IV. Market Research and Analysis
The purpose of this section of the business plan is to present enough facts to determine if your product or service has a substantial market in a growing industry and can achieve sales despite a competitive market. This section is one of the most challenging to prepare and also one of the most important. Almost all subsequent sections of the business plan depend on sales estimates that are developed in this section.
The sales levels you project, based on the market research and analysis, directly influence the size of the operation, the marketing plan, and the amount of debt and equity capital required. Market research defines the need for the product, aids in predicting market share, identifies competition, provides direction for efficient use of advertising and promotional dollars, identifies problems and opportunities, and establishes benchmarks by which to measure progress and success.
Basic research need not be expensive. Examples of primary (non-published) sources include personal focus group interviews, customer surveys and questionnaires, telephone surveys, traffic counts, and daily transaction reports (example includes information on personal checks that you receive in your business). Examples of secondary (published) research sources include business directories, advertising media, demographic data, census data, local government sales tax data, chamber of commerce information, and forecasts.
The three main types of information that you will need to collect include geographic (such as where are my customers located); demographic (such as the characteristics of your potential customers, i.e. age, education levels, income, gender, marital status); and psychographic (such as what makes my customers buy a product, and what are they looking for i.e. price, quality, location, convenience, status).
Because of the importance of market analysis and the dependence of other parts of the plan on the sales projections, you may want to prepare this section of the business plan before you do any other. Allow enough time to do extensive research and analysis and check all sources of market data. As already mentioned, this is a challenging section to prepare, but a good place to start is your local economic development office, chamber of commerce, Mississippi Main Street, library, community college, university, business support organization, or the Internet.
A. Target Market
One of the main objectives of market research is to identify the small business’ target market, which is the group of customers whom the company plans to market its product to. Who and where are the major purchasers? What is the basis for their purchase decision: price, quality, service, personal contact, or some combination of these factors? Are you trying to target a specific age group or status of customer? Basically, who is going to buy your product?
B. Market Size, Makeup, and Trends
Describe the primary market for your product in terms of total potential sales volume. In other words, how many customers does the market contain, and what are their potential annual purchases? Also, describe the seasonal fluctuations and the potential annual growth of the total market for your product or service, and discuss the major factors affecting the growth (industry trends, economic trends, government policy, population shifts). Is this a one-time purchase or a product that is repurchased on a regular basis?
C. Market Share and Sales
Summarize what it is about your product or service that will make it saleable in the face of current and potential competition. Identify major customers who are willing to make purchase commitments and if possible attach their commitment letters to your plan.
Discuss which customers would be major purchasers in the future and why. Based upon your assessment of the advantages of your product or service, market size and trends, customers, the competition and their product, and the sales trend in prior years, estimate your share of the market and your sales in units and dollars for a minimum of two years. Be sure to state any assumptions upon which your projections are based.
The pricing policy is one of the most important decisions you will have to make. The price must be right to penetrate the market, maintain market position, and produce profits. To determine price, calculate production cost and add a percentage for profit. Consider overhead, promotional and advertising expenses, and delivery cost. Remember that inherent price limitations in the marketplace, as well as variations of internal costs, weigh heavily in determining price. Pricing must be in line with that of major competitors offering similar products and services.
There is a distinct difference between value and price. While some customers do not look beyond a price tag, others also consider service, dependability, and convenience. You must know what motivates the customer to buy before determining what he is willing to pay for merchandise or services. Finally, when determining price, decide what image you want to project. Describe if you will have a low end priced product, high end product or somewhere in the middle.
E. Sales Tactics/Distribution
Describe the methods that will be used to make sales and distribute the product or service. Analyze the effectiveness of everything available within the sales system. Traditional channels include salespeople, agents, distributors, direct mail services, and dealers. Additional distribution methods involve warehouse clubs, electronic shopping, telemarketing, trade shows, temporary space in shopping malls, vending machines, franchising, or large volume sample sales to hotels for free distribution to guests.
Offering discounts to wholesalers or dealers who assist in distribution is also an effective channel. Each distribution method must be evaluated as it relates to cost, coverage, and performance. Many of these channels are geared only to large or very small volume, or lend themselves only to specialized merchandise. Choose what works best for your particular business and maintain an awareness of developing sales methods.
Selective distribution is the key to effective distribution. Most start-up businesses are most successful when operating out of one location or geographic area, even though they may employ several sales techniques.
F. Advertising and Promotion
Describe approaches the company will use to bring its product to the attention of prospective purchasers. The schedule and cost for advertising and promotion should be presented. If advertising and promotion will be a significant expense item, an exhibit of how and when these costs will be incurred should be included.
Though distinctly different functions, advertising and promotion work hand-in-hand to generate sales. Both are communication strategies designed to affect buyer’s behavior patterns and habits. Advertising concentrates on delivering a message through print and electronic media, while promotion relies on direct customer involvement and response. In both advertising and promotion, it is important to narrow the target audience, concentrating as specifically as possible on the group most likely to purchase the product or service advertised or promoted.
The key to a large return from a small advertising budget lies in the media chosen. Cost varies according to locale and competition among media sources. For example, a 30-second radio spot may cost $25 on one station and $50 at another station in the same town. The same size ad might cost three or four times as much in one newspaper as another. Rates for cable television and independent stations might be affordable for small businesses that cannot buy expanded network programming. Each advertising situation is different, and rates vary from town to town and from region to region.
To select the best media for the business and to effectively negotiate rates, it is important to examine the advantages and disadvantages of each type. Selection should never be based on price alone, but on what the media can do for your business image and sales. A more expensive station or newspaper might very well hit your target customer exactly and be well worth the investment. On the other hand, some businesses do quite well with strong customer service, and little purchased advertising. The needs of each business are unique.
NOTE: See Appendix A of The Entrepreneur’s Tool Kit for the advantages and disadvantages of each type of media.
Bartering and cooperative advertising are effective methods of stretching an advertising budget. Bartering is often called “trade out”. For example, a small business may be able to trade some of its goods or services to a radio station in exchange for an equal amount of air time. All media will not barter, but if your goods are useful to them, it is worth a try. Cooperative advertising refers to sharing expenses. Two or more businesses may share the cost of advertising or one of your company’s vendors may supply advertising dollars as well as camera ready copy to which you only need to add your company logo. This not only increases the advertising placement budget, but decreases or even eliminates production cost. As advertising costs grow, it is important that small business owners be creative with cooperative and bartering techniques.
Some businesses have discovered that setting up an in-house ad agency will save 15 percent of media cost. This is a simple procedure and can save substantial amounts, but the small business person needs to consider the extra time spent in dealing with advertising salespeople and additional paperwork.
Any event held to increase sales and traffic is a promotion. Promotional efforts include coupons, contests, sampling, point-of-purchase merchandising, visual displays, gift-with-purchase incentives, seasonal sales, special events, trade shows, imprinted specialty items and demonstrations.
Creativity and originality are the keys to successful promotional efforts and there are many low-cost and effective ways to do it. For example, a well known pizza chain has developed a technique called “banner-shaking” which involves one or two employees standing near major intersections during evening rush-hour “shaking” painted banners at traffic. These banners highlight a special price on pizza immediately ready for take-out. The promotion costs nothing but the price of the banner and the results are great because it targets working people, tired after a long day and provides an immediate solution for dinner with no cooking. Creativity is the most effective way of promoting any business.
Promotional activity should always be based on recognizing customer needs and making them feel special. Providing exceptional service, using friendly words and smiles, using their names, giving them advance sales information and sending them your business newsletter are just a few low-cost or no-cost promotions to use. Superior store or office appearance, cleanliness, business reputation and even good landscaping and signage are all important promotional tools that sell. Promotions are not just sales events, but anything that adds to the image of the business.
Another form of advertising is publicity. Publicity, often referred to as “free advertising”, means getting the company’s name, product, or service in the media at no charge. Publicity is especially important for entrepreneurs with limited advertising and promotional budgets. Press releases are effective only if they are genuinely newsworthy and should be accompanied by a photograph if possible. Company newsletters, sponsorships of local athletic teams, donations of gifts for charitable functions and participation in civic organizations are all good sources of positive publicity. Capitalize upon every opportunity to get your company’s name in front of the public at no charge.
Describe how the product will be packaged. Packing refers to the presentation of goods or services. Proper packaging attracts the customer, effectively communicates product attributes, identifies the brand and seller, lists ingredients, and makes the product easier to handle. Effective package design decreases costs associated with storage, labor, shipping and pilferage. Poor packaging, however, creates an impression of inferiority and significantly lessens sales.
H. External Market Influences
Describe how each of the following external forces impacts your ability to sale your product.
1. Economic Factors
Economic analysis requires data on employment levels, inflation, interest rates, recession, and high or low unemployment. Free sources of this information include libraries, banks, educational institutions, investment houses, government agencies, newspapers, business publications and trade associations. Compare and contrast several sources before drawing conclusions or implications.
2. Political and Social Factors
Depending upon the nature of the business, operations may be affected by local, state, regional, national and world political situations. National deregulations, tax increases, or elimination of trade barriers, for example, can have a profound impact. At the state or local level, the acceptance or rejection of bond issues, election of new officials, or renovation plans might affect a company’s marketing philosophy.
The media, periodicals, trade journals and general business publications are good references. Social analysis includes a study of the demographics of the customer base. Important factors include the age groupings, income level, type of employment, mobility, marital status and leisure habits of customers, as well as the number of women and teenagers in the local work force. Chambers of commerce are helpful in gathering local information.
3. Technological Factors
Technology is growing and changing at an alarming rate. The World Wide Web has enabled small companies to advertise their product, and compete effectively with the larger companies. Describe the impact the Internet will have on the sales of your product. Also, describe if you will use the Internet to order your products for resale, or raw materials for manufacturing.