If You Need Funding for Your Business, DO THIS FIRST.
Whether you need cash to start a business or you need cash to buy new assets to grow your business, it’s HARD to find those dollars. And, to make matters worse, small business lending has decreased 30% over the last 5 years.(Source: Federal Reserve) Banks aren’t lending to small businesses like they used to.
Why is it that most businesses (even ones with business plans) don’t get the funding they need? They are missing a crucial ingredient: Solid Market Research
Before financing any business endeavor, whether you’re considering opening a business, launching a new product, adding a location or buying assets, market research and validation is key to your project’s success. Market research involves finding out everything you can about your proposed business and product/service, the industry and your target market.
Lenders and Investors want to know that you understand and have validated your market opportunity. They want to know that there is truly an opportunity that you have identified and you’re not just chasing a pipedream. Lenders have to be sure that your business can repay any business loans and investors want to know that they will get a return on their investment. If you don’t have solid market validation everything can come to a big, screeching halt.
Big companies spend millions on researching market opportunities before they invest. Fortunately, you can do much of this research on your own. Not only will doing the research yourself save you money, but also it will help you to thoroughly understand your potential consumers, your competitors, and exactly how much you need to sell to make a profit.
Your research will help you answer questions like:
· How many people buy this product/service? How fast?
· What is the market value? How many are your competitors selling? For how much each?
· Is the market already saturated or near saturation?
· What's the most a business could possibly make doing this?
· How much of that market would you need to capture to break even, to make a profit?
· How many products/services must you sell in order to run a successful business?
Follow these steps:
Identify Your Competitors
The best way to start this list is to list the companies in your industry that are doing what you want to do and are leaders in your industry. List all the direct competitors you can think of. Google key words for your industry and see what come up. Use Google Maps if you have a bricks and mortar business.
A good tool to benchmark your competitors is the Small Business Administration’s SizeUP tool. This handy tool will allow you to map competitors in your area as well as see how your performance compares. You can find the tool here: https://www.sba.gov/tools/sizeup
Another way to analyze your competitor data is to use a comparative matrix. This tool allows you to compare your business with a list of competitors on features, benefits or services that you plan to offer. Each competitor receives a ranking score and gives you a clear picture of what you are up against as well as possible tweaks to your product or service offering. We’ve developed our own matrix tool for you. CLICK HERE to Download the File
Conduct Primary Research
Primary research is research that you do yourself, without relying on a database or other research tool. Primary research is when you engage directly with prospective customers to try to understand what their needs are and how your product or service can fulfill those needs. This is as simple as conducting customer interviews to sitting in restaurant counting how many people come in, sending out a questionnaire, hosting a focus group, or reaching out to a similar business.
Reach Out to a Similar Business Miles Away
The other thing to consider is to look for a similar business in a different part of the country. Typically entrepreneurs are proud of what they've done. If you're not right in their backyard and they don't feel like you're getting too personal, they may be willing to talk to you. You can ask questions like: How much money did it take to get started? What's your best seller? What's your target market in terms of demographics? What's your average sale?
Send an email first and explain what you’re doing and that you would like to ask a few questions. Say, “Would it be all right if I call you? If you don't have time for that, I'll send you the questions in email."
Conduct Secondary Research to Gather Quantitative Information
Secondary research uses quantitative data, which is based on statistics using information already gathered in databases.
Database information comes from resources like:
· Census Bureau's Fact Finders You can go in and look up stats by industry.
· The Economic Development Cabinet for each U.S. state. They give community reports by county.
· Chambers of Commerce.
· ReferenceUSA®, an expensive subscription-based database that’s invaluable and has several databases: U.S. Businesses, New Businesses and consumer databases, like U.S. New Movers and Homeowners and U.S. Consumer/Lifestyles. A lot of times, you can use it and other expensive resources for free at your local library.
· Don’t forget the SBA’s SizeUp tool: https://www.sba.gov/tools/sizeup
If you haven’t been able to already identify your competitors, these resources can help you to do that. Also, you can get statistical information to see how many people meeting your customer profile live in a certain part of town/neighborhood, etc.
Market research is imperative if you need funding for your business. More importantly, it will help you evaluate an idea before you execute on it, understand your customers, your competition, and how to set yourself apart from your competition.
Follow these tips to get a solid start on your own market research. If you get stuck, you can always get some help from us. www.louisvillesmallbusiness.com. We subscribe to several market research databases that are very expensive but we can get the data to you free. We can help you write your business plan/loan proposal and source funding sources too!
We also offer regular workshops. Check out our calendar here https://www.louisvillesmallbusiness.com/workshops/