Market analysis – Spreadsheets for Business – Using Excel to Help with your Small Business Questions

“Why Is a Market Analysis Important in a Business Plan?”

February 17, 2021August 4, 2020 by KCB

“Why include an analysis of the market in your business plan?” The market analysis is the foundation of the business plan. Other sections are important, of course. Not the least of which is the financial projections. But the market analysis is what will really make or break your business plan. It will solidify what problem you’re solving and what makes you unique.

If the market analysis is neglected, then the reader of your business plan is left to guess about your customers, competitors, and the environment you expect to operate in. Not surprisingly, if people are left to guess about these things – they’ll probably guess that there is no market for your product or service.

By committing to all the necessary steps involved in market analysis, you demonstrate to the reader that you understand important factors related to your company’s success. Furthermore, you’ve demonstrated your aptitude in analysis and willingness to be flexible.

Showing the reader that you know your customers, the competitive landscape, and the risk in your industry will set you apart from others who are looking for financing. Particularly those who are merely operating on a hunch.

**While writing a post for InvestSomeMoney.com on the topic of competitive market analyses, I stumbled upon this post on Buffer.com. I thought it had a lot of great ideas and would complement the information in this post.

What is a market analysis in a business plan?

The market analysis section of the business plan is where you demonstrate your qualitative and quantitative understanding of your environment. Also your company’s strengths and weaknesses.

A good market analysis will address anything and everything that pertains to your new company’s internal and external environment. For instance, topics covered could include:

Economics
- Distribution
- Manufacture
Regulations
- Taxes
- Privacy
Customer avatars
- Demographics
- Geographics
Competitors
- Identification
- Analysis
Customer behavior
- Decision making
- Motivation
Risk
- Government instability
- Operational risk
Opportunity
- Market size
- Unique selling proposition
Value
- Problem identification
- Product/service benefits

What is the importance of a market study?

A market analysis won’t tell you what to do, unfortunately. But if you commit time and effort, it should shine some light on how to proceed. Hopefully, it will make the course of action a little easier to see. A correctly executed market analysis should help your young company to navigate obstacles and avoid being stopped in its tracks.

There are many reasons to do a market analysis. Many are unique to the small business and the industry it operates in. Here are some potential reasons for you to consider…

Think about what problem your product or service will solve

It’s kind of an old cliché, but customers buy benefits. Not features.

For instance, people don’t buy saws to cut wood – they buy them to have a perfectly shaped piece of wood. We all know this intuitively. But it still takes an effort on most of our part to consistently think in this different way.

Unfortunately, thinking in this manner opens up a whole new list of competitors. Substitute products were discussed in the demand analysis post.

To use the previous example – say you were selling saws in your retail store. You might have to consider the local lumberyard a competitor if they started making custom cuts for their customers. Their primary product isn’t the same. But they are selling the same solution.

Be honest with yourself about your product or service

When a fresh idea pops into an entrepreneur’s head, they feel like they’ve just solved all the world’s problems. If it were up to entrepreneurs, everything they conceive would be an absolute hit.

The reality is – you’re not the only one who’s going to buy your product or service. Hell, you may not buy it at all. A business plan market analysis forces you to look at your idea objectively. To confront its faults, its shortcomings, and your erroneous assumptions.

Never forget why your customers would buy your product or service. They’re just as egotistical as you, and you’ll have to convince them that you’ve solved their problem in order to get them to buy.

Solidifying your unique selling proposition (USP)

Some say there are five ways that a company (or brand) can make itself unique. That’s kind of narrow, I think. Because if there are only five ways then there’s not much room for uniqueness. Nevertheless, it serves as a good thought experiment and a way in which a company can begin to think about its USP.

There’s an old saying in business “price, quality, or customer service. Pick two.” As far as I can tell, this cliché actually has some basis in reality. It seems that companies can be above average in two of these – but never all three.

So, your company can set itself apart with one of these three categories. Or, it can look to set itself apart in terms of image. It’s good to be above average in as many categories feasible. But ultimately, your company needs to decide to be the best at something. Something unique.

Working through the steps of writing a market analysis in your business plan will help you understand what distinguishes your product or service from others in the market.. If it doesn’t, then you probably have a little more work to do!

Here are the five (general) categories of uniqueness you might explore to clarify your USP.

1) Product

Usually, a product or service has to be of high-quality in order for a company to be renowned for it. Or, at the very least, it needs to have unique features (benefits).

Porsche is an example of a company with a reputation for quality. Porsche is, of course, a luxury automobile brand that uses high-quality and unique materials. According to Consumer Reports, Porsche’s quality is viewed as higher than other reputable automobile brands such as BMW or Mercedes.

2) Customer service

Just as a quality product can set you apart from the competition, quality customer service can do the same. Service so good that the (lower) quality and/or (higher) cost of your product or service can be overlooked.

Ritz Carlton is a company well known for its exceptional customer service. This is another luxury brand. But, it doesn’t mean that only luxury brands can offer great customer service. Ritz-Carlton sets itself apart by offering personalized and unique service to its patrons.

3) Pricing

There are many different pricing strategies that a company can employ. Typically, though, the only one that is going to resonate with customers is economy pricing.

Walmart is the de facto example when it comes to economy pricing. But, I would also submit Amazon for consideration. While Walmart might beat Amazon on a lot of prices. Particularly, well-known consumables. Amazon seems to have earned itself a reputation of low pricing for things that are a little harder to find. You might be able to find unique products on a specialty retail site too. But rarely will the specialty site beat Amazon on price.

4) Branding

Of the two perception-based categories for a USP, branding is the internal one. It’s the one that has to do with the company itself. It’s the image that’s portrayed to the public and the concepts that the company associates itself with.

Burt’s Bees is known for its all-natural beeswax lip balm. But, they actually have over 350 natural body care products. Burt’s Bees’ philosophy is “what you put on your body should be made from the best nature has to offer.“ They’ve worked hard to brand themselves as a natural and healthy alternative in an industry that uses a lot of unsavory ingredients in its products.

5) Customer avatar

Sometimes companies are defined by their customers. Their customer avatar is their image. Of the two perception-based USP categories, this is the external one.

There are lots of companies that could be considered as “defined by their audience.” Lululemon is an example that comes to mind. Typically if someone is a Lululemon customer you can picture in your mind some of their demographic characteristics. They’re probably, white, young, suburban, women from above-average income households. Whether Lululemon chose that demographic, or it chose them is debatable.

Now look at the competition

Since the goal here is to determine your unique selling proposition, you’re going to have to size yourself up against the competition.

The most straightforward way to do that is to lay out your information in regards to the five categories of uniqueness and compare it side-by-side with your competitors. After you’ve examined the competition’s products, customer service, pricing, branding, and custom avatars then you will have a very good idea of what it will take to be unique. More importantly, you should have an idea if that uniqueness can put you in a position to be successful.

See below for an example of how the comparison might look.

An example of USP in a business plan

If this is the first Spreadsheets for Business business plan post you’ve read then let me bring you up to speed.

For all of the business plan posts I’ve written, I attempt to apply the subject at hand to a hypothetical startup. This hypothetical business would manufacture and distribute an all-natural, topical, hair regrowth supplement.

Previously, by going through the market analysis steps, I’ve learned that there may be an issue with market saturation in this space. An issue that might not make this a feasible business. But, for the sake of consistency I’ll stick with the same business idea when examining the topic of why a market analysis is important in a business plan.

In previous market analysis posts, I outlined what problems I thought my hypothetical product would solve. I also addressed some of the strengths and weaknesses of my product and business model. So, here, I’ll take the opportunity to walk through the five categories of uniqueness and what my potential business might look like when stacked up against the existing competition in that space.

	Hypothetical product	Rogaine (Men & Women)	pura d’or Anti-Thinning Shampoo	iHelmet
Product	Quality ingredients. Untested.	60-92% positive results	Very positive ratings	Up to 98% positive results
Customer service	Via retailer? Untested.	Via retailer	Via retailer	Unknown
Pricing	$35.49 men. $29.49 women.	Approx $10/month	Approx $30/month	$490-$545 one time
Branding	Unique natural ingred. Not FDA approved.	Only FDA apprvd topical treatment.	Comprehensive natural ingred. Not FDA approved.	Less discreet. FDA apprvd.
Customer avatar	Men 18-35. Women 31-60. High income.	Men 35-50. Women 31-60. All incomes.	Men 18-35. Women 31-60. High income.	Men 35-50. Women 31-60. Very high income.

So, what conclusions can I draw from this?

For starters, I’ll know that getting (authentic) positive reviews will be crucial to get my business off the ground. Additionally, it will probably be best to leave the customer service up to the retailers – at first anyways.

In order to justify my pricing, I’m going to have to place a huge emphasis on my unique ingredients. That’s my rough USP, for now. A “one of a kind” formula.

Calculating Market Saturation for Your Business Plan

August 3, 2020April 16, 2020 by KCB

Market saturation is a measure of the amount of supply for a given level of demand. The more supply, the greater the amount of saturation. All things being equal, the more saturated a market is, the more difficult it could be to compete. Calculating and understanding market saturation will help you as a small business owner create strategies that will help you succeed.

Market research for your business plan is obviously critical. In addition to analyzing demand, market size, economic indicators, and location you’ll also want to know how much and what type of competition your face. You want to know how saturated your market is.

This is all a lot of work. But, I feel it’s important to help you stay competitive. Not only when you’re writing your business plan, but throughout the remainder of the life of your business. Understanding your customers and your competitors will help you to be more successful.

More market saturation can mean a smaller market share

Market share is exactly what it sounds like. It’s your share (percentage) of the market for your company’s goods and services. That’s the simple explanation.

What’s considered your market and what goods/services you’re referring to it’s up to whoever is calculating the market share.

On my sister site, InvestSomeMoney.com, I have talked extensively about total available market (TAM), serviceable available market (SAM), and serviceable obtainable market (SOM). Of these, the SAM is what I would advise for you to consider when calculating market share.

Also, many businesses, probably yours even, sell a variety of products and or services. Therefore their market share might vary in terms of what they’re selling. It might be that they have a dominant market share in one category, and a poor market share in another.

Market saturation is a situation where there is no unmet demand for a given product or service. This can happen from businesses entering the market, businesses growing, or from demand shrinking.

The market can be saturated if there’s only one business in it. Of course, that’s referred to as a monopoly. In other markets, particularly those that deal with commodities, the market could be saturated due to an overabundance of competitors. So, the number of businesses in the market isn’t necessarily indicative of whether or not it’s oversaturated. Again, it has to do with supply vs. demand.

Strategies for competing in a saturated market

There are five basic strategies for combating market saturation. For more details on business growth strategies read this post on InvestSomeMoney.com.

Market penetration

Market penetration means taking market share away from competitors.

This can be done in a couple of different ways.

The first is pricing. Lower prices, all things being equal, can take customers away from the competition. As a new business, you might not have the cost structure or processes in place to make the margins that you need if you compete on price. Alternatively, you can raise prices and present your product/service as a premium offering. This can work if you can truly isolate what is it that makes your offering unique.

Additional value is another way to penetrate the market. A better experience, upgrades, and loyalty programs are a few ways to do this.

Market development

Market development means focusing on an unsaturated geographic area.

If your first choice for location is saturated, perhaps your second, third… whatever choice might not be. In fact, your business model might have market development worked into it by design. If your plan is to start a franchise or to market your products through a network of distributors, then you will be planning on developing new markets in the future

Product expansion

Product expansion is the creation of new products or services which don’t yet have a saturated market.

Creating a new unique product/service is one of the most effective ways to penetrate a new market. We all know the cliché about building a better mousetrap.

Your new product/service doesn’t necessarily have to be revolutionary. It can be a minor improvement to something that already exists. It can even be something that has extraneous and unnecessary features (without huge benefits) stripped away.

Diversification

Diversification is the combination of market development and product expansion.

Diversification is really just a hybrid of the above strategies. The combination of any two or more ways to break into a saturated market.

For instance, a franchise restaurant that offers a half chicken and half beef sandwich. That’s a silly example but it shows you what the combination of market development and product expansion might look like.

Acquisition

Acquisition is investing in another company in order to capitalize on their market share.

If you’ve got the capital, and the business plan, an acquisition, merger, joint venture, or alliance may be the way to break into a saturated market. In a case like this, you might purchase the sole vendor in town and open your own retail location. This would give you control of the supply and the costs. This control would put you in a strong position to increase market share.

How to calculate market saturation

First of all, before we begin, we should probably be pretty clear about what we want. Here’s a somewhat technical definition that we can use as a starting point:

Market saturation is defined by the relationship between supply and demand. Supply and demand for substitute products within a particular geographic area. The geographic area can be small, or it can encompass the entire world.

Alright, so what’s meant by that?

If the amount supplied by your potential competitors is greater than or equal to what’s demanded, then the market could be considered saturated. However, getting an accurate read on the supply and demand for a particular product/service can range from time-consuming to damn near impossible.

Don’t let that discourage you. The point of writing a business plan, in general, and calculating market saturation, in particular, is to think things through thoroughly. To look at your aspiring business and the environment it operates in as comprehensively as possible.

So, you’ll have to work with what you have. It might be a little or a lot of information. That’s more abstract than I like to be. But, that’s the way it is. Every industry/business is different. So, I, unfortunately, can’t prescribe any “one way” to calculate market saturation.

I can, however, give you some guidelines and provide an example…

Use a benchmark

Credit for this idea goes to this slideshow.

In this example, the market saturation of a casino in the Chicagoland area was analyzed.

It was compared to areas that were assumed to already be saturated with casinos. This was done through the use of ratios calculated with demographic and industry data.

casino market saturation comparison ratios — Credit: digitalscholarship.unlv.edu

The authors of this slideshow probably didn’t know the exact demand for a casino in the Chicagoland area. How could they? Even if they could survey every individual living there, the demand information they gathered might not be reliable.

So, they did the next best thing – they used a benchmark.

Now, St. Louis, Kansas City, et al. may or may not really be saturated with casinos. However, if Chicagoland’s ratios (machines per 1K adults, machines per $1B of disposable income, etc.) are more favorable, it probably doesn’t matter. From a market saturation standpoint, the Chicagoland area is probably more favorable for a casino. If the Chicagoland casino fails, it probably won’t be due to market saturation.

Start with what you know (or, at least, what you’re pretty sure of)

What’s something similar to your product/service that’s got a saturated market? Where’s somewhere similar to your business location that you’re pretty sure is saturated? These can serve as your benchmarks.

I would suggest that you refer back to your business plan demand analysis. In particular to the drivers of demand. Hopefully, these will give you an idea for the metrics to use for comparison.

In the casino example, demand drivers such as population (21+) and disposable income were used.

Once you have a grasp on the demand side of the equation, you’ll need some supply figures. Again, use the best information you can get your hands on. This may come from an industry publication, an internet search, or just information you already know. If all that fails, you might have to use a proxy, as I did below.

In the casino example, they used industry information on the supply side. Things like gaming machines/facilities and revenue.

With demand and supply information in-hand, you can now calculate ratios. Do this for your own business and for the benchmark that you know is saturated.

Compare the results. If your prospective business looks more favorable – great! You might not have to fight a saturated market. If things don’t look so good, don’t give up. Consider which of the above strategies you could employ. Or tweak your business plan somewhat.

Consider a soaking wet rag. It might be completely saturated and unable to hold any more water. If you add one more drop, a drop will fall off of it. Your business might be the drop that’s added, but that doesn’t mean it’s the drop that will fall off.

An example of calculating market saturation

As with all of my business plan posts, I’m going to work alongside you. For those who are new to these posts, my potential business is for a natural, topical, hair regrowth treatment.

Let’s start with a benchmark. Something that, I assume, has a saturated market. This took a little bit of thought.

I wanted to stack my potential product against something that everyone uses. A commodity that has a negligible amount of distinction between products. I also wanted something that had separate men’s and women’s versions.

So, I settled on “shaving razors.”

The supply of the benchmark

How many shaving razors are supplied, though? Almost impossible to say for sure. But, I thought that Amazon might provide some insight.

So, I did searches for:

“mens shaving razor” in the “men’s shaving & hair removal products” category
“womens shaving razor” in the “women’s shaving & hair removal products” category

mens shaving razor amazon results — Click to enlarge
Credit: amazon.com

For each search, I estimated the number of results (excluding sponsored results). I figured that, for a commodity such as shaving razors, nearly every company that sold them would offer them on Amazon.

Sure, substitute products and other unrelated items came up in these searches. But, since that’s the case across all my searches – it’s fine. It’s all about the relative number of search results, not the exact number.

Demand for the benchmark + results

Next, I needed to know the demand for shaving razors. I decided to use males 20+ and females 15+ in the U.S. as my population. That data was derived from this source.

Then, it was a simple matter of division. The demand (male and female shaving population) divided by the supply (Amazon.com search results) gives me a ratio that I can benchmark against.

Here’s what that looked like:

	Population	# search results	Pop ÷ results
Males (20+)	119,000,821	8,060	14,764
Females (15+)	136,348,759	1,560	87,403

This means, in theory, that 14,764 men could buy each and every search result for shaving razors. 87,403 women. Again, I know not every person in the U.S. buys their shaving supplies from Amazon. It’s just that ratio I’m after.

At this point, I don’t know if that’s good, bad, or neutral. In order to put things into perspective, I need to know what the ratio might look like for my product.

I’ll need the same basic information, just tweaked for my particular product.

For starters, I’ll refer back to my post on determining market size. Here, I determined that my conservative serviceable available market (SOM) was 680,293 males and 1,159,854 females. That’s my assumed demand.

Supply for my product

As far as supply goes, I’ll approach it from the same way. I’ll use Amazon, but I’ll, of course, perform a different search.

This time, I’ll search for “mens hair regrowth treatment” and “womens hair regrowth treatment”. Both will be in the same category, “hair regrowth treatment” since there is no distinct category for the two genders – as there was with shaving razors.

Though the first page of results pulled up very different products, the total number of results was the same – 1,092 for each.

womens hair regrowth treatment amazon results — Click to enlarge Credit: amazon.com

Without further ado, here’s the results:

	Population	# search results	Pop ÷ results
Males in SAM	680,293	1,092	623
Females in SAM	1,159,854	1,092	1,062

Conclusions

What’s this mean? Way less Population per search result. That’s bad news.

I thought shaving razors would be the saturated market, but (wo)men’s hair regrowth treatment blew that out of the water. Only 623/1,062 people could buy every result in this market. That’s compared to over 87,000 in the women’s shaving razor market.

It turns out that hair regrowth treatments might be the saturated market. Boring ol’ razors (and other shaving acessories) might be where the opportunity is.

The numbers didn’t get any better when I used my SAM population instead of SOM. Though the populations were considerably bigger, the Pop ÷ results still paled in comparison to shaving razors.

As I was prepping for this post, I wondered if this wouldn’t be the case. Reviewing the information in my post on determining market size, I saw then that I was potentially demand-constrained (as opposed to supply-constrained). I saw then that I could make way more than I could practically hope to sell.

Going forward

What’s that mean for my prospective business?

First of all, it means that I’m glad that I performed this analysis for my business plan and didn’t dive in head-first.

It also doesn’t mean that there isn’t a business here. I just need to digest this information, circle back to some of the previous steps, and tweak my plan accordingly.

How to Choose the Best Location for Your Small Business

August 3, 2020April 2, 2020 by KCB

The Census Business Builder is a great tool to narrow down possible locations for your business. But, there are other important factors to consider like cost, competition, and capacity.

Why is location analysis important?

Location, location, location. This is often cited as the three most important factors in real estate. They’re also important for your small business too. Particularly if it’s a business that sells to the general public.

If your business doesn’t sell to the public though, that doesn’t mean that location doesn’t matter. You also have to consider your distance from customers, infrastructure, and other not so obvious things that can have an impact on sales and profit.

A business location analysis isn’t just important for your first location either. Yes, that might be the most important location analysis you undertake. But, it’s also important for your second, third,… whatever location.

So, what is a business location analysis?

It’s simply the gathering of location-related information, compiling it, and making the best decision you can. It may not be the optimal decision – which is okay. There are a lot of variables that affect the quality of a location. Probably more than you or I am capable of completely wrapping our heads around.

It is important to put your best foot forward though. If you give a business location analysis its time, you should make a good decision. Making a bad decision can result in costs (ownership or leasing) that are too high to support your level of business.

Remember, fixed costs aren’t necessarily bad. High lease payment can make sense if you’re in a location that’s going to make a lot in sales. Refer to this post on operational leverage to learn more.

A location analysis is vital for your business plan

Those who review your business plan are probably going to know how important location is. So, if you want to raise additional capital, or get a loan, you’ll need to address this important fact. You’ll need to make it clear how your location is going to contribute to your small business’s success.

Be prepared to answer why you’re choosing the location you are. what effect is this location going to have on your success? Take advantage of the tools available and consider the necessary factors. If you do, you’ll be able to confidently back up your location decision.

Factors to consider when doing site selection

Demographics of the area

When you think of demographics you typically think of descriptors for individuals. For example gender, income, age, homeownership, etc. Information like that is important, of course, if you’re relying on those individuals. Relying on them to purchase your products/services or to help sell them.

But, businesses also have demographics. So, if your small business is selling other businesses (B2B) – then you want to know the demographics of the nearby businesses too.

The competition

Where are your competitors located? Are they nearby? Or, are they in a completely different location? What advantages and disadvantages does their location have compared to yours? Do they know something you don’t? Or, maybe they didn’t think it through enough?

Nearby traffic

Traffic plays an important part in a business location analysis. If you’re selling to the people in those cars, and then you probably want to see more of them. That is, given that the local infrastructure can handle that volume of traffic. If it’s difficult to get in and out of your business, then all that traffic might be a deterrent for your customers.

Traffic also affects your employees. Depending on your geographic location, people’s tolerance for traffic might be different. If your location is going to be in a major metropolitan area, a lack of traffic might serve as something of an incentive to potential employees. If your location is going to be in a lesser metropolitan area, then being near the most congested traffic in the city might serve as a deterrent.

The local economy

Even if your business is based online, and you have minimal needs in terms of employees – the health of the local economy will still have a bearing on your business. Consider the economic implications of the different locations you’re reviewing.

Your business’ initial and ongoing location costs

As mentioned before, you need to make sure that the location you choose represents a good return on investment (ROI). Keep in mind what the initial location costs might be. So that you don’t spend too much before you’re even able to utilize the location.

Of course, you want to be cognizant of the ongoing location costs too. What the fixed costs will be and how they will affect your breakeven point and degree of operating leverage.

Will the location make business easier?

A lot of business revolves around the “numbers” making sense. But, there are human beings behind all those numbers. You being one of them. The best return on investment in the world probably isn’t worth it if it makes you, your employees, or your customers, miserable.

So, think about the intangibles. Don’t just quantify your analysis. Qualify it to.

Look at it from your employees’ perspective.

On the same token, how will the people working at this location feel about it? I mentioned traffic earlier, but there’s more to consider from the employees’ perspective. Are there places to eat nearby? Is this a part of town that employees will want to travel to?

Really try to look at this through your employees’ eyes. They don’t reap the same benefits that you, as an owner, do. If you were an employee, would you want to drag yourself to a job at this location day in, day out, year after year?

Adequate space and capacity considerations

It goes without saying that you need a building that facilitates the nature of your business. If you need warehouse space you’ll probably need loading docks. Or, doors that are big enough to drive a forklift in and out of.

If you have a computer-intensive business, you want to make sure that it has the broadband capability as you need.

Keep in mind, that you wanna look a bit into the future here. Don’t just think about what your needs are today or tomorrow, think about your best-case scenario. If your business grows faster than you anticipate, are you going to have the capacity to handle that level of business? Of course, don’t overspend just have a lot of excess space. Think of it as a balancing act.

An example of location analysis

As with most of my business plan related posts, I like to include an example. Previously, I had used my own aspiring business as an example. This business involves the manufacture and distribution of a topical hair thickening treatment.

I’ll rely heavily on the Census Business Builder (CBB) to narrow down a location. From there, potential locations can be qualified with some of the factors mentioned above.

Here’s a post I wrote on navigating the CBB.

Finding a location for a distribution center

As I mentioned in my Market Size for a Business Plan post, I would initially plan on outsourcing manufacturing. But, even though I’m not choosing where to locate a manufacturing facility, I may still need a location for distribution.

One of the potential manufacturers I found was in Florence, KY – which is near Cincinnati, OH.

So, on the CBB homescreen, I enter my NAICS code: 424210. Not because I’ll need it, in this instance, but because it’s required to get the map to come up. Then, I’ll enter Florence, KY as my location.

census business builder home screen — Credit: cbb.census.gov

Next, I’ll Select a Map Variable that will help in my search. My first thought is that I want my distribution center to be relatively close to the bulk of my customers – though I plan to eventually ship nationwide. This should help to keep shipping expenses down. So, I’ll use Consumer expenditures per household on Nonprescription drugs as my Variable.

I’ll also expand my geography out to the State level. I want to start broad and then narrow down.

census business builder state map — Credit: cbb.census.gov

As you can see, with the map centered around Cincinnati, the states represented in blue are those in the top quintile of spending on nonprescription drugs. Almost all of them stretch up the Northeast coast.

With that knowledge, I might start looking in Virginia. The closest of the high-spending states. Virginia is also, relatively speaking, closer to the West coast than the other states.

If I zoom in on Virginia and change my geography to County, I can narrow down further. Many of the counties are around the Richmond area and in Northern Virginia, close to Washington D.C.

What I’ll also do here is change my Map Variable. There isn’t one that details the average cost per sq ft of warehouse space (unfortunately). So, I’ll have to use something else.

I’ll use Average payroll per employee. I don’t want to hire just anyone, but I do want to keep costs manageable. So, I’ll focus on the second-lowest quintile ($34.7K – $44.3K).

Viola! I found it! Prince George’s County, Maryland will serve as a valid starting point for searching for a distribution center for my product. It’s not in Virginia, but it does seem to meet all of my initial requirements.

census business builder county map north virginia — Credit: cbb.census.gov

From here, I would search the web for available warehouse space and would qualify the choices with the factors listed above.

If I found another potential manufacturer, I could apply the same rationale to find more location options. Or, I could apply a completely different rationale. The steps I used to arrive at this location were just the first to come to mind. They aren’t necessarily the best.

Address potential problems with your business location

It’s best to get out in front of potential problems with your location. Just as it’s important to acknowledge your weaknesses and threats when doing a swot analysis. Think about how you’re going to handle your location’s shortcomings. Nearly every location has some.

Additionally, you want to acknowledge where your competitors are at. Consider the advantages and disadvantages of their locations.

Also, think about the best-case, most likely, and worst-case scenario. Just as I suggest you do with your annual budgeting.

How are you going to take advantage of the location? How are you going to overcome the shortcomings of your location?

Avoid picking a location just because it seems like a bargain. There’s more to consider than just the rent. Like almost everything in business, at the end of the day, it’s about the return on investment.

Business Plan Economic Analysis – Don’t Overlook It!

November 14, 2021October 8, 2019 by KCB

business plan economic analysis featured

Every small business operates in a number of different economies ranging from their neighborhood to worldwide. The health of these economies has a huge impact on the health of small businesses.

A business plan economic analysis should paint a picture of the economic environment your business will operate in. With many economic indicators, you can delve into further detail. Referencing information specific to small businesses in your state and industry helps to provide an even clearer context.

No, these indicators might not always paint a rosy picture. What they will do, however, is show that you’ve done your homework. That you, as an entrepreneur, understand your environment. You’ll show that you can plan around the threats you face and capitalize on the opportunities.

What to look for in a business plan economic analysis

Small Business Employer Firms
Proprietors’ Income
Small Business Job Creation
Business Births vs. Deaths
Small Business Loan Supply and Demand
Business Lending
Small Business Loan Approval Rate
Loan Charge-Off and Delinquency Rates

If you were so inclined, you could probably draw a correlation between any economic indicator and the health of your small business.

Depending on your industry, the particular economic indicators that affect your small business will vary. Whether you’re retail, manufacturing, goods, or services will make a difference.

Inspiration for these indicators was taken from the Small Business Economic Bulletin. This document is published by the U.S. Small Business Administration. Supposedly on a quarterly basis. Though, the Bulletin linked above is the most recent one I could find. It’s over six months old as of this writing.

Anyhow, I’ll work with what I’ve got. The Bulletin is a jumping-off point for the agencies that compile these statistics. I’ve covered some of these agencies before.

For each indicator addressed in the Bulletin, I’ll discuss what it measures, why (I think) it matters, and how to use the information. In the end, I’ll also touch on what (if anything) each indicator might mean for my startup.

These data are just a jumping-off point. You’ll have to dig into it further to determine what it means for your business.

Small Business Employer Firms

This indicator measures the number of small businesses that employ people.

business plan economic analysis small bulletin pg 1 — Credit: advocacy.sba.gov

It is derived from data maintained by the BLS. Specifically, a database named Business Employment Dynamics (BDM).

Small business, for the purpose of this indicator, includes businesses with less than 500 employees. I think that includes a lot of businesses that would qualify as “mid-sized.” But, that’s just me.

An uptrend in the number of Small Business Employer Firms implies that the environment is ripe for small businesses to launch. A decline would imply the opposite.

Where possible, I always recommend digging down into regional or state information. Doing the same thing by industry is smart too. That way you get the most relevant economic statistics for your business.

In the BDM database, the best way I found to do this is by using the Multi-Screen option for data retrieval.

You’ll notice two pairs of similar phrases if you browse the BDM. These phrases are Openings/Closings and Births/Deaths. So, what’s the distinction? I sent an email to the SBA and a tweet to the BLS.

The BLS responded quickly with a link to this page. The language is a little hard to understand. However, I think that the main difference is that Openings/Closings can include seasonal businesses. Births/Deaths are considered permanent.

The SBA, predictably, didn’t respond.

It’s my guess that this indicator is a tally of Births/Deaths. Which makes sense. Including seasonal businesses in the tally would increase its volatility. Probably better to count businesses that permanently open and close.

Proprietors’ Income

This is the aggregate amount of income earned by the owners of small businesses.

Specifically, sole proprietorships, partnerships, and tax-exempt co-ops. Dividends aren’t included in this indicator. Neither is rental income (i.e. by a landlord).

Most businesses start off as a sole proprietorship (Source). Businesses that don’t pay the proprietor enough income – die. A healthy small business environment should translate into healthy growth in Proprietors’ Income.

What if Proprietors’ Income is flat (or declining), but Employer Firms are growing? That might imply that more firms (proprietors) are fighting over shrinking pieces of the pie. If this is happening in your industry, beware.

The best way I found to drill down is to look at the most current release of Personal Income by State. From there, you want to go to the Interactive Tables. Specifically, you want tables SQINC4 and SQINC5 for quarterly information. SAINC4 and SAINC5 for annual information.

Clicking on either of those should guide you to what you need. Remember, you can use Ctrl to select multiple options!

proprietors income — Credit: apps.bea.gov

Small Business Job Creation

Job creation is a sign of growth. As customers demand more, help is needed to meet that demand.

It might come in the form of direct labor or administrative help.

Your small business may or may not follow suit. What this indicator tells us, though, is whether there is a net gain in small business jobs or not. If there is, that could be considered a tailwind. Not something that is going to guarantee success. But, not something you’re going to have to fight against either.

Here’s the flip side of that “good news” though. If small businesses (and the big boys) keep adding jobs, quarter after quarter, eventually you could reach a point where demand exceeds supply. The cost of labor goes up and (potentially) the quality goes down. For you, your suppliers, and maybe your customers.

Like Small Business Employment Firms, this indicator refers to the BDM database. Again, I suggest using the Multi-Screen Data Search to navigate it.

You can drill down by state if you choose to look at all industries and all sizes. However, some industry-specific searches can drill down by state too. I imagine it’s the bigger industries that allow for such a drill-down.

business plan economic analysis small job creation — Click to enlarge
Credit: data.bls.gov

Business Births vs. Deaths

This indicator ties in directly with the Small Business Employer Firms. More Births than Deaths mean that the number of Employer Firms goes up. More Deaths than Births – down.

Once again, we refer to the BDM database. Breaking information down this way allows you to see how much of pull Births and/or Deaths are having on the number of Small Business Employer Firms. For example, is the number increasing because of more Births? Or, because of fewer Deaths?

This is just further insight into the small business environment. It might be able to provide some clue as to how ripe it is for success.

When researching Establishment Births & Deaths you can isolate by industry. But, you’ll only get totals for the whole U.S. Conversely, when looking at all industries, you can narrow down by state.

Small Business Loan Supply and Demand

This indicator measures the percentage of bankers that answered two questions in the affirmative or negative. The first question asks if banks have tightened or eased their standards on small business lending. The second question asks if the demand for small business loans has increased.

business plan economic analysis small bulletin pg 2 — Credit: advocacy.sba.gov

Now we shift gears a little. Away from small business employment, openings, closings, births, and deaths. The focus of the following four indicators is small business borrowing.

This indicator seems to be rather subjective. It comes from a quarterly publication by the Federal Reserve. This publication is called the Senior Loan Office Opinion Survey (SLOOS) on Bank Lending Practices.

Not a terribly objective measurement. More of “getting a feel for the room” statistic. It is just a survey, after all.

Beyond those two questions, though, there is a lot more in the SLOOS that measures bankers’ attitudes toward small business lending. Questions related to terms, collateral, covenants, and much more.

The lines on the chart seem to oscillate around 0. A negative would mean that the banker felt the opposite of what is being charted, I suppose. For example, a negative Banks Tightening figure means that more bankers answered that they were easing standards. A negative Reporting Stronger Demand line would mean that demand was weaker.

Anyhow, this indicator might provide insight into how many small businesses are seeking to employ financial leverage. Those insights can be compared with the indicators measuring expansion and contraction. If the small business environment seems ripe, but few are willing to leverage in this environment, then maybe the optimism about the future is shaky.

Don’t forget to check out the accompanying tables for a more quantifiable view of the data.

No industry or state-specific information seems to be available for this indicator.

Business Lending

This indicator compares small business loan volume to that of big business.

The Federal Deposit Insurance Corporation (FDIC) Quarterly Banking Profile is the source of this information.

Commercial and industrial loans to small businesses are measured. As are real estate loans under $1 million.

Like the Small Business Loan Supply and Demand indicator, I think this is indicative of small business owner optimism. If small business owners feel like the environment is good for investment, they are more likely to borrow. If they don’t feel like they can earn an adequate return for the risk, they will likely limit their exposure.

It’s wise to look at small business lending in several different ways. One indicator might tell you one thing. Another indicator – something else. When you get conflicting (credible) information you should investigate. You’ll hopefully come out the other end a shrewder businessperson.

Credit: fdic.gov
Click to enlarge

Small Business Loan Approval Rates

This indicator provides valuable information two-fold. First, it gives you an idea of what the odds are of getting approved for a small business loan. Second, it breaks the approval rates down by the type of financial institution.

Granted, you don’t know the quality of the applicants measured by this indicator. That is something that would help to put this information into perspective. Are they startups or existing businesses? Maybe they aren’t adapting appropriately to changes in cash flow.

Big banks, small banks, credit unions, and alternative sources are measured. This might provide some insight as to where to go if your small business needs financing.

Unlike the other indicators, this one is more of a snapshot. Historical information is displayed. But only for the same month three and six years ago. It is not presented as a time series.

This gives you an idea of how well to prepare and where to focus your efforts when you need financing. If lenders are becoming more discerning, then you know that you’ll need to create a better business plan.

What you see in the Bulletin is pretty much all there is in the report itself. No state, industry, or size breakdown is provided.

Loan Charge-Off and Delinquency Rates

This indicator gives you an idea of how effectively other businesses are employing their leverage.

Access the tables behind this indicator here.

Granted, it really only points out what percentage of businesses are doing poorly. It doesn’t say much about the upside. Only the downside.

The description of the report doesn’t outline exactly how the terms are defined.

My interpretation is that Delinquency means that one or more payments are late. Maybe even only by one day.

Charge-Off likely means that the bank has written off the loan against their reserves. They feel that payment for the remaining balance is extremely unlikely.

This serves as a lagging indicator for some of the others. I think the indicator it ties to best is Business Lending. If Business Lending is increasing, but Delinquency is level, we can assume that businesses are finding a good use for the borrowed money.

No state, size, or industry-specific information is available.

delinquency rates — Credit: federalreserve.gov

Business plan economic analysis for my startup

I don’t know if I’ll finance my startup with debt or equity. Therefore, I don’t know if the lending indicators are relevant to my business plan. If I plan on using debt financing, I can circle back and scrutinize the relevant indicators.

Right now, I don’t plan on hiring any employees. So the Small Business Job Creation indicator isn’t currently relevant either.

Of the remaining three indicators, two are somewhat redundant – Small Business Employer Firms and Business Births vs. Deaths.

I feel like the Business Births vs. Deaths indicator gives a little more insight. Let’s look at what it shows for my industry – Wholesale trade.

wholesale trade births vs deaths — Credit: data.bls.gov

Not terribly encouraging. In 2014, Births fell below Deaths and seemed to stay there. This suggests, possibly, consolidation in the industry. Big, strong firms forcing out smaller, weaker ones.

What about Proprietors’ Income?

More encouraging. Proprietors’ Income has risen sharply in my state since Q1 of 2016. Despite the title, the table doesn’t have a NAICS breakdown. But it doesn’t.

So, I don’t know the whole story. If this rise took place in my industry, I could assume that there’s plenty of money to be made. It’s just going to fewer hands. This means that I had better have a sound plan for success.

proprietors income kansas — Click to enlarge Credit: apps.bea.gov

What other indicators should I have included in my business plan economic analysis?

Which indicators are important for your business plan economic analysis?

Join the conversation on Twitter!

Market Size for a Business Plan – 2 Methods to Gauge It

August 3, 2020August 29, 2019 by KCB

market size for a business plan featured

In order to estimate how much in sales your startup can hope for, you’re going to have to estimate the market size for your product/service(s). This is critical for your startup because it will give you an idea of your business’ potential. It will also help you plan for capacity-related issues.

2 approaches to estimating the market size for a business plan

I cover this topic more in-depth in a post on market size and growth rate on my sister site, InvestSomeMoney.com.

The context there is focused on investing your money in a publicly-traded company. Though that’s a little different than what we are doing here, the fundamental principles remain the same.

The goal is to determine how many potential customers there are for a business and how much they are willing to spend. In order to do that, we can employ two general methods. These methods are a top-down analysis and a bottom-up approach to understand market size and growth.

One way to think about this is that a bottom-up approach uses multiplication and a top-down analysis uses division to arrive at an estimated market size.

After writing on this subject several times, I’ve come up with another way to think about these methods. I think a bottom-up approach should look internally, at things like unit size and capacity. A top-down analysis should look externally at things like demographics and market research.

Looking at this from these two different perspectives opens the door for further analysis. When you’re done, you should know whether you can expect to be capacity constrained or demand constrained. You’ll also start to flesh out some ideas that will help you further into your business plan.

If you do an analysis with both approaches, you can compare the results. For instance, if your bottom-up approach is higher, you’ll know that you could have excess capacity issues. You need to consider scaling that back or otherwise expanding your product/service offering to drum up additional demand.

Conversely, if your top-down analysis reveals that demand is in excess of capacity, then you are leaving money on the table. Time to start thinking about what you can do to scale up and capture as much of the market as possible.

Let’s start by taking a look at a bottom-up approach to estimating the market size for a business plan.

Bottom-up approach example

On my sister site, InvestSomeMoney.com, I researched three real-life examples of a bottom up market sizing approach. In those examples, you’ll see that they sometimes mix in a little top-down analysis with their bottom-up approach and vice versa. There’s no rule against doing that, but I would rather look at things from two totally different perspectives.

When using a bottom-up approach, try to start with the most simplistic piece of firm information you can get your hands on. Then, start to build on it with other information, or the best guess you can muster.

You can think of a bottom-up approach as one that focuses on how much and how often customers will buy.

This information might be something you have internally. Or, it might be from the information you found by researching online. Start with a single “serving size” of your product/service. Then, think about how often a customer would buy. Work your way up from there.

A bottom-up approach for my business plan

As mentioned in earlier posts about business plans – I’m building one as I write these. My theoretical product is an all-natural topical hair loss treatment.

In the post linked above, I performed something of a top-down analysis of market size for a business plan. I later discovered that I was operating with incomplete information.

There’s still a lot to consider regarding packaging volume and dosage. That will require more thought. But, for the time being, I’m going to estimate the volume of a one month’s supply and the daily dosage to be the same as Rogaine. If that changes as I progress with my business plan, I can easily circle back to this and plug in different numbers.

With Rogaine as my benchmark, I know that a dosage of my product would be 1 mL. The product would be used twice a day. My product would come in 2 oz (60 ml) bottles. Each bottle would be one month’s supply, as I said.

Thinking about capacity

Okay. Now that I have a grasp on the package size – what about blending and packaging? If this idea were to come to fruition, I don’t picture myself blending batches in my bathtub and filling bottles with a ladle and a funnel. I would need access to some sort of industrial equipment.

Fortunately, a quick internet search shows that there is no shortage of contract blenders and packagers out there. Especially for food and supplements. What it costs, remains to be seen. That’s an issue for another time. For now, I just want to get an idea of how much I could manufacture.

This company claims it can blend 1.25 million pounds per workday. We’ll assume, for now, this represents the average contract blender/packager. What does that translate into in terms of 2 oz bottles?

First of all, I wouldn’t need all 26 of their kettles. Only one, tops, especially at startup. So, if we divide the 1.25 million pounds by 26, we get a per kettle capacity of about 48,000 lbs per day.

Pounds are a weight unit of measure (UOM) and ounces are a volume UOM. To make the conversion, we’re going to have to do some more estimating.

Water weighs a little over 8 lbs/gallon. We’ll assume my product has roughly the same density.

8 lbs ÷ 128 oz (per gallon) = .0625 lbs/oz. With each bottle containing 2 oz, we know that it’ll weigh approximately .125 lbs/bottle.

This means that with one of this company’s kettles, I could blend 384,615 bottles worth of product per day. 96.5 million bottles per year. At an approximate sales price of $7.50 per bottle, that translates into nearly $725 million in revenue per year.

Okay, I’ve looked at things from a bottom-up, capacity-focused approach. Let’s now consider a top-down, demographic-focused analysis.

Market Size for a Business Plan capacity

Top-down analysis

Not surprisingly, I also wrote a post on InvestSomeMoney.com with examples of a top-down analysis to determine market size for a business plan. When you read through it, you might notice that some of the examples use Census data (or something similar). They take big chunks of information and start narrowing down their market from there.

Which brings us to three important terms for performing a top-down analysis. These are:

Total addressable market (TAM)
Serviceable available market (SAM)
and
Serviceable obtainable market (SOM)

A SOM is a fraction of the SAM. In turn, a SAM is part of the TAM.

The TAM can be thought of as every potential customer that you can reach geographically. The SAM is what’s left when you niche down a little into the population that is a good fit for your unique selling proposition. Finally, the SOM represents the percentage of the SAM you can realistically expect to take.

It’s unlikely that you will ever capture 100% of the SAM. Even in a specific niche, you can’t be everything to everyone. That’s alright, though. The goal of this exercise is to make realistic estimates so that you have a sound business plan to work from.

When doing a top-down analysis, start with a large population or an overall industry size. From there, narrow down your customer until you arrive at your SOM. It helps to have a “customer avatar” in mind before starting a top-down analysis so you know where to niche down to.

I would suggest you perform a business plan demand analysis first to get a crystal clear picture of what that avatar is. You might think you know it intuitively. But you might be surprised at what you find – like I was!

A top-down analysis for my business plan

I know that not every person in the U.S. (much less the world) is going to want or need an all-natural topical supplement for hair loss. Who might though???

I’ll refer back to my handy-dandy business plan demand analysis (linked above) to see what I can find.

Here, I’m reminded of the ages that men and women first started experiencing hair loss. I’m reminded of the percentage that has sought any sort of treatment. Finally, I’m given an idea of what types of treatment they have tried.

A quick visit to Data.Census.Gov and I find table S0101, which gives me the U.S. population by age and sex. I customize and filter the table real quick. Then, I copy and paste the data I need into my spreadsheet.

Market Size for a Business Plan data census gov

Next step is to narrow these numbers down. I’ll use the “regular” numbers and the pessimistic numbers from sensitivity analysis from my business plan demand workbook.

I want to know the percentage of men who have had hair loss and tried any sort of treatment. Then, I want to go deeper and estimate the number that has found supplements to be effective. I’ll do this for both the most-likely and the worst-case scenarios. On the women’s side, I’ll do, more or less, the same thing.

TAM and SAM

You’ll see that I didn’t use the same age ranges for men and women. I assumed that males would start experiencing hair loss earlier, but would also stop caring about it earlier too.

The age range for males in my TAM was 20 – 54. For females, it was 25 – 59. This translates into a TAM of 151 million people in the U.S.

For the SAM, my worst-case scenario estimated that .9% of the male population in the target age ranges would be part of my market. 1.54% of females in the target age ranges were also assumed to be part of my market. This translated into a worst-case SAM of 1.8 million people.

As for my most-likely SAM, I estimated that 1.41% of males and 2.4% of females in the target age ranges were potential customers. This resulted in a SAM of 2.88 million people. Over a million more potential customers.

SOM

SOM is tricky.

Who’s to say what percentage of the SAM my company could capture? Obviously, it would start at 0% and work its way up from there. Where would it stop though?

It will depend, in part, on the number of companies vying for this niche. As I often do, I will refer to the Pareto principle. The Pareto principle states that 20% of the inputs will be responsible for 80% of the outputs. Put another way, 20% of the companies will have roughly 80% of the market share.

I’ll refer back, again, to my post on business plan demand. In it, I found three direct substitutions for my topical hair loss product. I won’t include Minoxidil (Rogaine) in that group, because of its unnatural chemistry.

Again, without getting too mired in math, I estimate that there are approximately thirty companies in the topical hair loss supplement space. This was a quick and dirty estimate based on the results of an internet search.

Six of those thirty companies probably control 80% of the market. That leaves 4.2% (1 ÷ 24) of the remaining 20% as my short-term SOM. Obviously, if my product were to take off, that amount could grow considerably and could approach the SAM.

What that means as far as the market size is 15K people worst-case and 24K people most-likely. At 12 bottles purchased per year, this translates into 184K and 287.5K bottles per year respectively.

Here’s a look at the spreadsheet breaking that all down:

Market Size for a Business Plan top down — Click to enlarge

Comparing a bottom-up and top-down analysis when determining market size for a business plan

Obviously, a couple hundred thousand bottles (top-down) is a far cry from 96.5 million (bottom-up). So, it would appear I will not be capacity constrained in the near future. In fact, as this startup moves forward, I need to make sure I’m not over-buying capacity. Those huge fixed costs could kill my business before it has a chance to get off the ground.

Speaking of fixed costs, the information from this analysis has given me good data to build my pro forma financials – when that time comes.

Now, at some point in the future, selling my product internationally could be an option. However, in this tiny niche, it is unlikely that I’ll ever need that much capacity for this one product.

Market size for a business plan

What were there factors I didn’t consider (but should have) when estimating my potential market size?

How might you have approached this differently?

Join the conversation on Twitter!

Business Plan Demand Analysis, Four Things to Consider

March 12, 2021July 13, 2019 by KCB

business plan demand and supply analysis featured

Small businesses and entrepreneurs use demand analysis to:

Consider substitute products and services
Get input from (potential) customers
Determine what “drives” demand
Understand what variables affect demand and to what degree

Demand analysis is about challenging your preconceived notions regarding your product/service. A stress test, if you will. A demand analysis will take your idea and start molding it into something that has even higher potential.

As an entrepreneur, you can’t be too stubborn. You have to be flexible. After going through this process, the hope is that you’ll come out the other end with an even more refined idea and a greater chance at success.

Market research and competitive analysis for a business plan

This is the second post on drafting a business plan for your startup. These posts are modeled after the SBA Business Guide.

Want to know how many people are included in your “customer avatar?” Read this post:
BUSINESS PLAN DEMOGRAPHICS – DEFINING A TARGET MARKET

Business plan demand analysis of the total market

When first thinking about the market for your product/service, don’t define it too narrowly. Try to think of substitutions that you might not have otherwise considered. No, you might not compete directly with these substitute products, but the presence of substitute products will have an impact on your pricing and demand.

Pricing too high could push customers to these substitute products. Even if that pricing seems in line with your value proposition when compared to direct competitors. But, theoretically, the amount demanded changes (inversely) with the price. A higher price will push customers to consider alternatives. A lower price should result in a higher volume sold.

Further defining the market for my product

As I mentioned in my first business plan post on the topic of demographics, I am working alongside you. I have a prospective product that I would like to explore the viability of, and I am creating a business plan for this product as I write these posts. As a reminder, my potential product is an all-natural hair-thickening topical supplement.

Anyhow, in the previous post, I used “customer avatars” to roughly ascertain the size of my market. I think I was fairly liberal in that estimation. The three of my avatars that were the most detailed totaled approximately 5.2 million people. The avatar that was broader included 6.5 million people.

Want to know what a top-down and bottom-up analysis would say about your market size? Read this post:
MARKET SIZE FOR A BUSINESS PLAN – 2 METHODS TO GAUGE IT

Substitute products

As mentioned above, I have to keep in mind that not all of these people will pursue hair loss treatment. Many, will just accept it as a normal part of aging. Others will choose to address the problem but will pursue an alternative treatment method to topical supplements. Some of these alternative treatment methods include:

Oral supplements
- Biotin, vitamin D, Viviscal, Nutrafol, Finasteride (Propecia), collagen powder, nutriceuticals, Spironolactone (Aldactone)
“Fake hair”
- Toupees, hair fibers
Procedures
- Laser treatments, microneedling, hair transplants, protein-rich plasma injection
Apparatuses
- HairMax LaserComb, light treatment

In addition to substitutions, I have to consider the direct competition. The alternatives that are also topical. Those include:

Minoxidil (Rogaine), rosemary essential oil, pyrithione zinc shampoo, scalp tonic/serum

Obviously, there’s no shortage of alternatives to my prospective product. However, many of these treatments are ongoing and the potential exists for customers to combine them.

After listing these potential substitutions, it dawned on me that there are a couple of different classes of hair loss. I would probably target individuals that are in the early stages and are merely looking for help to slow down and, hopefully, somewhat reverse the initial effects of hair loss.

Another thing that dawned on me when researching substitutions is that it might be a mistake to only consider men when ascertaining the market for this product. Most of the results I found when searching “hair loss treatments” were articles targeted at women.

As I said, I’m taking this journey right along with you. So, I’m refining my idea and picking things up as I go along.

Gathering survey information for your business plan demand analysis

The next steps are mostly statistical. That might give you pause if numbers aren’t your thing.

I really do wish I could provide you with the handiest spreadsheet imaginable to manage the information you find. There are just too many variables, though. Different surveys asking different questions. Not to mention, every industry is going to address unrelated topics. I just couldn’t figure out how to make a one-size-fits-all tool.

What we’re going to do is compile whatever relevant statistical information we can get our hands-on, and interpret what we find. You can input this information into your own spreadsheet if you like

Statistical information, hopefully, can be obtained from a simple internet search. “[your topic/industry] survey results”, or something similar should yield some useful information. If you can’t find relevant info, then you might have to reach out to industry trade magazines or organizations.

As far as how much survey information to collect – there’s no clear answer. It depends, first and foremost, on the abundance of such information. If there is plenty available, then I guess I’d recommend collecting it until you’re tired of doing so. You can always circle back around and search for more specific results if you need to in the future.

What to focus on

Right now, focus on demographics information, substitute product information, and information about motivation (drivers).

This is where having it in a spreadsheet will come in handy. With the numbers in a spreadsheet, you can combine survey information and break it down as needed. Check out my example below to see what I mean.

Survey information about my product

There was no shortage of survey results regarding hair loss. In fact, I grew tired of collecting information well before I was able to read it all.

I must admit, I learned something on this step. I learned that it probably makes more sense to do this research before creating customer avatars rather than after.

This research showed me that hair loss in women is a considerably more prevalent problem than I knew. So, I should definitely not exclude women when trying to calculate the size of my target market. Additionally, I learned a lot more about the age that hair loss starts to affect men and women. Not to mention, a lot of other interesting tidbits related to marketing and substitute products.

I simply typed the figures I found into the cells and tried to organize it in a somewhat easy-to-read format.

To make this information as useful as possible, I also included a link to the survey – in case I wanted to reference it again. Also, I thought it would be useful to make note of the year the survey was conducted. That way, I could note trends, if any existed.

Finally, to top it all off, I put in some charts. Charts can help to illustrate ideas in a way that numbers can’t, sometimes.

Now, I have a nice little foundation of data to build my business plan off of. I also know that there is plenty of other information out there if I want to delve further on a specific topic.

Divide total industry demand into its main components.

Now, you want to start to organize the information you found in a logical manner.

First, isolate the information related to demographics or that which otherwise describes your potential customers to you. You want to break this information up so that you can get an idea of what your potential customers might look like. You should, hopefully, begin to see customer “avatars” take shape.

Yes, I asked you to create avatars in the previous post. As I said above, that was probably premature. It would make more sense to create the avatars with this survey information, then use the census/demographic information to estimate the size of the market based on what you found.

Live and learn…

After you have the demographic information in good order, move on to the “solution” information – if available. This is information that specifies how customers are solving their problem(s) now.

If you’re lucky, this information will join seamlessly with the demographic information you organized above.

Start with the simplest questions (those with the fewest variables) and expound from there.

What if my survey data is inconsistent?

You might run into a situation where you have conflicting information. Or you might find yourself in the fortunate situation where different surveys seem to corroborate the same statistics.

If your information sources don’t jive, you have a couple of options. First, you can move forward with the information you deem to be the most trustworthy. Or, alternatively, you can average what you found. This works well if the differing results are relatively close together. Finally, you can choose to use the data source that is most recent – particularly if your industry is especially dynamic.

All of your numbers aren’t going to jive up perfectly. However, at this point, you are armed with a lot better information than when you started. Better information will ultimately lead to better decisions.

Industry components for my product

Demographics

For my part, I like to start simple and divide my demographics based on the variable with the fewest options. In this case, the simplest variable only has two choices – men and women.

From there, I used information that I found regarding the percentage of men and women that have had hair loss and have tried treatments.

Next, I break things down further based on the age that men and women started experiencing hair loss. I was fortunate to find information for both genders.

That’s the extent of demographic information I was able to obtain. I would have liked to have found some information regarding income or socioeconomic status. If that information proves to be critical as I move forward with my business plan, I’ll have to circle back around to see if I can track it down.

Once I felt good about my (revised) customer avatars, I moved on to “solution” information.

Want to use data.census.gov to know how big your potential market is? Read this post:
CENSUS DATA MARKET RESEARCH AT THE NEW DATA.CENSUS.GOV

Solutions

Again, thanks to the abundance of information I was able to find, I found similar questions for both genders. The first question was the simplest. It asked if the person with hair loss had done anything to address the problem.

From there, I had a couple of survey questions that explored the alternatives that hair loss sufferers had tried in the past. Additionally, I found results that gave insight into how effective these alternatives were.

When all was said and done, I had the groundwork laid for the ability to know how many potential customers I might have, their demographics, what they have tried so far, and how well those alternatives had addressed the issue at hand.

Here’s what my worksheet looks like after sorting my information into industry components:

business plan demand and supply analysis industry segments — Click to enlarge

Business plan demand analysis of drivers

Hopefully, in your search for survey results, you came across some information that provided insight into the “why people buy” question.

In particular, we’re looking for drivers of sales here. Specifically, what circumstances compel a customer to buy your product/service (or a substitute)? Hint: people usually buy to solve a problem. To avoid pain, not seek pleasure. Or, so I’ve been told…

Insight into what compels your customers to buy will not only be valuable in the drafting of the remainder of the business plan but in all your marketing efforts once you are up and running.

The information about who your customers are (from the previous step), why they buy, and what steps they are currently taking to solve their problems (also from the previous step) will hopefully paint a clear picture for you. A picture that will guide you to a point where you can position your strengths in a manner that will help other people’s weaknesses.

Understanding the drivers of demand for my product

Again, I was fortunate to have an abundance of survey information to draw from. A couple of my surveys not only touched on how hair loss made people feel but also on specific actions that they had taken before the hair loss started.

This information tells me an angle I can take when marketing my product, plus where a lot of my potential customers are going before they start to experience this problem. That place…the hairdresser.

Of course, that’s for women. Though there’s no rock-solid proof that it’s hairstyling that is contributing to hair loss in women, there is enough correlation to make a compelling case. For men, on the other hand, hair loss just seems to be the hand that most are dealt.

But, before we get into that, let’s look at some of the emotional drivers that might compel customers to purchase a topical hair loss supplement…

Drivers for men

On the “men” side I got information about how “worried” men were about hair loss. This told me that most men were, at least, “somewhat” worried about hair loss.

Beyond that, there was valuable information about how hair loss had affected them negatively.

Finally, the most valuable information, to me, was a question of what they would give up to solve this problem (men & women). The answers were encouraging for someone who was hoping to build a business in this industry. Almost half would rather have more hair than more money. Three quarters would give up a prized possession for more hair.

While I acknowledge that I’m not marketing a guaranteed cure to hair loss, that tells me that people are willing to try anything to fix this problem. As I know from my market segmentation analysis, supplementation works for about 1 in 17 people. Not great odds, by any means. But good enough, I hope, to at least try a new product. Especially when the ingredients are all-natural and offer no downside.

Drivers for women

About half had stress prior to experiencing hair loss. That’s a coin flip. It doesn’t mean that the hair loss was caused by the stress (though it surely didn’t help). But it provides insight into what women are feeling prior to and while they are experiencing this problem.

I also included the “What they’d give up” question on the women’s side of the analysis because my source for that information didn’t specify either gender. Plus, it seems feasible that women would feel the same or even stronger. It’s my opinion that society values female attractiveness above male attractiveness.

Finally, we get down to the brass tacks. A potential cause-and-effect situation for the problem I’m attempting to address. The number of women that are currently experiencing hair loss are also (possibly) straightening/heat processing or getting their hair colored on a semi-frequent basis.

This tells me that hairstyling might play a part in a lot of women’s hair loss (this goes back to the pressure to be attractive thing). Therefore, I should consider marketing my product in salons and other establishments that focus on women’s hair.

There’s still a lot of analysis to be done. But, two steps into the process of drafting my business plan, I feel a lot more confident about my understanding of the environment.

Here’s a look at my spreadsheet with the driver information included:

business plan demand and supply analysis demand drivers — Click to enlarge

Business plan demand analysis of sensitivity

To this point, the goal has been to make assumptions and get answers. We want to have a better understanding of the environment in which our business will operate. Hopefully, you feel that you’ve accomplished that.

But, we don’t do ourselves any favors by lying to ourselves.

Lying?

Well, yes. But probably not willingly.

You start off excited about your business idea. So excited that you decide to take the first step (something that the vast majority of people won’t do). You begin to write a business plan. You can feel your idea taking shape. You’ve already refined your idea a bit and feel that by the time this whole exercise is over, there’s no way you can fail. You’ve got momentum and your confidence keeps increasing.

That is all very good. Confidence is key. But, if everything looks rosy, you might be blind to a risk that could put your baby in jeopardy.

So, I don’t want to be a killjoy. But, for the sake of our businesses, let’s take a step back and play devil’s advocate. We need to ask ourselves some tough questions and challenge our assumptions. If we can rise to these challenges, and address them with confidence, our chances of success are that much greater.

Go back through your segmentation and demand drivers and think critically about this information. Some statistics might be a given, without much wiggle room. Others might be misrepresentative of reality. In these instances, tap into your inner cynic.

Make notes of what the worst-case scenario might look like. If you’re using a spreadsheet, like me, maybe use a different colored text. Address things like survey questions that might have been misinterpreted or alternative explanations for results.

Don’t get too down-and-out here and don’t dwell on this step too long. You don’t have to necessarily plan what you would do if these worst-case scenarios came to be. You just need to imagine them so that when the time comes for serious planning, you can take these risks into consideration.

Demand sensitivity for my product

Demographics

I think my categorization by demographics is pretty safe. It’s rather well established how many men and women experience hair loss. The only thing that I might tweak is the number of men and women who have had hair loss and tried treatment. I lowered those estimates by 20%. It could be that the respondents’ interpretation of “treatment” is to comb their hair a different way or to shave their heads rather than to buy a product to battle hair loss.

Furthermore, what if the number of people that have “done anything” is lower? What if I misinterpreted the question for women that asked: “Do you take medication to prevent hair loss?” Maybe it was 20% of women who actually had hair loss rather than all women? The effect of that would be dramatic.

Substitute products

What if the alternative treatments were more effective than I’ve been led to believe? It could be that the respondents only consider “effective” to be a restoration to a full, thick head of hair? Also, just because they consider them ineffective, it doesn’t mean that they’ll stop using them. They might think that all of their hair will fall out if they stop (which could work in my favor, though). Perhaps they were overly optimistic when it came to supplements? It could be that supplements gave them other benefits, but didn’t make their hair loss any worse – so they considered them “effective.”

Drivers

Could it be that fewer men are really “(very) worried about hair loss” than I’m led to believe? Are more are “Not worried at all?” Plus, it might be that those who are only “somewhat worried” aren’t motivated to do anything about it.

As far as confidence (love life, making friends, professional life) goes, it might be that that hair loss is a contributor to low confidence, but not the primary driver. Maybe they’re overweight or socially awkward and that’s why they lack the confidence they desire?

As far as “what they’d give up” it could be that the respondents were primed by the hair loss questionnaire to be more self-conscious than they usually are. If it came down to it, perhaps not so many would be willing to part with valuables to solve this problem.

Finally, as far as hair styling being a cause of hair loss in women, it could be that I am wrong. Maybe hair styling has no effect on hair loss. Or, maybe women overestimate how often they heat process or color their hair. It only feels like every day/once every 2-3 weeks. When, in fact, they do it a lot less often.

Okay, that’s enough pessimism. It seems unlikely that every worst-case scenario would be true. But, there’s probably a mix in there between my initial interpretations and the not-so-great ones.

Want to back your business plan up with valuable data? Read this post:
GOVERNMENT STATISTICS FOR MARKET RESEARCH VIA USA.GOV

This exercise should help me going forward to make realistic forecasts and assumptions. Which, in turn, should help me be proactive to some of the challenges I might face.

Here’s a final look at my spreadsheet with my worst-case notes in blue:

business plan demand and supply analysis worst case notes — Click to enlarge

Business plan demand analysis

This step takes a little bit of thought and a decent amount of research. This is done to give you a deeper understanding of the market you hope to compete in and the customers you hope to sell to.

What other steps would you have taken to refine estimates of demand?

Do you think my demand sensitivity was rational? Or, was I taking it too easy on myself?

Join the conversation on Twitter!

Business Plan Demographics – Defining a Target Market

March 12, 2021July 1, 2019 by KCB

Sorting through demographic information is one of the first steps in doing market research and competitive analysis. This is stuff you’ll need to know in order to prepare an effective business plan. Without this information, you, as a founder, don’t know if there is a sufficient market to support your business. You will also be starting off at a disadvantage when planning other aspects of your business.

**Note: this business plan demographics guide was written just before the Census Bureau changed its primary portal for data from the American FactFinder to Data.Census.Gov.

Download a free copy of the workbook used in this post

Complete the form below and click Submit.
Upon email confirmation, the workbook will open in a new tab.

Keep in mind that this workbook is only designed to work with table S0201, Selected Population Profile in the United States. Any other table might not be in the correct format.

About these posts

This series of posts was written to convey my take on how to write a business plan. My intent is to follow up with several more posts after this one.

I’m using the U.S. Small Business Administration (SBA) Plan your business guide as my outline (link). In true SpreadsheetsForBusiness.com fashion – I plan to include free downloadable spreadsheets where appropriate.

Rather than just recycling the same information you could find elsewhere, I’m going to take this journey with you. I’ll be building my own business plan as I write these posts. This is my first business plan, so you’ll be learning right along with me.

My business plan

My plan is based around a hypothetical business that will manufacture and market a hair regrowth product for men (and women, I suppose). The plan is to manufacture the product with all-natural ingredients.

What are business plan demographics?

Sorting through demographic data for your business’ potential customers is the first step in understanding what type of person (or business) might be interested in your product or service.

It can provide an unofficial ceiling to the number of customers you might expect. It’s from this information you can get into more detail about demand, market saturation, pricing, and so on.

Common demographic information includes:

Gender
Age
Race
Income
Education
Marital status
Employment status
Geographic area

Why worry about business plan demographics?

Focusing on marketing to specific individuals helps you plan with clarity. The saying goes: “you can’t please all the people all the time.” By not trying to market to everyone a little bit, you can focus your efforts on creating a really good experience for some people.

Understanding your target demographics can help you determine if your target market is saturated. Read this post:
CALCULATING MARKET SATURATION FOR YOUR BUSINESS PLAN

Whatever your business is, it probably is a reflection of yourself. Your interests and talents, that is. Who you market to will also depend on your characteristics and preferences. So, as you choose the demographics of your avatar, consider who you identify with and would be comfortable marketing to.

How to find and analyze business plan demographics

The market for a product or service is quantified by the number of people who make it up and the total amount of money they spend. We can quantify the size of the market by segmenting people based on their demographic characteristics

Of course, since most of this information is numerical, I’ll be using a spreadsheet to keep track of what I found and what changes in variables mean for the market of my aspiring business.

Also, I’ll be using online resources for the sake of time and simplicity. Theoretically, market research could involve things like focus groups and surveys. That’s more involved than I want to get for this idea, so, I’ll stick with the free information.

The SBA has a nice list of resources for market and competitive analysis here.

Demographic information

Here, we’re just looking for basic information about the people who I might be selling to. For instance, how many people are in the age range that I would market to? How much money do they make? Are they single and looking to mingle? Or, are they in committed relationships and proud of their bald head (like a certain “old man” I used to know and miss very much)?

From FactFinder to spreadsheet

First stop is the U.S. Census FactFinder (link).

Here, you can find Census data about your state, city, or even zip code. Not every business is going to be nationwide. Some, like a restaurant, will be very local.

Also, if your business will market to other businesses (B2B), then the information contained here may or may not be pertinent to you. Try another part of the Census website called the Small Business Edition (link) if you’re not finding what you need.

Interested in mining the Census website for more valuable market research? Read this post:
CENSUS DATA MARKET RESEARCH AT THE NEW DATA.CENSUS.GOV

Since, as of now, I envision my business being nationwide (at the very least regional), I chose to use the “Guided Search.” From there, in the “Topics” section, I chose to look at information pertaining to age, sex, age group, income/earnings (households), and marital status.

I can always delve into more detail or retrieve different information at a later time. My hope is that this gets me started.

business plan demographic analysis census search — Click to enlarge.
Credit: factfinder.census.gov

Additionally, on the next screen, I chose to break the information down by region. I included all regions so that I could total them for a view of the entire country.

Finally, on the last screen, I opted to see the one table that outlined this information in 2017, the latest year available.

Don’t bother with the “Download” Action. It will give you your data in a different format than it is displayed.

Instead, just highlight everything in the FactFinder table and copy + paste it in a spreadsheet.

business plan demographic analysis copy census table — Click to enlarge
Credit: factfinder.census.gov

Fixing errors

From there, do a Find and replace in your spreadsheet to get rid of the errors that are a result of a “=” being placed in front of the “+/-.01” in the Margin of error column. Replace the “=” with an apostrophe. Be sure to Also search within formulas.

Filtering for the demographic information I need

My goal here is to get a range of the number of potential customers based on a set of demographic statistics. I have a lot more information than I need, so let’s see if we can widdle this down into something more useable.

To do this, I added some columns to the Demographic Info worksheet.

First of all, I added a column (Estimate #) that aimed to translate some of the percentage population information into quantities. The format of every download from FactFinder isn’t going to be the same. But, an attempt was made to give you access to both percentage and quantity information for each line item.

Additionally, you’ll find a column named Enter 1-10 to rank demographics. Here, you’ll be able to rank demographic information and narrow down your market on the Pick Demographics worksheet.

Want to nail down the size of your market before you move forward? Read this post:
MARKET SIZE FOR A BUSINESS PLAN – 2 METHODS TO GAUGE IT

Creating customer avatars

Maybe you have a couple of different mixes of demographics in mind. That’s fine. Once you are satisfied with one mix of demographics you can highlight the information on the Pick Demographics worksheet, then copy and paste the values (Ctrl + Shift +V) into one of the boxes on the Customer Avatars worksheet.

This allows you to keep tabs on several different customer profiles as you move forward with your business plan.

Keep in mind, this is just the first step of the business plan. The whole point of a plan such as this is to be proactive. In order to be proactive, you’re going to have to be flexible.

If, as you move along through the steps, you reconsider your target demographic – that’s fine. Just circle back and refine your avatars and make adjustments to other parts of the plan as necessary. Don’t get discouraged if you have to do this. That is the whole point of this exercise.

My avatars

For my avatars, I created four, relatively similar mixes of demographic characteristics.

Gender and income

All include males. Though females can also suffer from hair loss, I am assuming that males would be the primary customer and who the majority of marketing would be geared toward.

Next, every mix of demographics included individuals with earnings as opposed to those with retirement income, with Social Security income, or any other type of public assistance.

Right now, I anticipate that this product would be sold at a premium price due to its uniqueness and all-natural ingredients. This would mean that customers would likely need to earn above-median incomes in order to be in a position to buy a product such as this. Assumptions such as this might change as I progress through this business plan.

In three out of my four avatars, I made assumptions about the relationship status of these men. The demographics included were Now married, except separated, Never married, and Separated. These were my three main avatars.

Education

The fourth included Males, With earnings, and who were High school graduates. This is my “catch-all” avatar. The real total addressable market for my product is probably between this population and the total of the three mentioned above.

The main difference between the three main avatars had to do with education. I assumed that men who were single might be more likely than married men to purchase a product such as this, I lowered the EDUCATION ATTAINMENT to Some college or associate’s degree.

Defining a target market with business plan demographics

Be sure to download your own copy of the workbook used in this post. Just fill out the form at the top.

What other sources would you use to find demographic information for your business plan?

How about the avatars? How would you have screened them further?

Join the conversation on Twitter!