The market analysis and marketing plan sections are two of the most critical elements of a business plan. Private equity investors or loan providers need to be convinced that a real demand exists for the company’s products and services and that management has a viable plan for capturing market share.
Market analysis should be current, specific and supported by credible, independent data. The section should precisely identify the customer base the business is serving and the needs of those customers. The following elements should be thoroughly covered based on detailed market research:
- Description of the company’s industry and potential customer base.
- Data on market size, demographics, growth trends, recent market innovations, any relevant regulatory issues.
- Number of potential customers in targeted niche market. Percentage of target market that company aims to capture, with justifications.
- Customer requirements. Purchasing decision key drivers, such as price, quality, tailored solutions, reliability of products or services.
- Purchasing behavior of customers, including purchasing rate and cycle and profile of typical decision makers.
- Analysis of company’s existing customers, if any, and their purchasing habits and history. Credibility will be greatly enhanced by verifiable evidence of customer demand and response to business products or services.
Information sources will vary by business and industry type and research may be carried out independently or with the aid of a professional market research consultant. Local and national government bureaus are excellent sources of demographic information and business surveys. Questionnaires compiled for current and potential customers will provide the best feedback specific to the company.
Having identified a specific target customer base and articulated the needs of those customers, management must now demonstrate that the marketing plan will result in a successful and profitable distribution of the company’s products or services. Projected sales drive the rest of the business plan in terms of growth and capital requirements. The marketing plan should encompass the following:
- Pricing strategy for the business’ products or services. Is the company aiming to appeal to customers though low pricing or is a pricing premium sought based on higher quality or unique product aspects?
- Pricing decisions in the context of gross margins and competitive issues.
- Details of distributions channels. For a product this could include, wholesalers, retailers, direct sales, distributors. For a service provider, the means of advertising and promotion must be explained. Choices directly impact growth projections and cost structures.
- Analysis of the competitive environment. Identification of existing competitors, their strengths, weaknesses and market shares. Management must explain how the company’s offerings will compete, including, if possible, direct product comparisons. The investor will need to be convinced that the business can generate sustainable advantages over the competition.
The essential message is that without any customers, there isn’t any business. The importance of understanding your target market cannot be overemphasized. Finance providers will only risk their capital if they are convinced that demand exists for the company’s products or services and that management can capitalize on the market opportunity.