version of the strategy story definition that starts with defining the target market as:

Terry is a successful business owner worried about social media. She knows her business should be on Twitter, Facebook, and the other major platforms, but she’s already busy running a business, and she doesn’t have time to do meaningful social media as well (from Lead with Stories).

In the second example in Set the Strategy, the bicycle store, the focus is on three distinct market segments:  university students, families, and serious sports bikers. The store presumably carries bikes, clothing, and accessories for each of those three segments; and the people running the store probably assign customers to these categories as they work with them.

Or, as another example, when a local computer store defines its customer segments as “high-end home office” and “high-technology small business,” its segmentation says a lot about its customers. Then the company can plan its focus on the different types of potential customers.

The Have Presence market definition is an intersection of three factors. Its potential market consists of businesses who share the three points:

1. They understand the value of social media;
2. They want outside help (not doing it themselves, or with an employee);
3. They have available budget to pay for the service.

I drew that as a market segmentation chart above, but I can also draw that as a Venn diagram, showing the intersection of various factors, as shown here:

This is a good example of how market numbers are sometimes educated guesses at best. In a pitch for a scalable defensible product, the vast majority of the angel investors I know and work with would accept this definition without having to put hard numbers behind it. They’d understand that the variable of wanting outside help eliminates most businesses with more than 20 or so employees, narrowing the U.S. version of this market to about 5 million with employees and another 25 million without employees. And they’d understand that the variable of having available budget would eliminate most of the 25 million without employees. They wouldn’t demand exact numbers and they would understand that there is a market there. The potential market is clearly big enough to operate in.

And I also mentioned a hypothetical market definition of a business addressing women between 50 and 70 with a minimum income. That’s another intersection.

Finally, I was working recently with a company that wanted to address the needs of entrepreneurs outside the U.S. who had relatively high disposable income and were regular users of social media. That diagram is shown here:

In that case, available information gave these entrepreneurs reasonably good numbers of Facebook and Twitter accounts in various countries. And they had to estimate what percentage of the adult populations of these countries were entrepreneurs; and what percentage of those had sufficient disposable income. The result is their target market.

However, technology and social evolutions are blowing up traditional segmentation: markets are splitting and splitting again into more well-defined new markets. Traditionally, we’d call the splintered markets niches, but the word “niche” implies small, and that’s hardly the case.

The most obvious example is in mainstream media. Television, once dominated by a few major networks, is now thousands of channels, broken into narrower focus, giving us seemingly infinite choices. Most of us have instant access to food channels, sports channels, travel, buying and remodeling houses, lots of choices with always more choices coming. What used to be sports provided by three networks in the U.S. are now specialty channels for pro football, college football, golf, tennis, fishing, and so on. And television broadcasts once picked up by antennae are now delivered as that plus cable, Internet, tablets, and mobile.

This new landscape offers your business the benefits of strategically defining a position that ropes off a set of specific target market and business offerings to enhance the business-customer relationship. The phrase “target marketing” has been around about forever, but it means more now than ever before. What were once narrow niches are rapidly becoming interesting opportunities.

Regarding TAM, SAM, and SOM, I suggest you think instead of total potential market, reachable market, and share of market. And be aware of these three acronyms in case they come up in questions or discussions. These are buzzwords you may encounter:

• TAM stands for total addressable market, or total available market. That’s the entire potential market. For a movie theater, that’s probably a total population over the age of two and under 85 or 90. It’s a large and essentially useless number.
• SAM substitutes serviceable for total. Serviceable addressable or serviceable available, So that’s a more useful number. I would define a movie theater’s SAM as the number of theater tickets sold per month or year in its geographic area. Others might make it the whole population, based on the assumption that even people who didn’t go to the movies during that time period could still choose to go tomorrow.
• SOM stands for share of market. People often refer to market share. I would divide a theater’s tickets sold per month or year by the total tickets sold in the whole area for a month or year. So for example, if this theater sold 30,000 tickets last year and all the theaters in the area sold 100,000, then this theater had a 30% share.

The problem with all of these terms is that they are buzzwords. I prefer to talk about potential market and current market share, and to make the potential market the available whole market. I don’t like acronyms and buzzwords that confuse real meaning.

Potential Market

A market analysis is about potential customers, not actual customers. If you need it for your business plan event, include an analysis of potential customers. As an essential first step, estimate how many potential customers there are. The way you determine that depends on your type of business. For example, a retail shoe store needs to know about individuals living in a local area; a graphic design firm needs to know about local businesses; and a national catalog needs to know about households and companies in an entire nation. This is where those TAM, SAM, and SOM breakdowns fit (if you insist on using buzzwords).

In the interplay between market stories vs. market numbers, market numbers mean less than they used to. Numbers don’t stand alone, and often they aren’t even necessary. Hard numbers can be a complete waste of resources. And, in many cases, market stories matter more than market numbers.

A Specific Example

To illustrate, consider the example of Have Presence’s market intersection of businesses that value social media, want to pay for the service, and have available budget. The actual total potential market is:

• A very small percentage of the 28 million businesses that have employees (most are solopreneurs who do social media themselves, and don’t have a budget to pay for it);
• Add to than a small percentage of the 3.6 million businesses with 1 to 4 employees;
• Then add a slightly larger percentage of the 1 million businesses with 5 to 9 employees;
• Plus a still slightly larger percentage of the 633 thousand businesses with 10 to 19 employees;
• Plus a very small percentage of the 526 million businesses that have 20 to 99 employees.

Estimating the percentage is relatively easy, and is especially credible for investors and other business plan audiences with these assumptions spelled out, as in this illustration:

On the other hand, validating these estimates with primary research would be difficult and expensive. You can see how in this case, taking market stories vs. market numbers, the story matters more. It would require researching several randomized lists of business owners, or doing focus groups, or interviewing a few randomly selected sample business owners in the various categories. And how much more exact would it be than the educated guess? This kind of research is so sensitive to random lists, proper polling, and professional survey techniques that it’s hard to believe the information value, for decision-guiding purposes, would be worth the cost.

Market Stories can Validate Market Numbers

Furthermore, when and if the marketing personnel attempt to find out how many of these various subsets of business owners are engaged in social media, they’ll find radically different numbers from various surveys and blogs. One study that surveyed business owners by mail concluded fewer than 30% valued social media; another study conducted over social media concluded more than 60% value it. And when they cut the market based on owners who don’t want to do it themselves, that’s even harder. Whatever final number they get will be an educated guess at best.

When Have Presence describes its market to outsiders, what usually sticks is the vision of the overworked small business owner without enough time to do social media right. Most people who hear that description understand it. Transparent assumptions indicate that the potential market includes at least a million businesses, and quite possibly two or three million. That’s clearly a good enough estimate to validate the market and guide strategic and tactical decisions. And whether that’s actually a million businesses or more, it’s an understandable niche.

Real business plans don’t necessarily need purchased market research. Combining available research with transparent assumptions is usually the best practical guide for decisions. You can buy expensive research reports for some markets: generally high-growth markets of special interest to companies that can afford to buy expensive research reports. Even if you have budget for that, you don’t have to spend so much money. Most of the best research is what you do yourself.

Do your homework. Search the web for good quotes. Blogs, websites, magazines, newspapers, books, and market research companies publish highlights and snippets with some key numbers from research reports. It’s part of their normal business.

Usually a market analysis includes a view of the industry you’re in. People expect to see a picture of the industry with factors such as industry trends, industry growth, recent developments, common keys to success, how concentrated in how many big players, how many total participants, and similar factors. The details depend on the industry and the specific nature of the business plan event. And you, the business owner, obviously need to know your industry well in order to survive – whether you write down what you know in a formal plan, or just keep it in mind with strategy and tactics, in a lean plan.

Do this if it fits the objective, but don’t weigh your plan down with too much information. I recently advised an entrepreneur developing a new bar in a resort area to summarize his lengthy analysis of the bar business in his main plan and move the bulk of it into an appendix.

Start an industry analysis by looking at existing, similar businesses. Do a good web search for available information that might come from market studies, trade associations, industry experts, blogs, and so forth. Look at the websites of major competitors and local competitors. And don’t forget the obvious real-world research, visiting and shopping existing businesses. If you are planning a retail shoe store, for example, spend some time looking at existing retail shoe stores. Park across the street and count the customers that go into the store. Note how long they stay inside, and how many come out with boxes that look like purchased shoes. You can probably even count how many pairs of shoes each customer buys. Browse the store and look at prices. Look at several stores, including the discount shoe stores and department store shoe sections.

If this is your first time with a business, you can’t afford not to know how it works. Being new is not a reason not to know, but a reason to make sure you do. For some kinds of business, you can find a similar one in another place, and talk to its owner. If you are planning a shoe store in a university town in Wisconsin, talk to the owner of a store in a different university town like Ann Arbor or Champaign. Make your target owner far enough away that your new store won’t compete with his. Call the owner, explain your purpose truthfully, and ask about the business. Many people like to talk about their business, and to give advice.

Always shop the competition if you can. Visit the websites, make an order, and see how well that order is handled. If you’re in the restaurant business, patronize your competition once a month, rotating through different restaurants. If you own a shoe store, shop your competition once a month, and visit different stores.

If you’re considering starting a new business, talk to potential customers. Talk to people coming out of stores. Talk to your neighbors, your friends, your relatives. Ask them how often they buy, what they buy, where, at what price, and whatever else you can think of. If you’re starting a restaurant, landscape architecture business, butcher shop, bakery, or whatever, talk to customers.

If you have an ongoing business, the process of developing a plan should still include talking to customers. Take a step away from the routine, phone some of your customers, and ask them about your business. How are you doing? Why do they buy? How do they feel about your competitors? Take a customer to lunch once a month, just to keep yourself in touch.

Do you need to prove your market to outsiders? Big numbers don’t work without a believable story. I know firsthand that angel investors want to understand the market story so they can judge for themselves the size of the market. Numbers alone are not enough. Granularity and credibility are very important. Investors would much rather hear about a market made up of small business owners who value social media but don’t want to do it themselves than a market of 4.5 million small businesses. For more on this, please refer back to Lead with Stories, Stories as Strategy and Planning for Angel Investment.

In previous sections of this chapter I used several examples of market definitions that depend on educated guesses. Informed angel investors and judges at business plan contests accept educated guesses easily, but only if the underlying assumptions are laid out openly. The story behind them drives the credibility.

Furthermore, no market numbers are ever exact. They are always guesses about the future and extrapolations of available information. So whether Have Presence determines its total potential market is one million or two, there is no practical difference between these alternative numbers. There is enough market to operate in, and the business will have to win customers one by one.

Numbers and research rarely if ever really validate a market for investors or banks. Sales validate the market. One of the best opportunities for real entrepreneurs, these days, is to put a product idea on Kickstarter.com or a similar site, to show that people will pay money for it when it’s available. This is essentially pre-sales, or commitments to buy, and it’s very convincing.

Other good validators are early sales, market tests, or letters or commitments from distributors and buyers.

Avoid surveys that collect random or anonymous opinions from people about what they say they would buy or what price they would pay. People behave very differently when answering survey questions than when they are actually spending their own money.