How To Conduct a Market Evaluation

Have you ever thought to yourself, “I wish I had a product that would do this,” or, “Hey, that would be an awesome business idea”? Well, that’s how lots of traditional businesses and startups begin.

Starting a business can be exciting, but it can also be a lot of work—if you do it right. Market analysis is one of the first hurdles you’ll need to overcome when you move from getting a business or product idea out of your head and onto paper.

The market analysis, or evaluation, takes up a large part of an overarching business plan, which you’ll need to help give you some direction as you move forward. That’s especially true if you’re looking for business loans from lenders.

This guide will help you figure out all the information you need to conduct a useful market analysis for your business.

What is a market evaluation?

A market evaluation is a process of analyzing a market in terms of its size, trends, competition, customer preferences, and other factors to understand its dynamics and potential opportunities. It's often conducted when a business is planning to launch a new product, enter a new market, or during strategic planning.

The idea is to study the dynamics of the area you intend to do business in. You’ll need to find out who your customers are, their spending habits and specific needs, the market size, and other businesses you’ll be competing with.

Doing market research this way is true whether you’re starting a whole new business, or when an existing business is looking to enter a new market.

Benefits of running a market evaluation

There’s a good reason why most (if not all) business loan providers require a business plan containing a market analysis—it comes with a lot of benefits. Let’s take a look at some of the major benefits below:

It helps you identify market trends. Conducting a market analysis allows you to see the market as a whole—which helps your business stay on top of, or get ahead of, trends emerging within it. For example, trending products in your niche or gaps that present opportunities.
You find potential customers and how to communicate with them. Perhaps the most obvious benefit is you can identify exactly who your customers are and develop a marketing strategy that works for your target market.
It reduces risk to your business. Building a new business can be risky, especially if you start running before you can walk, i.e., Planning your business strategy before investing too much can help you identify where your pain points might be and whether the risk is too much, as well as help you validate your product ideas.
It provides benchmarks for evaluation. Through comparative market analysis, you’ll be able to figure out the minimum KPIs your business needs to perform at—from there you can set your goals to exceed them.
It gives direction for business decisions. A completed market analysis document can help give you a “north star”—a direction on which you can base your business decisions. This is a lot easier than guessing your way through.
It offers better revenue and cash flow projections. It can be hard to guess how much money your business will make before you start selling, but a market analysis can help you forecast based on trends in the market.

These are some of the many benefits you’ll experience from conducting a market assessment or evaluation.

Drawbacks of running a market evaluation

The benefits of running a market evaluation can’t be overstated. But it’s not all glitter and rainbows—there are a few drawbacks to running market evaluations, especially your first one.

Here are some common drawbacks:

It can take a lot of time and effort. If you opt to do a market evaluation (which would be a cheaper option), you’ll have to dedicate a fair amount of time and effort to do it—time you could use on other important business tasks.
A market analysis can be limited. If you’re running your first market evaluation, you have little practical knowledge to help guide the content of the evaluation. Many businesses rely on customer surveys or existing customer feedback, which you might not have access to. As such, your evaluation will be limited to what you can observe.
Depending on your method, it can be expensive. If you don’t opt to run an evaluation yourself, you’ll need to hire someone to do it for you. There are two main options: hiring a freelance consultant or hiring an in-house marketer. Both options will impact your budget for starting your business upfront, but can provide better insights if you’re not well-versed in market research.

This isn’t an exhaustive list of potential downsides to market evaluations, but you also can’t take these drawbacks lightly—each one can prove to be a challenging obstacle. However, the benefits outweigh the drawbacks most, if not all, of the time.

How to conduct a market evaluation

Determine the state of the market
Research your target customer
Run a competitor analysis
Establish financial projections
Understand industry regulations and barriers to entry

1. Determine the state of the market

The first section of your market analysis should contain an overview or description of the industry you’re looking to operate in. Look at where the industry is going.

Are there any current trends impacting the industry?
What is the market growth rate?
What is the lifecycle of products and services in the industry?

These are all questions your market overview should answer. However, while this section is always at the front of your document, it can be easier to complete it after you’ve finished your research.

2. Research your target customer

The next step is to research your target customers. Who will be buying from you, and what are their needs?

You can’t serve every person in the world your product no matter how great you think it is. Trying to do so will be a huge waste of time. So the best option is to laser focus on the customer base most likely to be interested in your product—which will be your niche market.

You’ll want to define your segmentation strategy to help you identify individuals in your target audience. Target segments help you narrow down your audience based on sets of shared characteristics, such as:

Demographics: Age, gender, occupation, level of education, and religion (if relevant to your business).
Geographics: Where your target customer lives and works.
Buying Behavior: Are your customers likely to be impulsive purchasers? Or is your product a considered investment? Are they more likely to purchase in-store, on an online website, or through social media?
Psychographics: What your customers are interested in, what they’re passionate about, or what personal values they’re likely to have.

To keep track of your findings, it can be helpful to develop a persona of your target customer, or customers if you’re looking to develop product line extensions or multiple product lines.

3. Run a competitor analysis

Another important market area is your competitors—it’s very rare to identify a market need that doesn’t have any businesses already serving that need.

In this section, you’ll need to research what businesses you’ll be competing with for customers.

Some of the main areas you’ll need to cover are:

Who your direct and indirect competitors are
Your competitors’ market share
Their strengths and weaknesses (a SWOT analysis is helpful here)
What you’ll be doing that’s different from them

After you’ve researched each competitor, it’s helpful to rank them in terms of threat level: worst to least threatening to your business.

4. Establish financial projections

You’ll be trying to figure out your business’s earning potential in this area. Figures you’ll want to include are:

Your potential market share: Explain how your sales and marketing efforts will earn you the percentage of the market or valuation you’re looking for.
Pricing and gross margin: What your products will cost versus how much it costs you to manufacture or source products you sell online.
Cash flow: How much loss you’ll be looking at when starting, when you’ll break even, and when you expect to make a profit.

If you’re doing a market analysis for a new business, your projections will be based on educated guesses, which is fine until you get hard data.

5. Understand industry regulations and barriers to entry

The final area you’ll need to focus research on is what, if any, industry regulations you need to adhere to.

For example, if you sell food-based products, you’ll need to check the food-related regulations in your country of operation. Another example may be that you need specific licenses to be able to sell a certain type of product, such as alcohol.

Finding out the regulations involved in your niche is extremely important—being on the wrong side of the law can incur fines and sometimes even jail time. So it’s best to be as thorough as possible when completing this section.

However, another barrier to entry you’ll need to consider is technology, i.e., do you need to invest a lot of money upfront for specific technology or machinery? Identifying these types of barriers to entry can help you feel more prepared when jumping those hurdles.

Investing in the fundamentals of building a small business

Conducting a market analysis is an important step in building your business—it’s one of the first things you’ll do when you start turning your business ideas into a reality.

While doing a market analysis yourself isn’t the easiest task in the world, it does help you learn deeply about the niche in which you want to do business. That also includes testing whether your business is a viable solution to a real problem or addressing a real need in the market.

But whether you do the research or outsource it, a comprehensive market analysis can mean the difference between your business struggling to get started and having it thrive.

Market evaluation FAQ

What are the types of market evaluation?

There are three main types of market evaluation: overall industry evaluation, target customer evaluation, and competitor evaluation.

How do you do a market evaluation?

A comprehensive market evaluation includes researching the following five areas:

The overall state of the market
Identifying your target customer and their needs
Competitor analysis
Business projections
Industry regulations and other barriers to entry

Why is market evaluation important?

Doing a market evaluation (otherwise known as market analysis or assessment) is important because it helps reduce risks, identify your target customers, and identify your competitors, and generally helps figure out any blind spots you might miss when thinking or talking about business ideas.

What is the difference between market evaluation and market evolution?

Market evolution refers to gradual (or sudden) advancement, such as changes to primary product demand. In contrast, market evaluation is analyzing a market in its current state.