Market Strategies

Generally, there are seven major components that make up abusiness plan. They are:

1. Executive summary

2. Business description

3. Market strategies

4. Competitive analysis

5. Design and development plans

6. Operations and management plans

7. Financial factors

Market strategies are the result of a meticulous marketanalysis. A market analysis forces the entrepreneur to becomefamiliar with all aspects of the market so that the target marketcan be defined and the company can be positioned in order to garnerits share of sales. A market analysis also enables the entrepreneurto establish pricing, distribution, and promotional strategies thatwill allow the company to become profitable within a competitiveenvironment. In addition, it provides an indication of the growthpotential within the industry, and this will allow you to developyour own estimates for the future of your business.

Begin your market analysis by defining the market in terms ofsize, structure, growth prospects, trends, and sales potential.

The total aggregate sales of your competitors will provide youwith a fairly accurate estimate of the total potentialmarket. For instance, within the beer brewing industry, thetotal market potential would be the total sales of malt beveragesin the United States, which is $15.2 billion.

Once the size of the market has been determined, the next stepis to define the target market. The target market narrows down thetotal market by concentrating on segmentation factors that willdetermine the total addressable market -- the total number of userswithin the sphere of the business's influence. The segmentationfactors can be geographic, customer attributes, orproduct-oriented.

For instance, if the distribution of your product is confined toa specific geographic area, then you would want to further definethe target market to reflect the number of users or sales of thatproduct within that geographic segment.

Once the target market has been detailed, it needs to be furtherdefined to determine the total feasible market. This can be done inseveral ways, but most professional planners will delineate thefeasible market by concentrating on product segmentation factorsthat may produce gaps within the market. In the case of amicrobrewery that plans to brew a premium lager beer, the totalfeasible market could be defined by determining how many drinkersof premium pilsner beers there are in the target market.

It is important to understand that the total feasible market isthe portion of the market that can be captured provided everycondition within the environment is perfect and there is verylittle competition. In most industries this is simply not the case.There are other factors that will affect the share of thefeasible market a business can reasonably obtain. These factors areusually tied to the structure of the industry, the impact ofcompetition, strategies for market penetration and continuedgrowth, and the amount of capital the business is willing to spendin order to increase its market share.

Projecting MarketShare

Arriving at a projection of the market share for abusiness plan is very much a subjective estimate. It is based onnot only an analysis of the market but on highly targeted andcompetitive distribution, pricing, and promotional strategies. Forinstance, even though there may be a sizable number of premiumpilsner drinkers to form the total feasible market, you need to beable to reach them through your distribution network at a pricepoint that is competitive, and then you have to let them knowit's available and where they can buy it. How effectively youcan achieve your distribution, pricing, and promotional goalsdetermines the extent to which you will be able to garner marketshare.

For a business plan, you must be able to estimate market sharefor the time period the plan will cover. In order to project marketshare over the time frame of the business plan, you will need toconsider two factors:

1. Industry growth which will increase the total number ofusers. This is determined by growth models as described in the"Market Research" chapter. Most projections utilize aminimum of two growth models by defining different industry salesscenarios. The industry sales scenarios should be based on leadingindicators of industry sales which will most likely be industrysales, industry segment sales, demographic data and historicalprecedence.

2. Conversion of users from the total feasible market.This is based on a sales cycle similar to a product life cyclewhere you have five distinct stages: early pioneer users, earlyusers, early majority users, late majority users, and late users.Using conversion rates, market growth will continue to increaseyour market share during the period from early pioneers to earlymajority users, level off through late majority users, and declinewith late users.

Defining the market is but one step in your analysis. With theinformation you've gained through market research, you need todevelop strategies that will allow you to fulfill yourobjectives.

When discussing market strategy, it is inevitable thatpositioning will be brought up. A company's positioningstrategy is affected by a number of variables that are closely tiedto the motivations and requirements of customers within the targetmarket as well as the actions of primary competitors.

The strategy used to position a product is usually a result ofan analysis of your customers and competition. Before a product canbe positioned, you need to answer several strategic questions suchas:

1. How are your competitors positioning themselves?

2. What specific attributes does your product have that yourcompetitors' don't?

3. What customer needs does your product fulfill?

4. Is there anything unique about the place of origin?

Once you've answered your strategic questions based onresearch of the market, you can then begin to develop yourpositioning strategy and illustrate that in your business plan. Apositioning statement for a business plan doesn't have to belong or elaborate. It should merely point out just how you willwant your product perceived by both customers and thecompetition.

Pricing Your Product

How you price your product is important because it will have adirect effect on the success of your business. Though pricingstrategy and computations can be complex, the basic rules ofpricing are straightforward:

1. All prices must cover costs.

2. The best and most effective way of lowering your sales pricesis to lower costs.

3. Your prices must reflect the dynamics of cost, demand,changes in the market, and response to your competition.

4. Prices must be established to assure sales. Do not priceagainst a competitive operation alone. Rather, price to sell.

5. Product utility, longevity, maintenance, and end use must bejudged continually, and target prices adjusted accordingly.

6. Prices must be set to preserve order in the marketplace.

There are many methods of establishing prices available toyou:

* Cost-plus pricing -- Used mainly by manufacturers,cost-plus pricing assures that all costs, both fixed and variable,are covered and the desired profit percentage is attained.

*Demand pricing -- Used by companies that sell theirproduct through a variety of sources at differing prices based ondemand.

*Competitive pricing -- Used by companies that areentering a market where there is already an established price andit is difficult to differentiate one product from another.

*Markup pricing -- Used mainly by retailers, markuppricing is calculated by adding your desired profit to the cost ofthe product.

Each method listed above has its strengths and weaknesses.

Distribution

Distribution includes the entire process of moving the productfrom the factory to the end user. The type of distribution networkyou choose will depend upon the industry and the size of themarket. A good way to make your decision is to analyze yourcompetitors to determine the channels they are using, then decidewhether to use the same type of channel or an alternative that mayprovide you with a strategic advantage.

Some of the more common distribution channels include:

*Direct Sales -- The most effective distribution channelis to sell directly to the end-user.

*OEM (Original Equipment Manufacturer) Sales -- When yourproduct is sold to the OEM, it is incorporated into their finishedproduct and it is distributed to the end user.

*Manufacturer's Representatives -- One of the bestways to distribute a product, manufacturer's reps, as they areknown, are salespeople who operate out of agencies that handle anassortment of complementary products and divide their selling timeamong them.

*Wholesale Distributors -- Using this channel, amanufacturer sells to a wholesaler, who in turn sells it to aretailer or other agent for further distribution through thechannel until it reaches the end user.

*Brokers -- Third-party distributors who often buydirectly from the distributor or wholesaler and sell to retailersor end users.

*Retail Distributors -- Distributing a product throughthis channel is important if the end user of your product is thegeneral consuming public.

*Direct Mail -- Selling to the end user using a directmail campaign.

As we've mentioned already, the distribution strategy youchoose for your product will be based on several factors thatinclude the channels being used by your competition, your pricingstrategy, and your own internal resources. Distribution will becovered in greater detail in the "Distribution"chapter.

Promotion Plan

With a distribution strategy formed, you must develop apromotion plan. The promotion strategy in its most basic form isthe controlled distribution of communication designed to sell yourproduct or service. In order to accomplish this, the promotionstrategy encompasses every marketing tool utilized in thecommunication effort. This includes:

*Advertising -- Includes the advertising budget, creativemessage(s), and at least the first quarter's mediaschedule.

*Packaging -- Provides a description of the packagingstrategy. If available, mockups of any labels, trademarks orservice marks should be included.

*Public relations -- A complete account of the publicitystrategy including a list of media that will be approached as wellas a schedule of planned events.

*Sales promotions -- Establishes the strategies used tosupport the sales message. This includes a description ofcollateral marketing material as well as a schedule of plannedpromotional activities such as special sales, coupons, contests,and premium awards.

*Personal sales -- An outline of the sales strategyincluding pricing procedures, returns and adjustment rules, salespresentation methods, lead generation, customer service policies,salesperson compensation, and salesperson marketresponsibilities.

Sales Potential

Once the market has been researched and analyzed, conclusionsneed to be developed that will supply a quantitative outlookconcerning the potential of the business. The first financialprojection within the business plan must be formed utilizing theinformation drawn from defining the market, positioning theproduct, pricing, distribution, and strategies for sales. The salesor revenue model charts the potential for the product, as well asthe business, over a set period of time. Most business plans willproject revenue for up to three years, although five-yearprojections are becoming increasingly popular among lenders.

When developing the revenue model for the business plan, theequation used to project sales is fairly simple. It consists of thetotal number of customers and the average revenue from eachcustomer. In the equation, T represents the total number of people,A represents the average revenue per customer, and S represents thesales projection. The equation for projecting sales is:

T A = S

Using this equation, the annual sales for each year projectedwithin the business plan can be developed. Of course, there areother factors that you'll need to evaluate from the revenuemodel. Since the revenue model is a table illustrating the sourcefor all income, every segment of the target market that is treateddifferently must be accounted for. In order to determine anydifferences, the various strategies utilized in order to sell theproduct have to be considered. As we've already mentioned,those strategies include distribution, pricing, and promotion.

Part three of seven. Tomorrow, we'll cover competitiveanalysis. Tips are updated daily at 8:30am PST or 11:30EDT.