For a checklist of points to do, see the Business Plan in the Templates section of this website.
Define the Market
Start by defining the market very specifically by product, being clear on what is included and excluded. State what are parent categories and sub-categories, and which of those are included in the market. For example, within soft drinks are fizzy drinks, within that there is sparkling water or flavoured drinks, and within that there are sports and non-sports drinks. Pepsi does the whole soft drinks market through its different brands, Lucozade does only sports flavoured fizzy drinks.
Geography
Then define the market by geography. Determine what exactly it means for a market to be “in the UK” given the globalised world we live in. Raw materials may come from one place, assembly and transformation may take place elsewhere, and then wholesale and retail in a final place. For online companies this is even more confusing, as Google and Facebook’s recent tax cases with a number of countries show. You are free to use any definition you wish here, or make any grouping- the point is simply that you must communicate what you are defining as your market, and provide data that support that definition, not something else.
Limit your Market
Having put a label- which will inherently be slightly arbitrary- on a series of transactions in an area of the world, which you are defining as a market, you then have to limit your definition. If you are selling sports flavoured fizzy drinks then your market competitor is Lucozade. What happens when they release a water product for gym-goers? Do you count that as not your market, or say your market has now expanded, or mention that a contiguous market is closely related to yours as it serves the same customer needs?
Again, there’s no right answer, you just need to make your definitions clear and ensure that the data you are offering supports your definitions. If the entire soft drinks market grows by 10% but you have no data on your market- sports drinks- then you have not really told an investor anything.
It is also worth acknowledging how customers see the market boundaries. You, and your competing suppliers, may distinguish between flavoured sports and flavoured non-sports, but perhaps customers only see “healthy” and “unhealthy”, depending on the sugar content?
Consumer behaviour leads you on to complementary and substitute products. A complement is a good that is bought roughly in line with yours; increase the price of your good, and not only will sales in your good fall slightly, but so will sales in the complement. In other words, people normally buy the two together- burger patties and barbecue coal. A substitute is the opposite, with people buying one or the other, and so a price increase in one causing people to move across to buy more of the other- milkshakes or ice-creams.
In case you want to read more about this, the technical description of a complement is a good with a negative cross elasticity of demand with your good, while a substitute has a positive CED.
Rules of the Game
Describe some of the big influences in the market. Gambling is heavily regulated. Medical devices require clinical trials and approvals. Phone markets are dominated by monopolies, caused by the huge barrier to entry resulting from large capital requirements required to support the infrastructure at a unit cost competitive with the incumbents. Being an influencer is free to start but very competitive for exactly that reason, with success being fractally rather than normally distributed.
Conclusion
Imagine someone were describing your location to you, while you are blindfolded; they start by describing what kind of thing you’re in, a room or a field; they tell you where within that you are; they let you know where it ends, and what the big items inside it are. This is the same- you are describing something about which you are a specialist to someone who is not, so they can place your company within it.