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Market conditions refer to economic and competitive conditions that can impact a company's likelihood of success. So, understanding and researching market conditions is a crucial step in the process of starting a new business. 

For example, assume you’re considering opening a coffee shop. There’s only one shop in your area, but your research finds that it’s mainly empty—even in the morning. This fact could mean that people in your neighborhood aren’t interested in paying for coffee, so perhaps it wouldn’t make sense to open a new coffee shop. On the other hand, the existing shop may be empty because the coffee they’re serving is awful, in which case the really great coffee you plan to sell may attract hordes of customers.

Gathering relevant information before you invest your time & money in starting a new business is why market research is so important.


Evaluating Market Conditions

Market conditions include factors such as economic growth, consumer demand, and competition. While analyzing market conditions can be complex, it’s something a potential business owner can explore—in our coffee shop example above, we took a quick look at both consumer demand and competition.

Economic growth is another key part of overall market conditions. If the economy is strong and consumer demand is high, a company may experience increased sales and profits. If the economy is weak and consumer demand is low, sales and profits may decrease. For example, you may successfully open your hypothetical coffee shop, but what happens when there’s a recession and people lose their jobs? Without a population of people with discretionary income, sales of luxury goods like expensive coffee would likely suffer.

There are several steps you can take to determine market conditions when starting a business:

  • Identify the Target Market - Market research can help you understand the size and characteristics of your target market. Consider factors such as demographics, purchasing habits, and location when determining the target market.
  • Gather Market Data - Gather data on the market conditions. This data can include information on consumer demand, competition, and industry trends. For a local, small business idea, you can do much of this research by talking with potential customers and identifying potential competitors. For national business ideas, consider conducting online surveys and in-person focus groups.
  • Monitor Economic Indicators - Economic indicators such as GDP, unemployment rate, and consumer confidence can provide valuable insights into the overall health of the economy and can help you understand the market conditions for your business. 
  • Monitor Industry Trends - Keeping track of industry trends can help you understand the current state of your industry and identify potential opportunities or challenges. You can do this by reading industry publications, attending events, and following experts on social media.

Once you’ve gathered data relevant to your business idea, it's important to analyze the information to identify trends and insights that can guide your business decisions. Another helpful tool for analyzing the potential opportunity of a new business is Porter’s Five Forces.


Porters Five Forces: Next-Level Analysis

Porter's Five Forces is a framework developed by economist Michael Porter to analyze the competitive forces in an industry. When considering whether or not to start a business, this analysis can help you identify the potential risks and challenges you may face as a new business and recognize the opportunities for success.

The framework consists of five forces that shape the competitive environment and determine the intensity of competition in an industry:

  • Rivalry Among Existing Competitors - This force refers to the competition level among existing industry businesses. If there is a high level of competition, businesses may have to compete on price, quality, and other factors that can make it more difficult to turn a profit—especially for a new company.
  • Bargaining Power of Suppliers - This force refers to suppliers' bargaining power in the industry. If suppliers have a large amount of bargaining power, they can drive up the cost of raw materials, which can negatively affect profitability.
  • Bargaining Power of Consumers - This force refers to buyers' bargaining power in the industry. If buyers have a large amount of bargaining power, they can drive down the prices of goods and services. For example, if your local business sells the same products for less online, consumers have more power to make spending choices.
  • Threat of Substitutes - This force refers to the ease or difficulty of replacing the goods or services offered by businesses in the industry. If many substitutes are available, it may be easier for customers to switch to alternative products or services.
  • Threat of New Entrants - This force refers to the ease or difficulty of entry into the industry for new competitors. Factors that can make entry into the industry difficult include high startup costs, barriers to entry, brand recognition, and established supplier relationships.

Each of the Five Forces can be ranked from low to high. For each force, consider its impact on the intensity of competition in your industry. Factors that increase the intensity of the force will make the industry more competitive, while factors that decrease the intensity will make it less competitive. 

Based on the Five Forces analysis, develop strategies to position your business in the most favorable way. For example, if the threat of new entrants is high, you may want to focus on building strong brand recognition or developing proprietary technology to make it harder for new competitors to enter the market. Or, if the rivalry among existing competitors is significant, you may need to be more aggressive in your marketing and sales efforts to stand out in the crowded market.

Once you've conducted your research, creating charts, graphs, or other visualizations can help you understand the data and make informed decisions. These metrics can also plan an important role when writing a business plan and, if applicable, seeking funding sources.