Market analysis is a tool companies use in order to better understand the environment in which they operate. It is one of the main steps in the development of a marketing plan. The first step is to conduct market research—or gather information through direct mail, telemarketing, focus groups, online surveys, etc. Then comes market analysis, which involves critically reviewing and organizing the data collected so that it can be used in making strategic marketing decisions. "Just as one would not build a house on sand, one should never undertake a marketing program that is not built on a firm foundation of market knowledge, " David J. Freiman stated in his book What Every Manager Needs to Know about Marketing. "It is remarkable and alarming how little managers of businesses really know about their markets and the other elements of their outside environments."
A good market analysis should include information on industry trends, an assessment of major competitors and their strategies, a review of the channels of distribution, and a wide variety of data on current and potential customers. The market analysis provides the input for the next step in developing a marketing plan—market segmentation, or dividing an overall market into key customer subsets, or segments, whose members share similar characteristics and needs. The company then selects from among these segments the particular markets it wishes to target, and creates a marketing plan that will appeal to the target customers. "Small businesses that identify the needs of specific target markets—existing and potential customers who are the focus of marketing efforts—and work to satisfy those needs, are more effective marketers, " according to Gloria Green and Jeffrey Williams in Marketing: Mastering Your Small Business.
Most market analyses begin with a broad study of the overall industry and conclude with a narrow definition of the company's target market. Some of the industry factors that might be mentioned in a market analysis include the relative market share held by various competitors, the rate of new product introductions, the technological environment, and the impact of significant laws or regulations. A market analysis would also include overall market information such as sales history, current demand, and expected future trends. It is particularly important to know whether demand is increasing, decreasing, or remaining constant.
The next area of a market analysis involves creating an in-depth portrait of customers. Through market research, the company tries to answer such questions as: who are the primary decision makers and purchasers; what are their main motivating factors; and when and where do they tend to buy? The key is to understand how customers make their purchasing decisions in order to be able to influence those decisions. Market research might assess such demographic features as age, gender, income level, educational background, financial situation, marital status, household size, and ethnic or religious background. Once this information has been broken down through market analysis, the company then creates a detailed description of the most desirable segment of the market to be included in the marketing plan. The market analysis should demonstrate why the target market chosen is more favorable than other segments, since the company will be investing its limited resources in marketing to that target market.
In addition to its role in developing the marketing plan, market analysis has numerous other implications for company strategy. "Once we understand the phenomena that underlie the behavior of our markets, we can assess our strengths and weaknesses relative to those phenomena. External threats and opportunities need to be carefully examined so that we can apply our strengths to areas with high potential and avoid major environmental pitfalls. Finally, we must link the resulting diagnosis to our corporate capabilities, strategies, and constraints in order to ensure a good fit between our marketing strategy and major corporate goals and objectives, " Glen L. Urban and Steven H. Star explained in their book Advanced Marketing Strategy.