How to Do Market Research

First, what’s market research?

Market research is the process of learning about your potential customers. Who are they? What are their buying and shopping habits? How many of them are there? It sounds like a complex process for academics. But, it’s actually really simple.

Why you should do at least a little market research:

When you’re starting a business, getting to know your customers is one of the most important things you need to do. If you don’t understand your customer, you don’t know how you can help solve their problems. You don’t know what kind of marketing messages and advertising will work. You don’t know if your product or service is actually something your customers will spend money on.

Market research reduces risk

Please, don’t just do market research because someone told you to do it. Don’t just do it to fill in a section of your business plan. Instead, do market research to get to know your customers and prospects better. Do it because it will greatly reduce risk as you start your business. Do it because it will improve your marketing and sales process.

If you do need to do market research—and We recommend that everyone do at least a little—here’s how you should do it:

1. Start by identifying your target market

Imagine that someone walks into your business, or picks up the phone and calls you. It’s your perfect customer: someone who has the problem that you solve and is willing to spend money on your solution. Now imagine the details about this person. Who are they? Can you describe them?

Ideal customers and common traits

This “ideal customer” is your target market. Now, your business might have several target markets, but it will usually serve you best to keep your list of target markets to two or three.

Each of your target markets should share common traits. These might be demographic traits such as age group, gender groups, income levels, or locations. They might be what are called psychographic traits, which are groups of people that like the same things or have similar interests. Or, your target market might be a certain type of employee at another company, such as a CTO or head of marketing.

Most often, target markets are blends of demographic and psychographic groups. For example, you might be developing a new type of shoe targeted at female triathletes. Or you might be opening a hair salon targeting urban, hipster men.

Market segmentation

Creating multiple target markets for your company is doing what’s called “market segmentation.” This sounds complex, but all you’re doing is dividing your target markets up into different groups that you hope to sell to. Each market segment might have different characteristics and might buy your product or service for different reasons. You might end up coming up with different marketing campaigns for different market segments or even customizing your product or service for each segment.

2. Talk to your potential customers

Once you have identified your target market, or at least made a good guess at who your target market is, you need to take the most important step in this entire market research process. You need to get up from your desk, get out from behind your computer, and go outside. That’s right, you need to go and actually talk to people in your potential target markets. This is called primary market research.

Yes, you can do online surveys and other research, but that’s no substitute for actually talking to potential customers. You’ll gain more insight into your customers just by seeing their work or home environments, and get a better understanding of how they make buying decisions by actually talking with them than any survey will ever tell you.

Do this one thing, and you’ll be miles ahead of your competition. Why? Because most people skip this step. It’s intimidating to talk to strangers. What if they don’t want to buy what you plan on making?

So, don’t be like most entrepreneurs (including me!) and skip this critical step. It can mean the difference between success and failure.

One of the most popular methods for doing this kind of primary market research is to actually try and sell your product or service as if it currently existed. Talk to people who you think might be your potential customers. The more you talk to, the more you should start to see common themes in who your ideal customer is.

This process is critical because it might help you re-define your target market. Your initial assumptions might be wrong and that’s OK. Better to make mistakes early in the process before you’ve risked very much.

You might also learn more about how you should price your products or services, what the most critical features or benefits are, and what features your customers want.

Getting this step done early will help you refine your business model and make a clear impact on your future success.

3. Find out if your market is big enough

Once you have identified your target market and validated it by talking to them in person, you need to do research to figure out if your target market is big enough to sustain your business. If there aren’t enough potential customers to sustain your business and your competitors, then you need to consider changing your product or service offering.

For example, if your target market only has a few thousand potential customers, you either need to sell to them frequently or sell at a fairly high price to create a sustainable, profitable business.

To figure out if your market is big enough, you need to do some research. Use the attributes you defined in the target market step and then figure out how many people meet your demographic, psychographic, or location criteria. I’ve got some links to resources that will help you figure this out at the end of this article.

If you are targeting an existing market with established competitors, you do what’s called industry research. For example, perhaps you are building a new company in the market for sports drinks or the market for cell phones. In cases like this, understanding how much people buy of the currently existing offerings will give you the best sense of potential market size.

In this case, you want to look for industry reports and read trade publications for your industry. These publications often summarize the market size.

4. Document your findings

The final (and easiest) step in the market research process is to document your findings. How formal your documentation is will really depend on how you plan on using it.

If you only need to share your findings with your business partners and others in your business, then you can probably communicate fairly informally. However, if you’re looking for investors for your business, you may need to write a more formal market analysis and do a market forecast.

Presenting your market research

The single piece of documentation that every business should create is a buyer persona. A persona is a description of a person that hits on all of the key aspects of your target market. And, just like you might have several target markets for your business, you might have several different buyer personas.

Creating a buyer persona converts your target marketing information from dry research into a living, breathing person. For LivePlan, we’ve created a persona named Garrett who drives much of our product development. Garrett embodies the attributes of our ideal customer.

Where to find market research data:

Finding market research data really depends on the market you are targeting and the industry you are in.

Here are a few of the favorite sources for market research:

  • Consumer Expenditure SurveyIf you want to know what people spend their money on, this is your source.
  • MyBestSegments: This tool from Nielsen is a great resource for finding out what demographic and psychographic groups live in a given zip code or where the highest concentration of a given segment lives. While the most detailed data is not free, you can get a lot of great insights from the free version.
  • SBDCNet Business Snapshots: You’ll find a great collection of industry profiles that describe how industries are growing and changing, who their customers are, and what typical startup costs are. You should also check out their list of market research resources, sorted by industry.
  • ZoomProspector: This tool can help you find the ideal location for your business, or find new locations similar to where you already are for expansion and growth.