Start-up business plan essentials: Testing your business idea
Market research should be an important part of a startup’s preparation and business planning; it helps to shape your marketing, resources and business plan and can influence how and who you plan to target, what pricing point you choose and even alter your business idea to become more profitable.
Fundamentally an effective research plan involves two elements: desk and field research.
How to do market research
Nowadays the internet and social networks have had a huge impact on the development of market research practices, making desk research even more accurate and expansive. There is an increasing supply of secondary data available in published form, accessible either online or via business sections of public libraries throughout South Africa, to enable business starters and growers both to quantify the size of market sectors they are entering and to determine trends in those markets.
However the importance of going out into the field, speaking to customers directly, testing your product/service personally and building a brand through your interactions with users is still as important as it was prior to the evolution of data. This also entails getting out and finding out essential facts that have not been uncovered by desk research, either because the data hasn’t been collected, or because it is deficient in some important respect.
Very often you will find that while general market information is available there is not information for a particular town or region. Also, when the economic climate changes, say from boom to bust, buying patterns may shift quite suddenly, making desk research irrelevant. Here we look at key areas of field research in order to help you plan and implement effective market research.
Observing your business’ market
The power of observation as a method of gathering data lies in the inconsistency between what people will say in an interview, or on a questionnaire, and what they actually do. It’s not that people are necessarily lying, it’s just that their capacity for self-deception is often high. Customers may feel foolish admitting they have difficulty understanding how to use a product or service and so would not record that fact. That doesn’t mean that they don’t have a problem and that a company would gain valuable information from finding out about it.
So, observations can give valuable insights into how things look from an outsider such as a customer, supplier or prospective employee. But such insights will only be representative of the time the researcher was observing and may not be indicative of the general level of service. This type of research is often used to provide contextual information alongside some other research method.
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Face-to-face interviews with your potential customers
Talking and listening to people is the most basic and the most used method of conducting qualitative research. Interviews differ from surveys, for example in that they adhere less to a fixed set of questions but continually probe and cross-check information, building cumulatively on the knowledge gained from earlier answers.
Nevertheless, interviewers at some point have to ask the questions that give them the specific data they need. Good interpersonal skills, sensitivity to the respondent, conducting the interviews at an appropriate time and place as well as having an appropriate sample are all vital to successful interviewing.
Focus groups are a form of multiple interviews with small groups of around eight to 10 people selected with certain key attributes in mind, specific knowledge, experience or socio-economic characteristics for example. Participants are invited to attend informal discussion sessions of no more than two hours’ duration on a particular topic.
I personally believe that carrying out focus groups will help an entrepreneur see where their startup will fit into the market and, with the right responses, can validate your idea:
“See enough people with a problem and you have a business opportunity. Working in the events and shopping sectors we realised there was a wealth of quirky and distinctive retailers without an affordable and effective method of selling their products. Most of these businesses did not have an online presence, and of the ones that did, there was virtually no e-commerce capability.
“The businesses we spoke to were desperate for what we were offering: a way of reaching customers without lugging their products around the country attending really expensive trade fairs which could cost thousands to exhibit at.”
For more basic research decisions on product design, pricing and packaging, for example, focus groups are used extensively by most of the major consumer brands. The advantages of using one include efficiency, as you can get 10 opinions in around twice the time it takes to conduct an interview; and by listening to other people’s comments often more ideas, opinions and experiences and insights can be gained. It is also easier to take notes of the discussion, as this is expected and less threatening in a group situation. But as with interviews, focus groups rely on the views of a small sample and so are not truly representative of any body of opinion.
The market research survey
The most common field research method is the survey. This is a near-ubiquitous tool used by organisations to get a handle on almost everything from measuring market potential and assessing customer satisfaction to getting the views on almost any issue surrounding a product or service.
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Around half of all surveys are conducted face to face, considered best for tackling consumer markets. Next in popularity come telephone, email and web surveys, which work well with companies and organisations. Postal surveys, once very popular, now account for less than 10% of survey work.
Interviewing requires a very positive attitude, courtesy, an ability not to talk too quickly and to listen while sticking to a rigid questionnaire. Personally addressed email questionnaires have secured higher response rates as recipients have a greater tendency to read and respond to email received in their private email boxes. However, unsolicited emails (‘spam’) will mostly be ignored. The key to success is an explanatory letter and incentives for the recipient to ‘open’ the questionnaire; also keep the number of questions to a minimum, make them simple, and have an identifying question to show the cross-section of respondents and look for factual answers.
Just asking questions of anyone you come across is unlikely to give you reliable information. Unless you put some basic statistical method into your research you will be largely wasting time and money. You may also find that anyone reading your business plan or listening to your presentation will be underwhelmed if you can’t explain how you went about gathering your data.
It isn’t usually possible or even desirable to include every possible customer or competitor in your research. Instead you would select a sample of people, who represent the whole population being surveyed. Sampling saves time and money and can be more accurate than surveying an entire population. There are two main methods of sampling which can help ensure you have a population that will provide reliable data. These are probability sampling, which follows statistical rules with each member of the sample population having a known chance of being selected, and non-probability sampling which includes such methods as calling for volunteers or on-the-street interviews and using students as guinea pigs in an experiment.
This method can be further refined by selecting people or groups of people that you believe will result in a group that is representative of the population as a whole. Further refinement can be applied to ensure the people sampled represent the overall population in some important respect. For example, if we know that 60% of pet owners are women, then we might construct our sample with that proportion of women in it.
Testing the market
The ultimate form of market research is to find some real customers to buy and use your product or service before you spend too much time and money in setting up. The ideal way to do this is to sell into a limited area or small section of your market. In that way, if things don’t quite work out as you expect you won’t have upset too many people.
This may involve buying in a small quantity of product as you need to fulfill the order to fully test your ideas. Once you have found a small number of people who are happy with your product, price, delivery/execution, and have paid up, then you can proceed with a bit more confidence than if all your ideas are just on paper.
Pick potential customers whose demand is likely to be small and easy to meet. For example, if you are going to run a bookkeeping business select five to 10 small businesses from an area reasonably close to home and make your pitch. The same approach would work with gardening, baby sitting or any other service-related venture. It’s a little more difficult with products, but you could buy a small quantity of similar items in from a competitor or make up a trial batch yourself.
Market research will benefit your business on many levels, helping you get your business idea out there as well as to build reliable data to include in your business plan.