Investigating the possible market is essential. Market research involves you testing the feasibility of your product/service concept. Is the idea flawed? Are there enough people out there who really want your type of product/service? If you are a painter and decorator or market trader merely placing a few adverts in the press and equipping your van or buying a small amount of stock to sell from a market store involves a very low risk. An outlay of a few hundred £ will get you started and your first few weeks of trading will confirm your hypothesis that a market exists. But if business start-up involves a very big investment in fixed assets and promotions etc it is wise to do the best market research you can.
Modest but effective market research investment will try to confirm whether or not and further and larger investment is justifiable. You need to know that the market exists and that customers will really buy your idea.
Market research involves desk and field research.
Desk research
Using published market data. trade directories, Yellow pages, trade magazines.
You may look up the financial report of a competitor company at the Registrar of
Companies.
Field research
This means going out and asking your customers, testing your ideas and perhaps
your product on them. You may be observing behaviour e.g. customer flows in a
shopping centre, counting customers, counting cars or shops. You may do
interviews using a questionnaire or over the telephone. You may offer samples to
mebers of the public or organise a taste panel. This research may be commissioned
from a market research agency (expensive).
Study your competitors. Learning from them can very effective desk and field research. Look at their products, the elements of their service, their methods, how they achieve quality, how they satisfy customers. How do you do this? By observing and participating - become a customer.
Ask yourself, "who are their suppliers, how much do they buy". Examine their customers. What are your competitor's market segments.
Consider both direct competitors (local, same product, same customer groups) and indirect competitors (different product and sell to the same market or similar product but sell to a different market (location) than the one you intend to serve in the first instance).
Field research may even involve taking your future competitor's product apart to learn about it advanages and disadvantages in relation to your product.
This requires considerable forecasting of your proposed operations; the equipment and premises needed, the costs of supplies as you move from product launch to full (hopefully) capacity. Think through the costs of repeat advertising and promotions. Assess the staffing costs and miscellaneous expenses.
It is not until these are understood and compared with your estimated and targetted sales that you can begin the process of determining your pricing. Market research may indicate prices already prevailing in the market. These will range from premium prices for premium products/services acceptable to customers with losts of disposable income to lower prices for another market segment.
This analysis will involve you doing a lot of "What ifs" i.e.
What if
The technique of calculating break-even point is very useful. You can explore a rnage of fixed and variable cost assumptions and price levels to estimate the level of sales at which the business will be breaking even? Develop a break-even point model using a spreadsheet. The model should reflect your start-up costs and operating plan.
Of course this is all estimated and theoretical. the proof of the pudding will be when you launch your business and get into the first year of trading.
Many businesses fail because of underpricing. The general rule is price at a "level that the market will bear". But what is this level? You can launch at a price just below the competition but this has two problems. Firstly the competition may then cut its prices to keep its customers and force your back against the wall. you are struggling to service your start-up costs! secondly if you price low - you may subsequently lose customers if you want to increase your prices latter. Did anyone say that going into business was easy.
What margins are typical in your type of business?
See Barclays Bank advice on break-even analysis.
You may have to consider becoming an ISO 9000 business very early on in the life of your business. This will be the case if your business customers will only trade with an accredited ISO 9000 (quality management) firm.
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