How to “understand the market”?
When it comes to business and marketing strategy, anyone that has something to do with marketing will tell you that one of the first things to do, is to “understand the market”. Even though it sounds obvious, it is indeed crucial. Market understanding will determine your ability to craft a working product/service and help you take really strategic business decisions. However, what does “understand the market” mean? What are the key necessary pieces of information? And how to get it? Let’s dive in the subject!
First, let’s emphasize why understanding the market is so important. Either you are at the very early stage of a business idea or you manage an established profitable company, this knowledge is impacting the future success of your business. At Enigma, we know too many companies that fail because they try to sell something that nobody actually wants. This is the general problem of a bad Value Proposition, and it generally comes from a bad understanding of the market segment.
Understanding the market is not only about market size, growth, and potential, but also on understanding people’s problem: what they try to do, what are there pain points or gains. The more you know, the better you can create value and the more your products/services have a chance to be adopted by the market.
Let’s be clear: it’s not because you can solve a specific problem for a specific market that your business will be necessarily successful. Indeed, you have to assess the market potential, which will directly impact the total amount of value you can actually create (and therefore capture through pricing) with your solution. You won’t be able to generate sustainable revenue if the market potential is too low. For market potential, you’ll look at a lot of different metrics such as total market size, growth rate, competition, etc.
So, if we look closely, understanding the market can be done from two perspectives: 1. the marketing side and 2. the business/financial side. Of course, looking at solely one aspect won’t help you at being successful. You have to check both side to really understand the market holistically. Let’s have a look at both parts and how to evaluate them.
The marketing side of understanding a market
Here, we will be interested in what people do. Since not everyone is doing the same thing, you have to find a way of segmenting people to regroup the ones that have a common objective. Let’s take an example: the shoe industry. Almost everyone buys at least one pair of shoes in their life. However, how people use shoes are a completely different story. Some people want to go for a trek, others are running on concrete roads, and the third group of people is doing less than 100 meters a day but need to look fancy. So, if you wanted to sell shoes, you’d probably propose something different depending on the segment(s) you want to serve. You made the first step in understanding the market: you know that there are at least those three needs to fulfill. However, that won’t help you a lot. To really create value, you need to understand deeply the specific segment you want to serve. For that, you’ll have to step in your customer shoes (no puns intended).
For that purpose, I like to use the customer side of the value proposition canva by Strategyzer. It is a very simple tool where the market segment is analyzed over 3 aspects: what job it tries to achieve, what are the gains people in this segment seek when doing the job and what are the pains they try to avoid.
Let’s take an example to see how this structure of thinking helps: again in the shoe industry. Nike is originally commercializing shoes for athletes. If we look at that segment, one of their jobs is to improve their athletic performances. For that, a gain is having their foot and body protected while a pain is the extra weight that a shoe will add to their total mass. Having this knowledge (especially knowing how crucial the pain was) pushed Nike to develop the “Air” technology: a robust sole that absorbs chocs and is much lighter than plain rubber. For Nike, Air has been a huge success and is still today.
How can you obtain this knowledge about your customers? Well, there is more than one technique and you will probably have to use a mix of them. Let’s see a few:
1 – Talk to users
Go out and talk to people. You will easily observe differences between people that will help you identify the various jobs people are trying to achieve. For example, Jeff Johnson from Nike was visiting stadiums to promote the shoes but took the time to also discuss with athletes in order to learn from them.
2 – Observe users
Some gains or pains won’t be told. Especially, social gains are not easily expressed by people. It’s unusual that someone tells you that they are buying shoes to impress their peers. For that, you need to observe what people do and the context in which they do the job.
3 – Use secondary research
Many information about consumption habits can be found online. Consulting companies such as Nielsen are often publishing interesting reports on marketing research that can sometimes provide further information about gains or pains.
4 – Be a user
An interesting way of identifying pains and gains if you already know the job is to put yourself in the position of the user. Try to achieve the job and look for each situation in which you feel a pain point or a gain.
Only when you have all that information you are really understanding your segments. You should definitely have a look at competitors and do the same exercise. Work backward from their value proposition and try to find the segment they serve, the pain they mitigate and the gain they leverage. It is also another way to find new opportunities.
You now have all the cards in hand to craft a product or service that can really provide value for a specific segment (for that, have a look at how using the value side of the Value Proposition Canvas). It means that your product or service has a good chance to be adopted by that segment because it creates real value. However, you don’t know if it has any business potential. For that, you’ll have to analyze the whole market ecosystem.
The business side of understanding a market
Now, you need to know if there is business potential. A market ecosystem is comprised of customers, competitors, suppliers and external factors. Analyzing all those elements will give you a good overview of your market. From that, you can evaluate present and future profitability.
What interest you the most here is the amount of customer you can serve and how much they will buy. Of course, this depends on your value proposition: the more niche you go, the more value you can provide, but also the smaller the customer segment. It is not always necessary to have a huge amount of customers, but at some points, it will be a limiting factor. Here I recommend estimating the market size in sales. How many people are potential customers (i.e are likely to adopt your value proposition) and how many time they would buy during one year. This will give you more or less the maximum amount of sales the market hold during a year.
When analyzing the number of customers, you can also identify possible threats. For example, if there are only a few potential customers, the competition to catch them will probably be fierce (if not now, it will be in the future when your business model will have been proven to be working) and customers will have higher negotiation power.
Finally, check how the market is evolving. Is the demand increasing, meaning the market is growing? Or can we expect a decline in the future? Use it to evaluate future demand.
By competition, I mean similar offerings from other companies, but also other offerings that could fulfill your segment needs. The number of competitors will give you interesting insights. If it is high, it means that you will have to differentiate a lot. If it is low, maybe it is because barriers to entry are high (huge investment, technology, reputation, etc.).
If nobody is already there, then there are more or less two possible reasons: either you found a good segment unserved by competition, or there is no market (no demand). So, be sure that the segment actually exists (that the need is real and is not an illusion due to wrong assumptions you made about the market). In this case, go ahead but be ready to face competition as soon as your business model is proved to be working.
You should also analyze how many competitors could easily offer a similar product or service and at what pace, to forecast future competition.
Who are the important partners you will have to work with in order to create that value proposition? Are there many, so in case of one failing you, you can always find another one? If not, then it represent a threat that you will have to mitigate or compose with.
Analyzing external factors will help you identify the future orientation of your market. Of course, you want to know where the market is heading to keep your value proposition relevant. Check demographic shifts, technological developments, social and cultural norms as well as economic indicators that will shape future demand and competition.
You should also consider regulation. Is there any threat that your offering will be obsolete in the future due to a change of regulation? Or on the other hand an opportunity of making more people looking for a solution like yours? For example, transport companies like Uber profit from the increase in law enforcement concerning drunk driving.
Based on both the marketing and business knowledge concerning your market, you can craft a good value proposition embedded in a promising business model. Now, you have to keep learning about your market. Always check the latest development, new competitors, technology advancement, etc. Stay ahead of the curve to stay relevant at all time. And never take your success as granted (remember MySpace?)
This article and many others are related to our hub pages on launching new products and pushing existing products. Do not hesitate to visit those pages to get more content on those topics.