Market Analysis

What is a market analysis?

Market analysis (in German: Marktanalyse) describes the systematic examination of a market in terms of size, structure, competition, development and conditions of access. The subject is a market in which a company operates or wants to operate. The analysis clarifies how much demand exists, how it is distributed across customer groups, who serves it today, which forces are changing it and what makes access harder or easier for a provider. Its aim is a documented statement on whether and how the company can grow in this market.

The market analysis is a fixed component of the business plan and supplies the factual basis of the equity story, the coherent growth story for investors. In funding rounds, it appears in condensed form in the pitch deck, the short presentation for investors. In a company sale, it appears in the information memorandum, the detailed company description for prospective buyers. Banks and funding programmes also require it in loan and application documents. Investors and buyers have the statements reviewed in a commercial due diligence, a separate examination of market, competition and customers before signing a contract.

Carrying out a market analysis: a five-step structure

Market size

The starting point is the delimitation of the market by the need that the offering meets, and its size. German marketing theory distinguishes market potential, that is, the greatest possible demand, from market volume, the actual spending of all customers with all providers. In financing documents, the three-level presentation of total addressable market (TAM, the overall market), serviceable market (SAM) and the market obtainable within a given period (SOM) has become established. The size is preferably derived from customer numbers and prices (bottom-up market sizing), with a calculation from the top (top-down market sizing) as a cross-check.

Segments

The market is divided into customer groups that differ in need, willingness to pay and sales channel, for example by industry, size class or region. Segmentation determines where the company enters first and in which order it opens up further segments. It should be consistent with the profile of the ideal customer (ICP) and with the structure of the revenue plan.

Competition

The competition section describes direct competitors, indirect solutions and the substitutes with which customers solve the problem today, from spreadsheets through service providers to doing without any solution. For each relevant provider, the offering, target group, price level, strengths and weaknesses are presented. The statement that there is no competition is read in the review as a sign of insufficient market knowledge, because an alternative always exists.

Drivers

Drivers are the forces that change demand and prices: legal requirements, technical developments, cost pressure, skills shortages or changed purchasing habits. Each driver comes with an assessment of how strongly and how quickly it acts, together with the obstacles that can slow growth. A small market with strong drivers can be more attractive than a large one that is stagnating.

Entry barriers

Entry barriers work in two directions. They determine how difficult access is for the company itself, for example because of approvals, certifications or long purchasing processes of customers, and how well it can defend its position against imitators. A protective effect is created, among other things, by customers' switching costs (lock-in effect) and network effects, where the benefit of an offering rises with the number of its users. Further protection comes from data assets, industrial property rights such as patents and trademarks, and economies of scale.

Methods of market analysis

Secondary research (desk research) evaluates existing data, such as official statistics, trade association figures, registers, competitors' annual financial statements and market studies. Primary research collects its own data: interviews with customers and non-customers, expert conversations, surveys and the evaluation of the company's own sales data. Widely used for the evaluation are Michael Porter's industry structure analysis (Five Forces) and the SWOT analysis, which summarises strengths, weaknesses, opportunities and risks. The result becomes reliable when the assumptions on which the planning rests are confirmed by own conversations or sales data.

Role in the business plan and equity story

In the business plan, the market analysis substantiates the revenue plan. Every planning assumption on customer numbers, price, growth and close rate must be traceable to a statement in the market analysis. Conversely, every statement of the market analysis that matters for the planning must reappear in the figures. A market that, according to the analysis, grows strongly each year does not fit without explanation with a plan of falling prices and a stagnating customer count.

In the equity story, the market analysis supplies the first part of the argument: there is a sufficiently large, growing market in which the company can take up a defensible position. The drivers explain why the timing is favourable, the entry barriers why a lead can endure. Investors pay less attention to the size of the market than to the coherence between the picture of the market, the competitive position and the planning.

Review in commercial due diligence

The market analysis passes a first test already in the pitch deck. There, investors check in a short time whether market size, competition and planning fit together and whether every market figure carries a source. In larger funding rounds and in company sales, investors or buyers then often commission their own market and competition review. It checks market size, growth and the company's position by its own means: interviews with customers and former customers, conversations with industry experts, own market models and the evaluation of the sales data from the data room. In a sale process, sellers sometimes have such a review prepared in advance, as part of a vendor due diligence.

First, every market figure is checked for origin, reference year and method of collection. Then the focus is on the scope of the market considered and on whether overlaps between segments have been cleaned up. Finally, it is reconciled whether the sales plan and the financial model start from the same picture of the market. The results feed directly into the valuation, because they confirm or correct the growth assumptions on which valuation and purchase price are based.

Worked example: key figures of a market analysis

A hypothetical market for maintenance planning software in manufacturing companies with 50 to 1,000 employees in the German-speaking region is considered. All figures are freely chosen. The calculation shows the key figures with which a market analysis describes size, position and development.

• Market potential, that is, the revenue if all suitable companies bought: 18,000 companies × an average of EUR 12,000 = EUR 216 million a year
• Market volume, that is, today's spending of all customers with all providers: EUR 108 million a year
• Degree of saturation, that is, the share of the potential that is already spent today: EUR 108 million / EUR 216 million = 50%
• Own revenue: 100 customers × EUR 12,000 = EUR 1.2 million, market share EUR 1.2 million / EUR 108 million = around 1.1%
• Largest competitor: EUR 12 million revenue, market share EUR 12 million / EUR 108 million = around 11.1%
• Relative market share, that is, own revenue in relation to that of the largest competitor: EUR 1.2 million / EUR 12 million = 0.1
• Development: the degree of saturation rises from 50% to 65% within five years, with the same prices and the same number of companies. The market volume then grows to EUR 216 million × 0.65 = EUR 140.4 million. That is 30% more, or on average around 5.4% per year (1.3 to the power of 1/5 = 1.054).

The key figures complement each other. The low market share shows that the company is at the beginning; the degree of saturation shows that half of the possible demand has so far not been served by any provider. For the equity story, the second statement is the more important, because growth then does not have to come solely at the expense of competitors. It holds, however, only if the market analysis explains why the companies not yet reached will buy in future, for example because of new documentation obligations or rising downtime costs.

Distinctions: market analysis, competitor analysis and GTM strategy

• Competitor analysis: a part of the market analysis that is limited to the providers and their position.
• Go-to-market strategy: determines how the company reaches the segments described in the market analysis, with which channels, prices and messages. The GTM strategy presupposes the market analysis.

Common mistakes

• Only the overall market. An analysis that stops at the worldwide market of an industry says nothing about the part that the company can actually serve and win.
• Outdated or unsupported figures. Market figures without a source and reference year look like estimates in a review, even if they come from a study.
• Competition denied. The claim that there are no competitors ignores the substitutes with which customers solve their problem today.
• Size without development. A stagnating large market is often less attractive to growth investors than a smaller one with demonstrable drivers.
• Overlapping segments. If segments are formed by industry and by size side by side and added up, the same customer appears twice in the total.
• Analysis and planning contradict each other. Growth, prices and customer numbers in the planning must be derivable from the market analysis; deviations need to be explained.

Frequently asked questions

What is the difference between market analysis and market research?

Market research is the umbrella term for the systematic collection and evaluation of market information; market analysis is a part of it. Market analysis condenses the collected data into a statement about a market at a particular point in time.

What distinguishes market analysis, market observation and market forecast?

The time reference. Market analysis describes a market at a reference date, market observation follows its development continuously over a period, and market forecast estimates future development. In financing documents, all three interlock: the analysis supplies the starting point, the observation the growth rate so far and the forecast the assumptions of the revenue plan.

How extensive should the market analysis in the business plan be?

As a rule a few pages, as a rule of thumb three to six, with the full derivation of the market size in the appendix or in the financial model. In the pitch deck, one slide each on market size and competition is usually enough.

How current do the market figures have to be?

As current as available and always with a reference year. Figures that date back several years can be used only with a disclosed update; in fast-changing markets they lose their informative value particularly quickly.

Who prepares the market analysis?

The management, because it has to defend the statements in the review. Advisers and market research institutes can supply data and structure; the conclusions for strategy and planning should come from the company itself.

The Roemer Capital view

In preparing every funding round and every sale, we expressly link the market analysis with the financial model. Every market figure on which a planning assumption rests appears in the model with its source and reference year, and every statement on drivers is reflected in a concrete assumption.

In sale processes, we assume that buyers will retrace the market analysis in a review of their own. The supporting evidence is therefore in the data room before the question is asked, and we make sure that the information memorandum, management presentation and model draw the same picture of the market.