Noah is currently the COO at Palo Alto Software, makers of the online business plan app LivePlan.
How to Do Market Research
17 min. read
Updated November 30, 2023
One of the biggest and most expensive mistakes I’ve made in my business career could have been avoided by doing a little homework.
In the late 2000s, my team and I came up with what we thought was a great idea for a product. Tons of businesses would need it, and it was almost guaranteed to be a huge hit!
But, we neglected to do our market research.
We ended up with a product searching for a market instead of figuring out who our ideal customer was and building a product specifically for them.
You can avoid making this same mistake.
Let’s learn from my experience and go over the basics of how to conduct market research.
What is market research?
Market research is the process of gathering information about your potential customers.
It helps you define your target market, craft customer personas, and understand the viability of your business, by answering questions like:
- Who are your customers?
- What are their buying and shopping habits?
- How many of them are there?
By exploring your ideal customers’ problems, desires, and current solutions, you can build your product, service, and overall business strategy to better serve them.
Why is market research important?
When starting a business, conducting market research to get to know your customers is one of the most important things you can do.
If you don’t understand your customer, you don’t know:
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- How you can solve their problems.
- What kind of marketing messages and advertising work.
- If your product or service is actually something your customers will spend money on.
Beyond that, market research can help you:
- Reduce risk: Inform critical decisions with real-world data.
- Understand your competitors: Know how competitors and alternatives to your business represent themselves in pricing, quality, and placement.
- Identify market trends: Stay ahead by spotting emerging trends and shifts in the market.
- Enhance customer experience: Improve customer satisfaction by addressing their pain points.
Gathering data on your customers should become a regular practice for your business.
The more in tune you are with your customers, the better you can serve them and the more likely you are to grow your business. You should never just let assumptions about your customers drive business decisions.
Developing primary and secondary data through market research is how you get an accurate reflection of your customers’ needs.
Further Reading: 6 things to consider before entering a market
Things to consider before conducting market research
Market research can be incredibly time-consuming (and even a waste of time) when done without the right preparation.
Here are a few questions to answer to help ensure you make the most of your efforts.
What are your objectives?
A research objective is a stated purpose that explains why you’re doing market research. It should include a specific result you intend to achieve, using available resources within a certain time frame.
Without an objective, you’ll pour over a sea of data without knowing what you’re looking for. And if you speak to customers without a goal, you’ll struggle to ask useful questions and dig deeper.
Don’t overthink it.
Your objective should be easy to understand and connected to your business needs.
For example, if you’re just starting, your objective may be to verify before investing in production if your chosen customer base is interested and willing to purchase your product or service.
What research methods will you use?
You don’t need to have every question prepped or a list of people to interview at the start—but you should know what research methods you intend to use.
The research options you choose will impact the data you collect, and the time it will take to complete it. By doing this ahead of time, you’ll be better prepared to create a timeline of when to take specific actions and what milestones to hit to stay on track.
What tools and resources do you need?
You likely won’t know every resource you’ll need until you start doing research. However, that doesn’t mean you can’t be proactive.
If you know the methods you’ll be using, research what tools you’ll need to:
- Conduct interviews
- Create surveys
- Observe customer behavior
If you use third-party data, identify reputable sources to provide the information you want.
How to conduct market research
Every business will do market research differently. The sources, the methods of data collection, and how you’ll use that data are entirely up to you.
However, the core steps you should take remain the same. Here’s my recommendation for how to structure your research efforts:
1. Start by identifying your target market
Imagine that someone walks into your business, reaches out online, or picks up the phone and calls you.
It’s your perfect customer: someone who has the problem that you solve and is willing to spend money on your solution.
Now imagine the details about this person. Who are they? Can you describe them?
Ideal customers and common traits
This “ideal customer” is your target market. Your business might have several target markets, but it will usually serve you best to keep your list of target customers to two or three.
Each of your target markets should share common traits. These might be demographic traits such as:
- Income levels
They might be psychographic traits—groups of people that like the same things or have similar interests. Or, your target market might be a certain type of employee at another company, such as a Chief Technology Officer or head of marketing.
Most often, target markets are blends of demographic and psychographic groups. For example, you might develop a new type of shoe targeted at female triathletes. Or you might be opening a hair salon targeting urban, hipster men.
Further Reading: Why niche audiences are important and how to find yours
Creating multiple target markets for your company is doing what’s called “market segmentation.”
This sounds complex, but all you’re doing is dividing your target markets into different groups you hope to sell to. Each market segment might have different characteristics and buy your product or service for different reasons.
You might create different marketing campaigns or customize your product or service for each segment.
Target marketing explained
Your target market is your ideal customer who needs your solution. They share common traits like age, gender, income, interests, or job roles. To start, focus your efforts on one target customer.
2. Find out if your market is big enough
Are there enough potential customers to sustain you and your competitors? If the answer is no, then you need to consider changing your product or service offering.
Use the attributes you defined in the target market step and determine how many people meet your demographic, psychographic, or location criteria. I’ve got some links to resources to help you figure this out at the end of this article.
For example: If your target market only has a few thousand potential customers, you must either sell to them frequently or at a fairly high price to create a sustainable, profitable business.
Further Reading: How to use TAM, SAM, SOM to determine market size
If you are targeting an existing market with established competitors, you do what’s called industry research.
For example, perhaps you are building a new company in the market for sports drinks or the market for cell phones. In cases like this, understanding how much people buy of existing offerings will give you the best sense of your potential market size.
In this case, you want to look for industry reports and read trade publications for your industry. These publications often summarize the market size.
Further Reading: Differences between industry and market research explained
3. Talk to your potential customers
Once you have identified your target market, or at least made a good guess at who your target market is, you need to take the most important step in this entire market research process.
You need to get up from your desk, leave behind your computer, and go outside. That’s right, you need to go and talk to people in your potential target markets.
Yes, you can do online surveys and other research, but that’s no substitute for actually talking to potential customers.
You’ll gain more insight into your customers through first-hand accounts than any survey will ever tell you.
Do this one thing, and you’ll be miles ahead of your competition. Why? Because most people skip this step. It’s intimidating to talk to strangers. What if they don’t want to buy what you plan on making?
So, don’t be like most entrepreneurs (including me!) and skip this critical step.
It can mean the difference between success and failure. Getting this step done early will help you refine your business model and make a clear impact on your future success.
Further Reading: How to Create a Market Penetration Strategy
4. Identify and analyze your competitors
Part of understanding your customers is knowing what solutions they already use.
These are your competitors, and they may directly compete with you or provide a reasonable substitution customers settle for.
You’ll understand how to position your business to take advantage of potential opportunities and mitigate risks by analyzing who they are, what they do, and how customers respond.
Document your known competitors
To keep things simple, start by listing your known competitors. Account for businesses that offer a similar product/service, and those that indirectly compete with their solution or industry expertise.
Example: You operate an outdoor goods retail store. Your mission is to provide hands-on direction for customers to find camping, hiking, and survival gear that they will love. You offer a wide selection of well-known brands, local options, and in-house creations.
Your direct competitors are the large brands themselves, less niche retail stores, and online sellers. You must also account for other businesses that provide expert-level information on outdoor activities.
They likely don’t sell the products, but may provide guided tours, reviews, or other insights that overlap with your business.
Analyze your competitors
Once you have your list, it’s time to get to know the competition. Check out their websites, social media, customer reviews, and news stories from the last year.
Sign up for their email lists, visit their stores (if they have them), and track down any industry reports that give you an idea of their size, performance, and strategic direction.
You don’t have to do everything I just listed. But you must go deep enough to clearly understand your competitors and why potential customers may choose them over you.
It may even be useful to use the SWOT analysis framework to provide additional structure for your research.
Further Reading: 10 ways to determine what your competitors are doing
5. Document your findings
The final (and easiest) step is to document your findings. How formal your documentation is will depend on how you plan on using it.
If you only need to share your findings with business partners and others in your business, then you can probably communicate fairly informally.
However, if you’re looking for investors for your business, you may need to write a more formal market analysis and do a market forecast.
Presenting your market research
The single piece of documentation that every business should create is a buyer persona.
A persona is a description of a person that hits on all of the key aspects of your target market. And, just like you might have several target markets for your business, you might have several different buyer personas.
Creating a buyer persona converts your target marketing information from dry research into a living, breathing person.
When we think about creating a new marketing campaign or developing a new feature for our products, we ask, “Would Garrett like this?” You can read about the process we used to create Garrett in this article.
How to create a detailed user or buyer persona
Visualizing your customers when reviewing a sea of data can be tricky. So, create a customer persona and turn that data into the living, breathing person you imagine your customer to be.
When should you conduct market research?
Market research is vital when starting a business. It will improve your product or service and help you avoid starting a business without customers.
However, market research shouldn’t be exclusive to new businesses. Conditions are bound to change, and you must stay up-to-date on your industry, competitors, and emerging trends.
Here are a few other business events where market research can make a difference:
- Launching a new product/service or updating current features.
- Expanding into a new market.
- Consistent dips in financial performance.
- Widespread market changes.
- New competitors enter the market.
Primary vs secondary market research explained
No matter how you decide to gather information, the methods can be boiled down to primary and secondary research. As a business owner, it’s worth understanding the basics of each type of research and how they work together.
What is primary research?
Primary research is the first-hand information collected (by you or someone you’ve hired) from customers within your market. Primary research cuts out the middleman and ensures that the results you are gathering are straight from the source.
That’s why you should conduct primary research when validating your business idea.
Furthermore, it can be broken down into two result categories — exploratory and specific.
Exploratory primary research
Exploratory primary research involves non-quantifiable customer feedback. This means you’re not trying to measure results but to record interest or an emotional response. You’ll accomplish this by asking open-ended questions in formats like focus groups or 1:1 interviews.
Asking for open-ended feedback ensures that the results are unfiltered and honest. You aren’t unintentionally leading or hindering their responses.
Specific primary research
Specific research allows you to dig deeper into issues or opportunities you identified through your exploratory research.
You may target a smaller segment of customers from the larger group you’ve spoken to, conduct additional interviews, or shift to more quantifiable research such as beta-testing or surveys.
What is secondary research?
Secondary research covers every other piece of data you have available. This includes resources such as:
- Public sources: Typically free and highly accessible information gathered through government-sponsored research projects.
- Commercial sources: Research studies conducted by private organizations regarding the state of specific markets, industries, or innovations.
- Internal sources: Data you have collected through everyday business operations. Everything from financial statements to Analytics reports can qualify.
Which is better: primary or secondary research?
Neither primary nor secondary research is better than the other. They simply have different use cases. So, aim for a healthy mix.
When starting, focus on conducting primary research to ensure you get the necessary information to validate your business.
Compare those findings to secondary resources such as industry benchmarks, market reports, and internal data you’ve collected.
You’ll likely leverage secondary research more consistently as you grow—but it’s wise to run primary research initiatives occasionally, especially when approaching a strategic decision. Only with both types of research will you fully understand the story of your place in the market.
Further Reading: Types of market research explained and how to use them
Types of market research to try
1. Face-to-face, remote, or phone interviews
I mentioned this before, but the best thing you can do is get out and talk to your potential or current customers, virtually or in person.
Be sure you have a refined set of closed and open-ended questions ready, and consider the interviewee’s tone, body language, and interest alongside their answers.
2. Focus groups
Similar to interviews, focus groups can provide direct feedback from your customer mix. Rather than receiving answers or reactions in a bubble, you get to see how customers may act when influenced by others in the market. You can simply ask questions, run product tests, or have them watch a demo.
3. Observational research
Observational research is about watching how potential customers engage with your product or service. You’re attempting to understand what roadblocks or frustrations they may be hitting, what functionality seems to resonate, what they want from your business, etc.
To conduct observational research, you can set up an official testing environment that you control. Or you can just go out and observe your potential customers and see how they shop, make purchases, and what factors encourage or deter them from purchasing.
4. Pricing research
You may include questions about pricing when conducting interviews or focus groups, but you can also specifically develop research around pricing.
This can be anything from testing different pricing options on your website (A/B testing), offering discounts to exclusive segments, or running ad campaigns with different pricing positions. The goal is to understand what your customers are willing to pay and what they consider a fair price.
5. Brand awareness research
This type of research is about understanding if your target market knows about your brand and how much they happen to know. What do they associate with your brand? What competitors come to mind first?
It’s a great way to understand your current market penetration and who your competitors are. You can integrate this type of questioning within your other tests or conduct surveys to get this data.
6. Customer interest
As part of your initial validation process, you should try to understand current customer interest. At its most basic, you’re asking: Are customers willing to buy your product or service?
You can simply ask questions and look for yes or no answers, but it may be wise to run a limited-time sale or pre-sale to actually line up initial revenue for your business.
You can offer the chance to purchase during your interviews or focus groups, as well as run pre-orders through a simple landing page or by measuring engagement with a paid ad campaign.
7. Customer satisfaction
This research will help you understand current customer loyalty and what it will take to get customers to come back. Again, you can do this research within focus groups or interviews.
Still, you can also test loyalty programs, limited-time promotions, customer service initiatives, and other ways to improve customer loyalty.
Market research tools and resources
Finding market research data depends on the market you are targeting and the industry you are in.
Here are a few of my go-to sources for market research:
- U.S. Census: If you’re opening a business in the U.S., the U.S. Census site is a goldmine of information. Check out the Census Business Builder to get population data and data on how much people spend in a given area on your type of business.
- Bureau of Labor Statistics: Another U.S.-centric resource, but a fantastic site for information on specific industries: hiring and expense trends as well as industry sizes. If your target market is other businesses, this is a good place to look for data.
- Consumer Expenditure Survey: If you want to know what people spend their money on, this is your source.
- SBDCNet Business Snapshots: You’ll find a great collection of industry profiles that describe how industries are growing and changing, who their customers are, and what typical startup costs are. You should also check out their list of market research resources, sorted by industry.
- ChatGPT: All data generated from AI models like ChatGPT must be verified. But it can still be an excellent market research assistant. With the right prompting, you can generate customer segments, understand their nuances, and prioritize them based on your needs.
Further Reading: 21 best market research resources for small businesses
Market research informs your startup decisions
Effective market research can help you avoid costly mistakes early on in the life of your business.
However, it should remain a core practice that you regularly implement when approaching crucial business decisions, growth opportunities, or just to reaffirm your understanding of the market.
Revisit this framework whenever you’re approaching a key strategic decision. Confirm that you still understand your customers, competitors, and where the market is headed.
Then use this information to inform your planning and adjust your strategy if necessary.