We perform market research to validate our assumptions about the opportunity we presenting. The biggest question we need to answer here is, are enough people willing to buy what we creating to make this venture worthwhile starting? If you can answer in the affirmative then you can proceed. When doing your market research there are five things important points you need to cover based on the best selling book The Personal MBA.
How many people are actively purchasing products like this currently? Notice that the question is not how many people are willing to buy your product? If you are asking that question it means you are trying to create a new market and a product similar to yours doesn’t already exist. This must already be a red flag, it is very difficult to create your own market and you should try to avoid it at all costs. Depending on the product you want to create you can go about it in several ways and will just suggest a few ways:
If your product is common like electronics, there are many consumer reports available to use like financial reports of companies, trade reports from the government (Department of Trade and Industry), and the Statistics department. To make use of financial reports, you need to look at companies listed in the stock exchange, they usually have a link to their annual reports. Annual reports often contain sales report and market research that the company has conducted to justify why investors need to keep investing in the business. To make use of financial reports, find a company that sells similar products as yours and look at the data they have, for example you might want to build a designer computer keyboard, the financial reports will not tell you how many keyboards they sold last year but however they will show you how many computer accessories they have sold which would include mouses, keyboards, cables, etc, it won’t be accurate but you can use it as a benchmark.
If you can’t estimate the market size based on available resources, it might be that the market is small. In that case, you can carry out a survey yourself by asking the main stakeholders. For example, if you were creating a designer keyboard and you wanted to know the market for designer keyboards you can call your local electronics store manager and ask him how many people buy keyboards in a month and why. If you can’t get through to the manager then talk to the salesman if they are open to discussing business. matters The point here is to get reliable data no matter how small it is, you can do that with four other distributors and use the data you have to extrapolate the market size of that product.
When starting your business, usually you don’t have the resources to interview thousands of people and mine data for market research. Fortunately, there are companies that specialize in market research and sell their reports to businesses. The reports might seem expensive but they are far less than the price it would cost to do your own study. Some of the companies specializing in market research are Market Research Reports, Euromonitor International, Who Owns Whom
When buying any market research make sure the reports are audited by independent auditors.
One of the easiest ways to do market research is to find out the demand for that particular product online. Before customers go and buy a product they mostly like the search for it on the internet, not necessarily to buy online but to find out who has the best deal for them. People don’t buy braai stands online in South Africa but they might search online the different braai stands they can buy, where to buy and who has good value for money. Therefore knowing how many times people search for a product similar to the one you are developing might give you a good indication of the demand for your product. If you see that people search for “buy car trailers” a million times then you know there is a lot of people actively looking to buy car trailers. There are many tools available online to find data some of the commonly used ones are: Google Analytics, Google Adwords, Similarweb, and if you want a more in-depth knowledge of doing online research read this article.
How many times do people need to buy your product? Are they going to buy it once a year, once every two years? Monthly, weekly? It is important to know your point of entry so you can position yourself accordingly. If you selling a pump to an engineering company it might take 3 months to build and once you have sold it, you might wait another 5 years before you can offer another pump to the same client.
Another important factor to consider is that people might already be using something else, so even if they want your product but because they already using something similar it’s not easy to change. A good example is a geyser unless it is broken or reached its life service people will be reluctant to buy a new solar geyser. Contrast this with a keyboard or a mouse, a phone, and a watch they are used frequently and wear quickly. As a result, people replace them often in addition to that people can buy more than one at a time. If a person owns a watch it is possible to sell them another watch, this is not so easy with a car.
When creating a product it is important to understand the maximum amount you can charge your customers, if you creating a new toaster and currently the most expensive toaster available costs R5 000, you can be certain that anything above this customers will not buy no matter how remarkable the toaster is.
To get a good pricing estimate, look at other products similar to yours if you can’t find similar products then look at related products. For example, if you selling a handheld tire pump, the price cannot be more than that of a new tire, and the tripod of the camera cannot cost more than the camera itself.
To get the best price you need to quantify the value your products provides, this is easy to do with products that can easily be measured on some metric. For example, if you building a coffee machine to sell to coffee shops and the current machines cost R3 000 and can only make one coffee at a time which takes 5 minutes, a coffee machine that makes 5 coffee cups at a time in less than 3 minutes can justify a price of R4000.
The goal of your price should be to deliver more value than the cost to purchase the product. The value needs to be at least ten times better than the cost of the product. Imagine you run a photo studio, and you use a camera and laptop every day extensively. If your studio generates R50 000 a month and the camera and laptop can last for 3 years would you care if the camera and the laptop costs R30 000? Most probably not because the value they provide is far more than the cost of purchase, for paying R30 000 you get assets that will help you generate R1.8 million in 3 years.
Cost of acquisition
How much will it cost to acquire a new business or close a sale? How much time and energy will it cost? You have probably heard the saying that “it takes money to make money”? Well, it’s true, except that it takes more than money, it requires effort and time in addition to money. Therefore you should always quantify how much it will cost you to close a sale in both money and effort.
Having a high cost of acquisition poses a great risk for small businesses or startups. If the only way you can sell your product is by going to every individual client and presenting your product then profit made per each sale must justify your cost of acquisition. If you selling a new mop to households, and the only way you can sell it is by visiting every potential client’s home in order to sell, then you will quickly realize that you are spending too much time, money and effort for little value in return. If however, you drive around every day selling R2 million power generators to companies where your profit margin is 30% then the cost of acquisition might justify the initial investment. In general, you want to avoid high acquisition costs because you might spend money trying to close a sale and end up not getting the sale.
Cost of value delivery
How much will it cost to deliver the value both in time and effort? In order to sell your product do you need to build a factory, do you need to rent a warehouse to store your stock, do you need to own a fleet of delivery trucks? This is the cost related to deliver the product.
Uniqueness of offer
How unique is your offer versus other offers in the market place, and how easy it for competitors to copy it? This should be obvious already, otherwise, you wouldn’t be investing the time and effort if you were building something that already exists in that market. Your product cannot be a minor improvement to what is already in the market, it needs to be at least ten times better.
Speed to market
Starting a car company can take years to launch, designing a handheld pump can take months, phone cover might take a week. In general, you don’t want to take too much time before you can launch your product because it will require a lot of resources and if it fails you stand to lose much more. Opportunity is always there for a limited time, the world is not going to wait for you to secure funding or do research, if their needs are not met they will find someone else to meet their needs.
If you want to create a car manufacturing business, you will inadvertently require huge capital investment for research, infrastructure, raw materials, etc and that becomes a big risk for a startup. A company that requires huge capital to start is a big risk for investors unless it has a proven business model. It’s generally better to design products that can be manufactured on a small scale with fewer resources because you can easily test and modify your product.
The upfront investment is not only measured in financial terms, but it is also measured by the effort required for you to successfully produce the product. Will the business require you to learn new skills that might take months or years? Companies that produce pharmaceutical products usually take years before they can put their products on the shelf because of the extensive research they have to do.
The output of market research and feasibility study is to generate user requirements. The user requirements are the summary of your market research that should inform you what customers are looking for. You will not be able to meet all user requirements but nevertheless, you should still write them down and consider them. Some might say they want a fridge with a TV screen so they can watch tv while cooking it sounds good but it’s not really related to the functions of a fridge.
For example, the user requirements for an electric scooter might look like the following.
Convenient mode of transportation
It’s not expensive to maintain
Transport must portable
Transport must have tracking installed in it
Must reduce delays caused by traffic
Must be stylish and fashionable
Must be safe to use on the road and on walkways
Must be able to power itself for energy
The user requirements are important during design because they are a reflection of what customers want out of the product. In the following sections of product development, you will see just how useful the user requirements are in designing your product.