What Is a Market Analysis? 3 Steps Every Business Should Follow (2023)

Wouldn’t it be great if you could launch a business knowing, without a doubt, that you’d succeed? While literally seeing into the future isn’t plausible, savvy ecommerce entrepreneurs know there are a few steps you can take to validate your business ideas and make sure there’s a customer base and target market ready to spend their money on your offer.

One of those business planning steps is conducting a market analysis, and it's critical for winning over the hearts and minds of potential customers in your target market.

In this guide, we'll cover the market analysis process, and how to utilize your findings into your own marketing efforts using market data.

What is a market analysis?

Market analysis is the process of evaluating various factors that impact a specific market, such as industry trends, customer preferences, and competitor behavior. It involves gathering and analyzing data to understand market size, growth potential, target audience, and competitive landscape. Market analysis helps businesses make informed decisions, identify opportunities, and develop effective marketing strategies.

At minimum, your market analysis should identify the following:

Who your target customer is
Where, why, and how they shop
The size of your target market
The price people are willing to pay for what you sell
Your competitors and their strengths and weaknesses

Keep in mind that the market changes, so conducting a market analysis isn’t just for new businesses—established businesses can also use market analysis to validate new product ideas or address challenges.

Here’s a quick market analysis example to demonstrate exactly that: iHeartRaves analyzed the market when the COVID-19 pandemic first hit. The clothing brand sells apparel people wear at music festivals and gatherings—events that slowed down or even halted during the pandemic.

As such, the brand needed to pivot. So, it changed promotional tactics and added face masks to its product lineup after conducting a quick analysis to see what opportunities it could pursue.

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How to do a market analysis

There are three main steps to completing a market analysis for your ecommerce business:

Research the industry
Understand your audience
Know how you stack up against competitors

1. Research the industry

Now it’s time to understand the industry as a whole. Researching your chosen industry helps you get a bird’s-eye view of the market landscape.

When researching your particular industry for your market analysis, consider the following:

Market size. Estimate how many businesses and customers are in your potential industry. A big market could be saturated and require you to niche down more specifically, whereas a smaller market could mean there’s lots of opportunity for new businesses.
Market value. Get insight into how much money the industry generates each year. Lots of consumer spending means there’s plenty of opportunity for you to claim your slice of the pie.
Market demand. As many as 42% of new business startups fail because of insufficient demand, so it’s essential to validate that people want what you offer before you pursue your idea.
Market need. Identify gaps in the market and how the existing landscape falls short in those areas.

Here are some reputable places to check for this data:

You may also find industry-specific resources. For example, if you’re looking to start a pet business, check out the American Pet Products Association and the American Veterinary Medical Association.

2. Understand your audience

Now it’s time to drill deeper into your research and understand your target market—the people behind the demand in your industry. This step involves customer research and segmenting your audience based on shared characteristics.

When researching your potential audience, you want to know the following:

How old they are
Where they live
Where they work, what they do, and how much they make
Where and how they shop
What they buy, and how much money they spend
What technology they use
How they interact with brands
Their current market perceptions
Their pain points and challenges

Audience research involves both internal and external sources. If you have an existing audience, you can tap them for valuable insights. Run surveys and questionnaires to get their thoughts, and pursue more thorough and in-depth interviews with individuals who exemplify your target customer. If you don’t already have an audience you can leverage, you might invest in focus groups for your own research purposes.

External data is equally valuable. You’ll want to understand things like where your audience lives, works, and hangs out, as well as how much they make and spend. You’ll also want to gain an understanding of their current perceptions about your industry or product(s). Here are some places to get external data about your customer:

You can also do social listening to see what people are saying online, conduct SEO research to see what people are searching for, and check customer reviews to find out how people like or don’t like products that are already in the market.

3. Know how you stack up against competitors

Much like you want to know about your audience when you’re conducting a market analysis, you also want to understand the competitive landscape. Knowing who your competitors are helps you pin how your brand is different and how you can differentiate yourself from other players in the market.

It’s important to differentiate yourself from competitors because this will increase perceived value and push customers to purchase your options instead of the same or similar options from other brands or businesses. When Albert Matheny launched his natural protein brand Promix he has relied on market research and analysis to remain competitive as the market evolves.

“Identify some unique propositions that you have for customers or unique values that your brand has and then make those really, really clear and simple. Don’t try to highlight too many different things,” he said in an episode of Shopify Masters. “Constantly evolve and say, ‘How can I make this product better?’”

The first part of understanding how to differentiate involves understanding your brand and your business and what you bring to the table. You can conduct a SWOT analysis—which identifies your unique strengths, weaknesses, opportunities, and threats—to understand your position in the market.

Here’s a hypothetical SWOT analysis for an online t-shirt business:

You’ll also want to go ahead and conduct a competitive analysis. Generally speaking, you want to pick seven to 10 competitors to include in your competitive analysis. Include a variety of competitors, such as those who sell a similar product to the same customer as you, as well as those who sell a slightly different product to a slightly different customer in the same industry. This means going for a variety of direct, indirect, and tertiary competitors.

When analyzing your competitors, you want to understand what they offer, how they position themselves, and how people perceive them. To help with your competitive analysis, we’ve created a free template you can use. It has rows for each competitor’s pricing, offering, marketing, shipping, and more, so you can cover all the bases.

How to write a market analysis for a business plan

While you might have a comprehensive market analysis documented for internal purposes—this is especially helpful for marketing and business development teams—you may create a shortened version for your business plan.

Your business plan is another comprehensive document that outlines all areas of your business, including your market analysis and other elements such as business structure, operations and logistics, and financials. So when you prepare the market analysis section for your business plan, you’ll want to summarize the findings from your full in-depth analysis.

Narrow your analysis down to the most important information that most convincingly validates your idea and likelihood of success. Remember what type of business plan you’re writing and who you’re writing it for. Feel free to use bullet points, tables, and charts to make the information presentable.

If you’re drafting a business plan for your business, you can start with our free business plan template to guide you through each section.

Moving forward with your business plan

Though an important component, your market analysis is just one piece to your overarching business strategy and plan. Careful business planning across all areas of your entrepreneurial endeavor will set you up for success and ultimately help improve the chances of your marketing strategies paying off down the road.

Market analysis FAQ

What is market analysis?

Market analysis is the process of assessing a specific industry, niche, or market segment with the goal of understanding a target audience and competitive landscape.

What is the purpose of market analysis?

Market analysis helps brands better understand how to promote their products to a specific target audience. It can also help to demonstrate the viability of a business idea for the purpose of securing investments.

What are the steps to performing a market analysis?

Research the industry. Consider market size, value, demands and needs.
Understand your audience. Research age, location, and how they interact with brands.
Know how you stack up against competitors. Examine your strengths and weaknesses, and identify opportunities and threats.

What Is a Market Analysis? 3 Steps Every Business Should Follow