The market and customer analysis section of a business plan will be carefully scrutinized by any potential investor. Nobody is going to commit capital to your company, product or service unless it is ultimately capable of generating substantial cash flow from a base of paying customers. Customer analysis therefore needs to be clear, specific and substantiated by credible, verifiable data.

The most important rule is to adopt a bottom-up approach in defining the company’s target market. A top-down approach, claiming that you will capture a small fraction of a huge market conveys that you are both naïve and have failed to do your homework.

First, be as specific as possible in identifying the target market. Explain the factors that have been used to segment the market such as demographics, geography, or company revenues or number of employees. Describe why the business is focused on its chosen segments and identify relevant market trends. Use the bottom-up approach to realistically forecast the number of potential customers based on the ability of the business to reach its audience and deliver the product or service.

As important as quantifying the target market is demonstrating that a customer need exists and that your business can fulfill this need. Your offering must also be superior based on one or more key criteria such as price, prestige or ease of use. Also explain how the company’s marketing strategy is aligned with the customer’s typical decision making process.

Entrepreneurs sometimes assume that a great idea or product will generate its own customer base and that vague market research based on bold predictions suffices. Unfortunately they may never get to find out since these are not usually the start-ups that get funded.