The first thing an entrepreneur needs to do after they have an idea for a product or a service is to see if it has been done before.
Every entrepreneur is out to solve a problem or a need. Perhaps it is something they have noticed that they themselves need (I wish there was an organic baby formula) or maybe it is something they have noticed others need (kids need a way to know when the bus is coming – what if they had an app?). Regardless of where the inspiration comes from, the entrepreneur is starting with the idea that there is a problem or a need that has not been solved yet, and should be. They are the ones to do it.
However, just coming up with an idea is not enough. There are plenty of ideas in the world, and a lot of them have already been tried and tested. Some are even already in the marketplace.
So the first thing an entrepreneur needs to do after they have an idea for a product or a service is to see if it has been done before. This is called a Competitive Market Analysis.
The main purpose behind figuring out if someone has already implemented their idea is because it will take a lot of work and effort to create a company. If there is already a product solving the problem, all that work could be for naught. Imagine if someone said, ‘there needs to be a carbonated, brown, sugary liquid in a can!’ and yet, they didn’t stop to learn about Coca-Cola. It would not be a very informed company to start.
However, an idea does not necessarily need to be original to be successful. There are plenty of soda companies out there, just like there are plenty of make-up companies, and any other items you can think of.
What the idea does need, is Value Differentiation. Before Cherry Coke, thinking of a soda that also had cherry flavoring would have been something that would have been different enough in the market to cause people to buy it. Yes, cola existed, but not with cherry flavoring! That would have been new! And it could have been very profitable.
So once an entrepreneur has an idea they need to see what else is out there that is like their product or service. They need to ask questions like, ‘Is mine different – enough?’ and ‘Will people spend their money on mine rather than on something else they can get that might be similar?’
If an entrepreneur doesn’t ask these questions, they risk launching a business in an already saturated marketplace, where their idea doesn’t stand out, and they can’t make an argument for why dollars should be spent on their product rather than on another.
Another factor in a Competitive Market Analysis is in assessing the cost of what consumers are willing to pay for a product or service. Even if cherry cola was a great idea, completely different and people wanted to buy it, if an entrepreneur priced it at $100 a can, it likely wouldn’t last long in the soda market. So knowing the right pricing to apply to get a significant share of the market is important.
Now an entrepreneur might want to launch a luxury brand that is the most expensive in the market (the only $100 soda!) but that would need to be a very specific type of marketing message, and still there would need to be a big enough market (more than 2 people…) who would want to pay that much for a soda.
This sizing of the market (more than 2 people, we hope) is part of the analysis as well. This becomes a simple math problem. Let’s say that the product we are talking about appeals to women, and there are 51% women in the US. Now to size the market further, let’s say it only appeals to women between the ages of 24- 35. That makes the market even smaller.
We keep parsing the market smaller and smaller by asking questions – i.e., it only appeals to women in the workforce between the ages of 24-35, and only in the Western US. In addition, these women are college educated, and usually have one child at home.
If an entrepreneur knew the traits of their possible purchasers to this much of a degree, they would be able to describe the Addressable Market in their Competitive Market Analysis. This would tell us how many total people are likely interested in their product (let’s say it’s make-up with a high SPF for mountain states).
If that was the case, then the entrepreneur would want to say what percentage of the market they think they’d be able capture – i.e., how many of the total population of people likely to buy their product, actually would. This is their market size.
Knowing the market size, possible competitors and conducting a price analysis is vital for assessing the viability of any new product or service. They are the core elements of any Competitive Market Analysis.
A good acronym to know with regards to competitive analysis is SWOT – strengths, weaknesses, opportunities, and threats. This is a method by which businesses can assess where they stand with regards to other products, services or businesses, as well as the market at large.
Lastly, knowing trends in the market and growth strategies are key. If you were starting a typewriter business in the 80s, it could have been very successful… for a short amount of time. Knowing that the trends were heading towards laptops would have shown that it was wiser to diversify into technology and electronics.
The above is just a snapshot as to the first steps any entrepreneur must go through when thinking about starting a business. This analysis forms the foundation upon which other key decisions will be based. When analyzing a business to invest in, it’s important to know the entrepreneur has done their homework.
Article to read:
Competitive Analysis – Entrepreneur.com
SWOT Analysis – Mindtools.com