What this lesson covers
How to research and document the external conditions in which a business will operate. This lesson covers three components of market analysis: defining the target market, conducting a competitive analysis, and assembling a SWOT analysis. The goal is to produce a clear, evidence-grounded picture of who the customers are, who else serves them, and where the business fits.
Part 1: Target market profile
The target market is the specific group of people the business intends to serve. Defining it requires answering three sets of questions.
Demographics: who are they?
Demographics describe the measurable characteristics of the target population:
- Age range: What generation or life stage?
- Income level: What can they afford? What do they consider a normal expenditure in this category?
- Location: Where do they live and work? How far will they travel for this product or service?
- Occupation: What do they do? Does their work schedule affect when they’re available as customers?
- Household composition: Singles, couples, families? Does the business serve individuals or groups?
Sources for demographic data: U.S. Census Bureau (census.gov), Bureau of Labor Statistics, local economic development agencies, and commercial platforms like Esri’s community profiles.
Psychographics: what do they value?
Psychographics describe attitudes, values, and lifestyle:
- What do they spend discretionary income on?
- What do they care about when choosing a business in this category — price, quality, convenience, atmosphere, ethics, novelty?
- How do they discover new businesses — word of mouth, social media, search engines, walking by?
- What keeps them coming back versus what drives them to switch?
Sources for psychographic data: customer interviews, surveys, social media analysis, industry reports, and comparable business reviews.
Behavioral patterns: what do they do?
Behavioral data describes how the target market actually acts:
- How often do they purchase this type of product or service?
- What’s their typical spending per visit (average check)?
- What time of day, day of week, or season are they most active?
- Do they buy for themselves, for others, or for groups?
Assembling the profile
Combine these into a written profile — not a persona with a fictional name and stock photo, but a clear description of the customer segment grounded in data.
Worked example:
The primary target market is working adults aged 25–45 within a 10-mile radius, with household incomes of 80,000. They eat out 2–3 times per week, spend 20 per meal, and prioritize flavor and convenience over ambiance. They discover restaurants through word of mouth and social media (Instagram, local Facebook groups) rather than through review platforms. Weekend customers skew toward families; weekday customers are primarily individuals and pairs on lunch breaks.
State what you know, what you’re estimating, and what you need to learn. A target market profile that acknowledges its gaps is more credible than one that presents guesses as facts.
Part 2: Competitive analysis
Competitive analysis identifies who else serves the target market and assesses their strengths and weaknesses relative to your business.
Step 1: Identify competitors
Direct competitors: Businesses offering the same product or service to the same customer. For a taco restaurant, other taco restaurants and Mexican food spots within the trade area are direct competitors.
Indirect competitors: Businesses offering substitutes. For a taco restaurant, these include other fast-casual restaurants, food trucks, grocery store prepared foods, and meal delivery services. The customer choosing between your tacos and the pizza place next door is making a substitution decision.
Potential future competitors: Businesses that could enter the market. A vacant commercial space nearby, a regional chain expanding into the area, or a food truck testing the same territory.
Step 2: Evaluate each competitor
For each direct competitor, document:
| Factor | What to assess |
|---|---|
| Product/service | What do they offer? What’s their quality level? |
| Pricing | What do they charge? How does their average check compare? |
| Location | Where are they? Is their location better or worse for your target market? |
| Capacity | How many customers can they serve? Are they at capacity or underutilized? |
| Reputation | What do reviews say? What do locals say? |
| Strengths | What do they do well? What would be hard to match? |
| Weaknesses | Where do they fall short? What complaints recur? |
Step 3: Identify your differentiation
What can your business credibly offer that competitors don’t? Differentiation must be specific and verifiable — “better quality” is not differentiation; “house-made tortillas using heritage corn from a named supplier” is.
Common axes of differentiation: product quality, price point, menu range, location convenience, atmosphere, service style, dietary accommodation, cultural specificity, hours of operation, community integration.
Worked example: competitive landscape
| Competitor | Type | Avg check | Strengths | Weaknesses |
|---|---|---|---|---|
| Rosa’s Cantina | Direct | $15 | Established 12 years, loyal regulars | Limited menu, no events, closes at 8pm |
| Chipotle (chain) | Direct | $12 | Brand recognition, speed, consistency | Generic, no local sourcing, no dine-in atmosphere |
| Joe’s Pizza | Indirect | $11 | Late hours, delivery, fast | Different cuisine — captures convenience-driven customers |
| Farmer’s market vendors | Indirect | $8–14 | Fresh, local, weekend traffic | Seasonal, limited hours, no seating |
Differentiation claim: Evening events with live music and regional Mexican cuisine (Oaxacan, Yucatecan) not available at other area restaurants.
Part 3: SWOT analysis
The SWOT analysis synthesizes target market and competitive findings into a structured assessment of the business’s strategic position.
Building the matrix
| Helpful | Harmful | |
|---|---|---|
| Internal (what you control) | Strengths | Weaknesses |
| External (what you don’t) | Opportunities | Threats |
Filling each quadrant
Strengths — internal advantages:
- What does the business do well?
- What resources does it have (skills, relationships, location, capital, recipes)?
- What competitive advantages are defensible?
Weaknesses — internal disadvantages:
- Where does the business lack resources?
- What capabilities are missing?
- What operational constraints exist (size, budget, staffing, experience)?
Opportunities — external favorable conditions:
- What trends favor the business (dietary trends, neighborhood development, competitor closures)?
- What unmet needs exist in the market?
- What partnerships or channels could open up?
Threats — external unfavorable conditions:
- What competitors could enter or expand?
- What economic, regulatory, or environmental risks exist?
- What supply chain vulnerabilities are present?
Worked example
| Helpful | Harmful | |
|---|---|---|
| Internal | S: Unique regional menu; experienced chef; event programming capability; lower rent (off-main-street location) | W: No brand recognition yet; limited seating (40 capacity); single-chef dependency; no delivery infrastructure |
| External | O: Growing interest in regional Mexican cuisine; nearest competitor closes at 8pm (evening market open); new housing development within 1 mile | T: National chain expansion in area; rising food costs; labor shortage in food service; zoning review pending for event permits |
Using the SWOT
The matrix is a starting point, not an end product. Its value is in the strategic questions it generates:
- S+O: How can strengths be used to capture opportunities? (Evening events exploit the gap left by Rosa’s early closing)
- S+T: How can strengths defend against threats? (Unique menu differentiates from chain competition)
- W+O: How can opportunities compensate for weaknesses? (New housing development may provide customers despite off-main-street location)
- W+T: What combinations are genuinely dangerous? (Single-chef dependency + labor shortage = existential risk if chef is unavailable)
The W+T quadrant deserves the most attention. These are the combinations that can close a business. Feed them directly into your risk mitigation plan.
Guidance
- Conduct a competitive analysis for a business you’re planning or one in your neighborhood. Visit competitors, read their reviews, eat their food or use their service. Document what you find.
- Build a SWOT matrix and then deliberately challenge each entry. Is your “strength” really defensible? Is your “opportunity” actually available to competitors too?
- Compare your target market profile to your revenue model assumptions. Does your projected average check match what you know about your target market’s spending habits? If not, one of them is wrong.