Part 3 Business Plan Tutorial - ABC's of Small Business

Business Plan Tutorial, Part 3
Market Research

Tutorial Part 1 2 3 4 5 6 7 8 9

Intro

Many people get discouraged when they consider business planning activities. Doing it right involves work and takes time away from your other tasks. A lot of people can't find the time to do it in one burst of activity. For that reason, we're breaking this business plan tutorial into nine sections so that you can pace yourself and make reasonable progress while still taking care of everything else you do. If you're just getting started, see Part One. The plan itself will cover:

Market Research

I've often had people tell me that their business is going to do incredibly well because everyone will want to buy their product or service. I always get nervous when they say that because it means that they don't really understand who their buyers are going to be. You'd think that having a very wide appeal to everyone would mean that you would sell more products, wouldn't you? It's not often true that having a huge pool of potential buyers and users is a very good thing for a start-up business.

Why is that? Well, the biggest drawback for a start-up business in looking at an enormous potential market is getting a compelling sales offer to customers. Imagine that you've just introduced the BRAND NEW ASTOUNDING WIDGET. It slices, it dices, it cleans floors, grooms the dog and arranges flowers for just a low, low $49.95. Everyone who's tried it loves it. How do you tell everyone in the world about it? There are two basic ways: advertising and public relations. So you get all of your investors together and build up a war chest of $100,000. Very nice! But if your goal is to reach every single person in the world, you'll need many times that amount of money.

What to do? Well, you could load up the old family minivan and set out with a load of Astounding Widgets and try to sell one to everyone you meet. Or you could rethink the whole situation and decide to develop a target market niche of the people who are most likely to want an Astounding Widget.

It's time to talk about market research. How do you find people who will want to buy your product? What is the most effective way to tell them about your product?

Step One: Ask Your Potential Buyers

Usually, a product or service will appeal to a group or groups of potential buyers. The most direct way to find out who wants to buy your product is to take it to the potential buyers. Let them see it and use it if possible. Then ask them what they think about it. What do they like? What don't they like? Do they think that they might use it? Would they buy it with their own money? You can do this yourself in an informal way if your company is small but you've got to be careful not to persuade your potential customers to see it your way. You want to listen and hear them, you don't want to tell them what to say. If you're larger, you may wish to hire a market research team to run full focus groups to find out how your prospective clients view your product or service and where improvements can be made.

Marketing Research Activity for Step One

If you have an example of your product, bring together a group of people you think might be interested in it. Collect information from them that you think is relevant to their purchase of the product or service. For a consumer product, that may be:

Age
Gender
Marital Status
Income

Now you ask them about the product, let them try it. How do they feel about it? Is it something that they'll:

Buy, consider buying or have no interest in?
Are there any features that they'd like to see in it?
What kind of price and warranty would they like?
Where would they buy it?

Step Two: Estimating Market Size

Let's say that Venture Consulting has a new client who has contracted with us to do market research on her brand new line of greeting cards. By no stretch of the imagination is there a shortage of greeting cards currently available. In talking with our client, we compare her fledgling company with Hallmark & American Greetings. They've got money, an extensive distribution system, talented artists & greeting card sentiment writers. How is she going to compete?

And that's just what we'll ask her. What is different about your greeting cards? What can you do better than anyone else does? Well, it turns out that our new client has decided to license the right from the NFL to make football greeting cards, featuring the greatest NFL stars of today and yesteryear. And she's managed to talk them into an exclusive license!

That means that her potential market can be narrowed down to people who are major league football fans. How many is that? A reasonable proxy is the total number of TV households(43,630,000) which viewed Superbowl XXXII. (I tried to get Superbowl XXXIII statistics but my source, the Information Please almanac online www.infoplease.com , was unable to access that page.) So we have 43,630,000 households, in the United States, as estimated by the Nielsen rating service, that are interested enough in NFL football to watch the league championship. The population of the United States is estimated at 270 million people, and a rough estimate shows that at least half of those are in households that watched the Superbowl. So our potential national market for NFL greeting cards is 135 million people.

Marketing Research Activity for Step Two

Take the results of your informal focus group (Step One Activity) and see if you can classify the most likely buyers and users of your product or service. Then use the resources that you can find to estimate the total size of that market. Again, if it's a consumer product, a good place to find people sorted by age, gender, marital status and income level is through the U.S. Department of the Census. You can find them online at http://www.census.gov/.

Answer the following questions:

Who is likely to buy my product or service?
In which demographic groups (age, gender, income, marital status, etc.) do our potential customers fall?
How many potential customers are there that meet these descriptions?

Step Three: Take It Local

The NFL has 31 teams in major television markets throughout the United States. Our hypothetical client has determined that, with the exception of a few NFL superstars, her line of greeting cards should feature the "local" team. As an example, we'll look at Dallas, Texas, home of the Dallas Cowboys and their popular cheerleaders. At Venture Consulting, we have determined that two-thirds of her sales will be seasonal, starting to peak in August and finishing in February, roughly coinciding with the NFL training camps, season and post-season games but finishing with a Valentine's Day push. The remaining third of sales will be for people's specials occasions, including birthdays and anniversaries.

According to The 1998 Sales & Marketing Management Survey of Buying Power, Texas has a total population of 19,613,400 (7.2% of the U.S. total) and purchasing power equal to 7% of the entire United States. The Greeting Card Association (www.greetingcard.org), a very good trade association that provides excellent value and access to industry resources for small greeting card publishers, we get the following useful information:

In 1998, over 7 billion greeting cards, with a retail value of over $7.5 billion, were expected to be purchased by American consumers. Taking the information we've got about the population of Texas and purchasing power, almost half a billion of those greeting cards will be sold in Texas. The NFL license is very powerful, so our client sets a target of capturing 2% of the market in Texas during her first year of sales, roughly 10 million cards. Again, according to the Greeting Card Association, Christmas, Valentine's Day, Mother's Day, Easter and Father's Day are the big holidays. Women purchase more than 80% of greeting cards, so our client needs to pay careful attention to making sure that her cards are attractive to women, though she may open an untapped market niche with men.

Marketing Research Activity for Step Three

Now it's your turn to get local. Although your market may be spread across the country, you need to determine which areas have a significant amount of your target customers. So go to the Census, or Sales & Marketing Management's Survey of Buying Power, or trade associations or other resources, to determine where your market is so that you can focus on making your promotional dollars count.

How many of your target customers are there in each of your prospective sales territories?

Step Four: Getting the Lay of the Land

In order to do a great job of selling, you need to find out how things are currently done in your industry. Once again, the trade associations and trade magazines are a great place to pick up this basic information. When evaluating whether to join a trade association, you need to determine what it's going to cost to join, both in money and time. Then evaluate the benefits: Is it going to be a benefit you more than it will cost? Trade associations can be a valuable source of information on pricing and distribution. They may also organize trade fairs where you can contact potential distributors and resellers for your product. They can help you find manufacturer's representatives and potential strategic partners and financial investors. They are usually excellent sources of information about the legal and other regulatory hurdles that you may encounter while producing or distributing your product.

Marketing Research Activity for Step Four

Find your industry's trade associations and trade magazines. In most cases, it will be possible to get an initial complementary copy of a magazine before purchasing a subscription. In some cases, trade magazines will be free to the subscriber who is active in the business. Find the trade association organization that will work best for you. You may need to be a little creative, particularly if your business is something that a great deal of people choose as hobbies, in order to find which magazine takes the most businesslike approach because it may not be labeled as a "trade magazine." You will be able to tell, though, by determining if the ads in it are geared to people in the business or just to hobbyists.

Marketing Research Wrap-up

Finding this information will probably take you a number of hours, especially once you begin looking for industry practices. It is time that will be well spent because it will let you target your customers. That means you won't spend your resources on people who are highly unlikely to buy and you'll find the way that comparable products and services are sold and learn a lot about the finances in the industry.

Good luck with your research--you can do it right even if you're tiny as long as you pay attention to details and follow the leads that make sense to you in your business.

-Cynthia Nemeth-Johannes

Tutorial Part 1 2 3 4 5 6 7 8 9