How to develop markets

One of the most important components of any business plan is a thorough analysis of the market. The goal is to demonstrate that the product being developed has a substantial market in a particular industry and can achieve sales in the face of competition.

This assessment determines whether a business and its product are viable. Therefore, the analysis should be conducted before you seek out investors so that you can be certain you are developing a product with demonstrated potential.

Finding value: The first step in business development

Developing markets for a recycling business is the same as developing markets for any type of business. The only real difference is that a "recycling" business manufactures its products from materials that were once considered waste.

The first step in establishing a business is not really developing markets in the sense of "creating" them. Rather, it is finding markets to which you can provide value - and then developing relationships that enable you to sell your product.

From the beginning, then, what is a "market?" The word market comes from the Latin mercatus, meaning "trade." A market is a group of people or businesses that are willing to trade with you because what you have is useful to them. A business is an organization that can exchange or trade value for mutual benefit with other organizations and individuals. Every business that succeeds is built around an exchange between a market that has a need and a product or service that meets that need.

Step 2: Determine whether there is a genuine need for your product

Once recycling businesses view their raw materials as resources they are ready to explore whether there is a market for their product by asking the following questions:

  • What needs and problems does the material solve?
  • Who has those needs and problems?
  • Do those needs and problems affect the quality and profitability of their work?
  • How are they solving those needs and problems now?
  • Do the prospective customers see that your solution clearly provides a better answer? Why? How?
  • Are those needs and problems high priorities to the prospective customers, or not?
  • Do the prospective customers have the resources to purchase your solution?
  • Do the people who need your solution control the resources to purchase it?

Step 3: Maybe nobody wants it

This step is a state of mind, not an action. It is accepting the possibility that the material may not be of any value to anyone. It is also accepting the probability that you are going to find you may need to modify the process, material and/or product to match the market's needs.

If your product seems to be falling short of the market's needs, consider these three insights into developing markets for post-consumer recycled materials:

  • Instead of creating a material and then searching for uses, products should be engineered to perform as well as or better than the products they would replace. An industry that holds great potential for using recycled materials in value-added applications is advanced composites. Composites are stiff, strong, light-weight materials made with two or more materials. The Market Development program administered several directed research and feasibility study projects for composites involving fiberglass, pre-and post-consumer plastics, mixed paper, and construction and demolition wastes.
  • In addition to the performance specifications, the product typically must be less expensive to produce than the material it was intended to replace.
  • The best markets for recycled materials may be in industrial uses, as components of end-products, rather than in finished products. Performance, far more than aesthetics, drives industrial value. In addition, industrial markets tend to be more concentrated, making it easier to identify potential markets.

Step 4: Evaluate the product's performance characteristics

Once you have identified a proven need for your product, begin to gather information about the product's features to determine its selling points. Conduct product testing and develop a technical performance report. Identifying the product's attributes and properties enables you to see the hypothetical uses for which the material may be superior to existing solutions. Most customers require products to meet certain performance specifications. Therefore, when approaching possible users, you should be prepared to demonstrate that your product not only meets these standards but exceeds their expectations as well.

Examples of performance characteristics to evaluate include:

  • What extremes of temperature will it withstand?
  • What load will it bear?
  • How resilient is it?
  • Does it burn?
  • Is it waterproof?
  • How can it be joined with other materials or components?
  • How sound-absorbent is it?
  • What additional processing, shipping, coating can be done?
  • How does it compare on each performance criterion to other materials that might be used?

Step 5: Market segmentation

Having identified how the product performs, you can look more closely at the potential applications for your products, and which applications may be most suitable. At this point, you are ready to begin to separate hypothetical uses and markets from real opportunities. This is done by considering who makes the decisions as to what gets used for what reasons in what types of situations. This is known as "market segmentation."

Click here to see a hypothetical market segmentation matrix for a building material made from processed agricultural waste. The segmentation matrix is divided into possible markets, primary uses for the product, and the people who influence the decisions about those uses.

This matrix allows you to further dissect a market. So that what appears to be one market - construct- is from the perspective of finding value, many different markets. Here are some ways in which to study the chart:

  • Each type of construction uses different methods and techniques. In addition, the professionals working in these various areas of construction have different results they want to achieve. For example, aesthetics may be a high priority to a custom-home builder, but energy efficiency may be what is most critical in an industrial plant.
  • Carpenters, contractors and code officials have different priorities. The carpenter wants to pound a nail through a board fast and straight. The contractor wants the nail to be as inexpensive as possible. The code official wants the nail to be safe and durable.
  • Determining who influences purchasing decisions and why tells you whether there is any likelihood of sales to this market segment.

Completing this type of analysis helps you identify potential niche markets in which you can then narrow your potential customers and target your product more effectively.

Step 6: Using secondary sources to narrow the scope of markets

How do you narrow this wide range of possible markets developed through the segmentation process? Would it be cheaper to tell everybody about what you are selling and then see who buys it? No, because:

  • When you sell a product you have to be ready to produce and distribute it. Before taking on the major capital expenses of a manufacturing facility, equipment, materials and labor, a company needs to secure commitments from potential customers to know that it will be able to sell the product.
  • Often times, small companies do not have sufficient marketing resources to attract the attention of all their potential customers, accordingly, their efforts should remain as focused as possible.
  • Unless a company knows before marketing its product what is of high value and to whom, it cannot tell the prospective buyers what benefits the product offers them. Most potential buyers will not expend the extra effort to try your product and learn this for themselves.

Secondary source research can reduce the range of possible markets to a manageable size for further exploration. Secondary sources are typically trade journals and trade associations. The goal is to determine both what is and is not of importance to those people in the industries or businesses to which you are interested in marketing.

To narrow the possible markets shown in the segmentation chart, we talked with ten to twelve national trade associations in the construction industry, such as the National Association of Home Builders and the Metal Building Manufacturers Association. We read articles, editorials and ads in industry magazines, such as Automated Builder and Wood Technology. We narrowed the possible uses for this material to seven markets: modular buildings, building panels, metal pole buildings, modular office systems, soundproofing cores, overhead doors, and diversified building materials.

The focus has now shifted to specific uses that can be explored with easily identifiable companies. The emphasis has moved away from complete end-products to component uses to accomplish defined results.

The following are general sources of information for further investigating your recycling enterprise:

  • Related Environmental Magazines. Trade journals provide current industry information, including announcements about new products and technology, research activities, business mergers and expansions, and market forecast information.
  • Recycling Trade Associations. Most industries linked to commonly recycled materials promote recycling activities by providing information hotline numbers as well as literature on how to organize recycling programs, listings of recycling markets and directories of companies that sell recycled products.
  • Professional Conferences. Conferences provide an opportunity to network with equipment vendors, potential customers and industry experts. Like trade journals, conferences are also a good place to learn about the latest industry advances and the success and failures of other recycling efforts. Refer to trade journals or contact industry associations for calendars of conferences.
  • Distributors. Distributors can play a role both as customers and as sources of information. Properly approached, distributors can often provide product, pricing and marketing suggestions.

Step 7: Listening - Qualitative open discussions

There is only one way to assure that a company will deliver genuine value to a business in exchange for money and profits — listen to people who influence and make purchasing decisions for actual companies that have these needs and uses. Listening does not mean sending out surveys or showing potential customers the product and asking if they would buy it. Instead, listening entails meeting with professionals within an industry to understand all facets of a potential market. Talk to these individuals about their work to ascertain what it is they are trying to accomplish and why, where are improvements needed, and how their business and industry works. Step back far enough to hear what they want to do, whether you like what you hear or not.

The answers to the questions listed in Step Two and those that follow can often be obtained in four or five discussions with companies in each market segment. Sometimes, one discussion is enough to eliminate a market segment: "The product would work for us except that legal restrictions prevent us from using it economically. The whole industry has tried for years to get those restrictions lifted, but we have not been able to do so."

Ideally, these discussions should take place at the company because non-verbal information about activities, attitudes and ways of doing business is often as important as what people say. Telephone discussions, however, can be mixed with on-site meetings when the issues are sufficiently clear.

When you begin listening to people working in potential markets you have identified, you are seeking the answers not only about whether or not a market exists, but also how to design your business so that both your products and processes mirror the way that particular market works. Even if the prospective users value the solution you offer, you may still end up without an exchange of mutual benefit if you cannot deliver your solution in a way they can use.

Your company should ask these questions of itself as it is listening to the possible users for your products. To get the answers necessary to design a successful business requires listening for the purpose of taking direction from the potential customers - not for the purpose of figuring out how to sell them something.

What final product development work do you need to do?

  • What price will these potential users pay for a solution? Is the price at which you would need to sell your material proportionate to its value to the potential user? It is not a matter of matching existing prices. For many potential users the product will either have to provide a notably higher value or a notably lower price. Only a few potential users will consider the environmental benefits sufficient to change what they do.
  • Can the material or product be modified to provide an acceptable price/value ratio?
  • What design modifications are necessary to meet customers' requirements for performance, reliability and maintenance?
  • Are any changes in material composition needed?
  • Will the potential users work with you to modify the material or product to meet their needs?
  • What final tests do you need to perform?

How should your production and manufacturing systems be structured?

  • What capabilities must you have to provide the services the customers require?
  • Which of those capabilities must be in-house?
  • How available and reliable are contract or partner sources? Whom should you use?
  • What work systems, standards and processes are required to meet customer expectations? For example, is ISO 9000 certification needed? What do regulatory agencies require of the potential customer's suppliers?

How are materials and products distributed in this market?

  • Who makes purchasing decisions?
  • What criteria do they use?
  • What are the vendor relationships? Is it an "arms-length bid" system, or are long-term working partnerships the pattern? Are contracts exclusive?
  • What are the "channels" of the markets? Do goods move from manufacturer to distributors to wholesalers to retailers? Which type of organization drives the system?
  • Does the industry have a few large companies or many small firms?
  • How is credibility most quickly established with people in the industry?
  • What key customers or markets will "leverage" more customers or markets because of their credibility and position in the industry?

How do you communicate to this market that you offer the value they want?

  • What is important to them? Does our product accomplish it?
  • How do you "position" the product? What do you say about it in a few words that is both true and meets their needs? Is it "strong," "reliable," "durable," "vandal-proof," "easy-to-use," etc.
  • What sources of information do the target markets most value?
  • What information do they expect?

In conclusion

When you complete this process, you have done more than develop markets - you have developed a business. The business knows who its customers are likely to be. It knows what they value and what they are willing to exchange for that value. The business knows what its final product development work will be. It knows how it needs to structure manufacturing and production systems and how to distribute its product. It will be a company that communicates the value of its product to those who have strong needs and genuine uses for it.

Written by Margaret Thorpe, Venture Catalyst (St. Paul, Minn.) —, and Cliff Havener, President, Growth Resources Group, Inc. (Forest Lake, Minn.) —