Real Small Business: Building Your Business

III. The Market

From the Editors of Real Small Business

This section is designed to provide enough facts to convince an investor, potential partner or other reader that your business has enough customers in a growing industry, and can garner sales despite the competition. It is one of the most important parts of the plan, taking into account current market size and trends, and may require extensive research. Many of the sections that follow - from manufacturing to marketing to the amount of money you need - will be based on the sales estimates you create here. Customers Market Size and Trends Competition Estimated Sales

Customers

It is important to be thorough and specific when creating a description of the target customer for your product or service. This description defines the characteristics of the people you want to sell to and should indicate, among other things, whether your customers are cost or quality conscious, under what circumstances they buy, and what types of concerns they have. If you have an existing business, list your current customers and the trend in your sales to them.

To create a customer definition, describe your target customers in terms of common identifiable characteristics. For example, a catering company could target professional couples in the metro Chicago area who need to hire caterers for their kids' parties. Or it could target corporate event planners in Massachusetts responsible for procuring caterers for internal meetings. A windshield wiper blade business can sell directly to automobile manufacturers, or to aftermarket parts distributors.

Tips Narrow the field by briefly describing customers you don't want to reach. High-end general contracting services would not have people who buy on price as customers. An association management consulting service might not be interested in selling to associations with 1,000 or more members.
A common mistake is to describe customers in general terms, such as all "people who want to buy a bicycle," or "anyone who needs a resume created."
Be sure to include details of what geographic region you plan to sell to. Is your market national, regional, international, or local?
Do not use industry jargon or regional slang that may confuse readers. If you must, define the terms in your business plan.

Market Size and Trends

This section defines the total market size as well as the slice of the market your business will target. Use numbers as well as trend information to make a case for a viable current market and its growth potential.

After you define the total market, create a description of your target market by using geography, company size, business organization, lifestyle, sex, age, occupation, and other characteristics to describe the companies or consumers likely to buy your product or service.

Tips When discussing any market size, be sure to talk about factors affecting market growth - industry trends, socioeconomic trends, government policy, population shifts, and the like. Show how these trends will have a positive or negative impact on your specific business.
Remember to cite all sources for your data. This will prove that you've done your homework, and will assure the reader of your plan that your information comes from a reliable source. Also, state the credentials of the people providing this data. It is stronger to say "According to Acme Corp's market research study of the widget market..." than "A market researcher says..."

Competition

The competition section indicates where your products or services fit in the competitive environment. Presenting your business in the landscape of its competitors proves that you understand your industry and may be prepared to cope with some of the barriers to your company's success.

Present a short discussion of each of your primary competitors. If possible, include their annual sales and their market share. Each assessment should include why these companies do or do not meet their customers' needs. You should then explain why you think you can capture a share of their business.

Strengths and weaknesses can fall into a number of different categories. Sales, quality, distribution, price, production capabilities, image, and breadth of products/services are all ways companies differentiate themselves. Ask yourself: Who is the price leader? Who is the quality leader? Who has the largest market share? Why have certain companies recently entered or withdrawn from the market? These factors are critical to a successful competitive analysis.

Tips Never say "we have no competition." Lenders won't believe you. Even if your product or service is truly innovative, you need to look at what else your customers could buy instead. Remember, the first personal computer competed with calculators and typewriters; the first calculator competed with slide rules.
Your competitors won't always be immediately evident, since they don't necessarily provide the exact same product or service as you do. If you sell gourmet salsas, you will be competing with other salsa makers, and you also might compete with makers of gourmet ketchup, mustards, and other condiments. List these as "indirect competitors."
Many business plans fail to give a realistic view of their true competitive universe by defining the competitive field too narrowly. Think as broadly as possible when devising a list of competitors by characterizing competitors as any business customers may patronize for similar products or services. A local florist obviously competes with other flower shops, but must also contend with delivery services such as 800-FLOWERS and supermarkets that carry flowers and plants.
To determine your competitors' strengths and weaknesses, evaluate why customers buy from them. Is it price? Value? Service? Convenience? Reputation? Very often, it's "perceived" strengths rather than "actual" strengths that you will be evaluating.
A table can be a good way to present your competitive analysis, since it will allow your competition to be evaluated at a glance. Columns should include the name of your competitor, market share or position, annual sales (if available), strengths, weaknesses, and comments.
Consider describing who is not your competitor. The person reading your plan may have an inaccurate picture of who your competition is. If this is the case, you will have to dispel those preconceptions by explaining why these businesses are not your competitors. For example, people may think that a company that hires out freelance technical writers competes with temporary personnel agencies or clerical agencies. This company might want to stress that it is not a clerical agency, but rather a writing consultant.

Estimated Sales

Estimated sales for your business are based on your assessment of: the advantages of your product or service, your customers, the size of your market, and your competition. This should include sales in units and dollars for the next three years, with the first year broken down by quarter if that's appropriate for your industry. These numbers will be crucial to other financial documents you present later in the plan.

Use a one-paragraph summary to justify your projections. Be sure to use a succinct statement of what sets apart your product or service from other companies in the marketplace. Include a brief discussion of any customer commitments. Also state why you envision your customer base growing, and indicate how you will garner this business.

If you derive your average sale per customer from trade association information, research, or interviews with business owners in similar endeavors, cite those sources in this section to provide credibility to the numbers on which you base your sales projections.
Do not use the word "conservative" when describing your sales projections. Lenders are used to seeing this term preceding projections that are usually anything but conservative.
Do not make outlandish projections. They will ruin your credibility as a reputable business person. A common mistake is assuming your business will have a few modest years and then a dramatic increase in sales when "the market takes off."
Use "best case," "worst case," and "likely" scenarios to create a spectrum of sales projections.