Around 50% of startups cease to exist during the first five years of life. The common reasons are the lack of customers, the mistakes in the business model and, of course, the lack of money.
That’s why it is compulsory to firstly calculate the potential costs of your startup, the income you might get and the growth rate of your business.
A market analysis will help you understand how many potential buyers would you have and how much would they be willing to pay for your product. It may turn out that there are too few of them within the market, which means there is no point in launching your product. It would be much better to find this out before you delve into the entrepreneur life.
In order to understand the state of the market, you must evaluate several parameters.
Find out how many buyers are in the target market - estimate the approximate number of people who are ready to buy your product. See how much people are willing to pay for products similar to yours. This can be done by comparing your potential competitors 'prices or your customers' expenses for similar products.
You also need to find out how often do your potential customers buy similar products. People buy some goods every day, some – once a year. What category is your product related to? Your possible income directly depends on the answer.
What about how often could your product be bought throughout a lifetime? Supposedly, a person buys a flat only once in a lifetime. On the other hand, people buy clothes regularly.
You need to find out the market capacity - multiply the number of customers by the frequency of purchases and the cost of one unit of goods. Thus, you would find out the maximum amount of revenue. The received number does not mean that your project will bring so much money. After all, some of your potential customers might not know about you, while some might be buying from your competitors.
Market analysis provides insight into the scope and potential of a business model. It is important that you won’t have to cover costs for 1000 customers, while not reaching even 500. You can also discuss the appearance of new offers, the general condition and trends of your niche and government regulation. All this affects the existence and condition of the market.
After assessing the capacity of the market, you should compile a forecast income table. It will help to visually see how much money the project would bring in a month. To forecast sales, take data on market capacity and assume how many customers might buy your product.
To make the data more accurate, you could conduct additional marketing research, for example, surveys. You can test the pre-order option before the official start of sales - according to the number of interested buyers, it would be possible to draw conclusions about the interest in the product. If you have direct competitors with a similar product, try to find and analyze information about their sales.
Estimation of demand is important for a more accurate estimate of income. The simplest way is the analysis by keywords in search engines. You could develop a minimally viable version of the product and carry out pre-sales among the target group.
Have you ever heard about the model of sales funnel? It is a cool instrument, which helps you develop different scenarios. One can simulate the best, the medium and the worst case scenarios. You can estimate the approximate number of buyers based on competitor data or form the estimated numbers based on market analysis.
When planning revenue using a sales funnel, you can see how changing the number of potential customers at each stage affects profit. That helps you not only assume, but also see what factors affect the growth or decline in sales.
You also need to understand how real is your project: whether it will be profitable and your costs will pay off. Perhaps you’ll understand that the game is not worth it and you don’t have the money to get it started.
Analyse the income table and how many units of the product would you need to sell in order to achieve the desired profit. Via this sales plan, draw up a cost plan: how much money will you spend on production, what is its cost, the sales costs, and those of advertising. Compare income and expense tables to see if you have enough resources.
Evaluate the amount of sales needed to make a profit, see how realistic would it be to achieve such indicators with your resources and estimated costs. Count how long it would take to go plus. If you need to wait 10 years before the business becomes profitable, you may have chosen the wrong thing.
In the case of negative indicators, it is important not to engage in the adjustment of numbers and leave emotion aside. It is better to revise your business plan or to think about other ideas, no matter how great this product seemed to you.
