Market Research and Business Modelling

Market research and Business modelling

Market research is one of the most important aspects of starting a business on the right footing and yet it is probably one of the most under-valued activities in a start-up. Not surprisingly, many businesses fail because of poor market research that was done at the beginning of the business. No amount of beautification of the business can hide or make-up for bad market research. Bad market research will expose the business to failure almost without exception. Secondly, it is important to ensure that not only is the market research relevant but that it is broad enough. Market research is not just about finding out consumer purchase behaviour as many entrepreneurs presume. It is about much more, such as:

  1. Economic indicators as they relate to your line of business.
  2. Industry statistics and dynamics.
  3. Competing product types.
  4. Attributes and substitutes that consumers use.
  5. Supply lines.
  6. Location and site characteristics.
  7. Consumer characteristics and statistics.
  8. Taxation and other statutory obligations.
  9. Pricing, margins and sales projections.
  10. Market share projections and product supply logistics.

The more issues that an entrepreneur covers in his research the broader the picture that he will have about the market and the better the quality of decisions that he will arrive at about his business as a result. The basic research strategy is to start broad with economic indicators and then narrow it down to specifics relating to consumer purchase behaviour, production or supply volumes and logistics. There is no substitute for the entrepreneur’s own first-hand involvement in the research process. Both secondary and primary sources of information are important. The entrepreneur should be prepared to put in a considerable amount of time, money and leg-work into this process. From their market research, the entrepreneurs should to clearly address these questions.

  1. Who are the customers?
  2. What do they purchase in the product class and why?
  3. Where do they purchase it and why?
  4. What value are they looking for in the product and can we deliver it better than the competition?
  5. What quantities do they purchase and why?
  6. How do they consume it and why?
  7. What trends are emerging and why?
  8. What is the likely impact of these new trends in future, as well as new economic and political developments?
  9. How should we prepare to take advantage of them or to neutralize their impact?
  10. How can we consistently supply an affordable product to the market while remaining profitable and at what volumes?
  11. At which locations should we make the product available and why?

Business modelling

Once an entrepreneur has a clear picture about the market, the next thing that they have to work out is how they will engage with the market that they wish to do business with. This is what business modelling is about. The entrepreneur knowing what he knows about the market has to find the best formula of delivering his product or service to the market. If the formula that he chooses is right then he will be successful. But if the formula that he chooses to use is wrong, then he will fail. Many businesses fail not because there is no demand for the product or service that they are offering but fail because the formula that was used to deliver the product or service to the market was the wrong one for that market. Developing a business model or a business formula for the market is an essential multi-layered process that includes:

  1. Selecting a basic operating format – Manufacturer, distributor, retailer or franchise].
  2. Selecting a customer contact method – Physical, mobile and or online presence, direct selling to final customers, indirect sales through intermediaries, direct door-to-door sales, physical and online auctions.
  3. Selecting customer attraction tactics:
  • Shared economy model – This involves sharing a private resource through hiring or renting of the resource.
  • Pay-as-you-go model –Using a flexible payment model based on pay per use.
  • ‘Freemium’ product model – Using a free basic product with a premium product available for a price.
  • Add-on model– Using a cheap basic product plus more expensive optional extras.
  • Advertising model – Using your medium or space or asset to generate revenue from advertisers that want access your customers.
  • Affiliate [Agency] model – Making commission sales for many suppliers or having many sellers for a single supplier.
  • Network marketing model – Using customers to recruit customer for a reward in a hierarchical structure.
  • Software as a service [SAAS] model – Using cloud computing platforms to provide online services to customers.
  • Bait and hook model – Using a cheap main product and expensive non-optional parts.
  • Low cost model – Using a stripped down model of a product that traditionally has many more features.
  • Subscription model– Using some contractual means to tie customers to the seller.
  • Franchise model – Using licensing of other entities as a means of market expansion and revenue-building for the licensor.
  • Somali pirate business model – Using a project-based consortium model that disbands after the project.
  • Overlay model – Bringing unrelated services used by the same customers under one roof.

An optimum combination of the three levels of business modelling should be found based on understanding the market, the competition and the entrepreneur’s own capabilities to execute a specific business model. Once the basic structural design of the business has been developed, it becomes necessary to fill in more details about how the business will operate. This is where the business model canvas becomes useful. It helps an entrepreneur thrash out some specifics about the business that he wants to engage in. Often there is a misconception that business model development is just about addressing the nine elements of the business model canvas. That is not so. There is more to business model development that entails the designing the basic structure of the business model. Nevertheless, the nine elements of the business model canvas also should be addressed. These are given in the business model canvas illustrated below.

Addressing the business model canvas helps the entrepreneur look at the business in more realistic and concrete ways. In addressing each of the nine elements of the business plan, an entrepreneur often finds the need to find out more about specific aspects from the market. This is research that is current and relevant to the business. It also helps the entrepreneur revise their original thoughts about certain elements of the business and its operations. In addition, the business model canvas also provides vital source information for developing the business plan, which is the next level of business development after formation of the business model. Therefore, as an entrepreneur either planning to start a business or to improve your business, you should engage in a process of asking yourself questions about each of the nine elements, such as: who are my key partners? what are the key resources that I need for my business? What is the cost structure of my business like and what are the consequences of that, what are the revenue streams of my business and are these enough? etc.

Business plan

The business plan looks at the business in a broader context but covers all the elements considered in a business model canvas.

How to use the business plan

Research shows that many entrepreneurs do not write a business plan and even more do not follow the business plans that they have preferring to trust their instincts for business. This raises the question: are business plans of any real use for entrepreneurs? To start with, a business can be successful without a documented business plan up to a point of diminishing returns due to lack of business planning. Sooner or later the business reaches a stage where the hit or miss benefits of an entrepreneur’s instincts are not enough and a plan becomes necessary not only for the entrepreneur but also for the other members of his team. Secondly, the success of a business without a plan leads entrepreneurs to a point where uncertainties and risks of making bad decisions with their money increase tremendously that a plan is needed. Great success without a plan becomes dangerous. Contrary to popular beliefs and behaviours, a business plan is not a document that is prepared for the benefit of third parties such as financial institutions and potential investors. It is primarily a document for the benefit of the entrepreneur himself.

  • A fundamental use of a business plan is to anchor the business in a particular product line. In this way, the entrepreneur resists the temptation to add new transient opportunities that may happen to be making money at any specific time. Moving from one opportunity to another often creates lack of focus for the business. The business plan helps the entrepreneur remain grounded as he regularly asks himself: ‘what business are we in?’ It helps them sort out their thoughts and prioritize what is important towards achieving the mission among many competing alternatives.
  • Similarly, a business plan provides a vision for the business that everybody in the business is working towards. There may be detours along the way to a specific destination. The existence of a business plan shows where the business wants to get to and makes it possible to get back on track even when deviations have been necessitated by circumstances.
  • Progress towards and achievement of milestones towards defined goals of the business have great motivational value to entrepreneurs and their teams. Such achievements are not only celebrated but have a uniting effect among team members towards a common objective.

How to develop a business plan

Business plans vary in terms of their detail. However, the important thing to remember is that the plan should provide an adequate roadmap towards the destination that has been selected for the business. It can be a concise document that covers the following headings in adequate detail:

  1. Cover Page
  2. Table of Contents
  3. Executive Summary
  4. Company Description
  5. Purpose of the Business Plan
  6. Goals and objectives of the Business [Vision and mission, values unique selling and value proposition]
  7. Industry profile and Overview, Target Customer, and Competitor Analysis
  8. Product/Service Plan [Company products and services, intellectual property, production processes, future products and services, etc.]
  9. Overall business strategy
  10. Marketing Plan
  11. Location and Layout plan
  12. Operations and Development Plan
  13. Management Team
  14. Critical Risks & Contingencies
  15. Offering
  16. Exit Strategy
  17. Financial Plan [including financial forecasts, financial statements, break-even analysis and key industry ratios]
  18. Deal structure [loan amounts, investment proposal, repayments etc.]
  19. Appendix of Supporting Documents