part 4 The New Venture Business Plan 9

Looking Ahead After studying this chapter, you should be able to: 1. Describe small business marketing 2. Discuss the nature of the marketing research process. 3. Define market segmentation and its related strategies. 4. Explain the different methods of forecasting sales. 5. Identify the components of a formal marketing plan. Copyright © by South-Western College Publishing. All rights reserved. 2

What is Small Business Marketing? • Marketing – Activities directing the flow of goods and services from producer to consumer or user. • Small business marketing consists of those business activities that relate directly to: – Identifying a target market – Determining target market potential – Preparing, communicating, and delivering a bundle of satisfaction to the target market Copyright © by South-Western College Publishing. All rights reserved. 3

Essential Marketing Activities • Market Analysis – An evaluation process that encompasses market segmentation, marketing research, and sales forecasting • Marketing Mix – The combination of product, pricing, promotion, and distribution activities. Copyright © by South-Western College Publishing. All rights reserved. 4

Core Marketing Activities for Small Business Market Analysis Marketing Research Market Segmentation Sales Forecasting Target Market Entrepreneur Marketing Mix Distribution Promotion Pricing Product Entrepreneur Target Market Fig. 9 -1 Copyright © by South-Western College Publishing. All rights reserved. 5

Marketing Philosophies Make a Difference • Production-Oriented – Emphasizes development of the product and production efficiencies over other activities • Sales-Oriented – Favors product sales over production efficiencies and customer preferences • Consumer-Oriented – All marketing efforts begin and end with the customer; focus is on the consumer’s needs— this philosophy is the most consistent with longterm success of the firm Copyright © by South-Western College Publishing. All rights reserved. 6

Why Firms Fail to Adopt a Consumer Orientation • The State of Competition – With no competition or high demand, firms focus on production. • Production Focus of Small Business Managers – Small business managers tend to have strong production skills and weak marketing skills. • Focus on the Present – Small business managers tend to focus on current success which is the result of an overemphasis on selling. Copyright © by South-Western College Publishing. All rights reserved. 7

The Nature of Marketing Research • Marketing Research – The gathering, processing, reporting, and interpreting of market information • Secondary Data – Market information that has been previously compiled by others • Primary Data – New market information that is gathered by the firm conducting the research Copyright © by South-Western College Publishing. All rights reserved. 8

The Nature of Marketing Research • Steps In the Marketing Research Process 1. Identifying the informational need Why do we need to know this? 2. Searching for secondary data Who has researched this topic already? 3. Collecting primary data Who do we ask and what do we ask them? 4. Interpreting the data Got the information, now what does it mean? Copyright © by South-Western College Publishing. All rights reserved. 9

Methods for Collecting Primary Data • Observational Methods • Questioning Methods – Human – Mechanical – Surveys ØMail ØTelephone – Personal interviews – Experiments Copyright © by South-Western College Publishing. All rights reserved. 10

Understanding Potential Target Markets • Market – A group of customers or potential customers who have purchasing power and unsatisfied needs • Focus strategy – A type of competitive strategy in which cost and marketing strategies are achieved within narrow market segments • Market Segmentation – The division of a market into several smaller groups with similar needs. Copyright © by South-Western College Publishing. All rights reserved. 11

Ingredients of a Market Ingredient 1 Customers: People or businesses Ingredient 2 Purchasing power: Money/credit Ingredient 3 Unsatisfied needs Copyright © by South-Western College Publishing. All rights reserved. 12

Market Segmentation Variables • Segmentation Variables – The parameters used to distinguish one form of market behavior from another for the purpose of market segmentation • Benefit Variables – Specific characteristics that distinguish market segments according to the benefit sought • Demographic Variables – Specific characteristics that describe customers and their purchasing power Copyright © by South-Western College Publishing. All rights reserved. 13

Types of Market Segmentation Strategies • Unsegmented Strategy (Mass Marketing) – A strategy that defines the total market as the target market • Multisegmented Strategy – A strategy that recognizes different preferences of individual market segments and develops a unique marketing mix for each • Single-Segmentation Strategy – A strategy that recognizes the existence of several distinct segments but focuses on only the most profitable segment Copyright © by South-Western College Publishing. All rights reserved. 14

Small Business (Community Writing Company) An Unsegmented Marketing Mix 1 Product: Price: Promotion: Distribution: Lead Pencil $0. 79 Television Extensive Market All Potential Users of a Writing Instrument Fig. 9. 3 Copyright © by South-Western College Publishing. All rights reserved. 15

Small Business (Community Writing Company) Marketing Mix 2 Marketing Mix 1 Marketing Mix 3 Product: Felt-Tip Pen Product: Gold Fountain Pen Price: $1. 00 Price: $0. 49 Price: $50. 00 Promotion: Professional Magazines Promotion: Campus Newspapers Promotion: Personal Selling Distribution: Direct from Factory Distribution: Bookstores Distribution: Department Stores Market Segment A Students Market Segment B Professors A Multisegmentation Market Strategy Market Segment C Executives Fig. 9. 4 Copyright © by South-Western College Publishing. All rights reserved. 16

Small Business (Community Writing Company) A Single. Segmentation Market Strategy Marketing Mix 1 Product: Price: Promotion: Distribution: Felt-Tip Pen $0. 49 Campus Newspapers Bookstores Market Segment A Students Market Segment B Professors Market Segment C Executives Fig. 9. 5 Copyright © by South-Western College Publishing. All rights reserved. 17

Estimating Market Potential • The Sales Forecast – A prediction of how much (in units and/or dollars) of a product or service will be purchased within a market during a specified period of time – An essential component of a business plan that: ØAssesses the new venture’s feasibility. ØAssists in planning for product scheduling, setting inventory levels, and personnel decisions Copyright © by South-Western College Publishing. All rights reserved. 18

Dimensions of Forecasting Difficulty Conditions That Make Forecasting Easier Conditions That Make Forecasting More Difficult Established Business New Venture Experienced Entrepreneur/Manager Limited Entrepreneurial/ Managerial Experience Forecast Entrepreneur Familiar with Forecasting Techniques Poor Understanding of Forecasting Techniques Fig. 9. 6 Copyright © by South-Western College Publishing. All rights reserved. 19

The Forecasting Process: Two Dimensions of Forecasting • The Starting Point – Breakdown process (chain-ratio method) ØForecasting begins with macro-level variable and works down to the sales forecast (top-down). – Buildup process ØAll potential buyers in various submarkets are identified and then the estimated demand is added up (bottom-up). Copyright © by South-Western College Publishing. All rights reserved. 20

The Forecasting Process: Two Dimensions of Forecasting (cont’d) • The Predicting Variable – Direct forecasting ØThe use of sales as the predicting variable – Indirect forecasting ØVariables related to sales are used as proxies to project future sales Copyright © by South-Western College Publishing. All rights reserved. 21

Sales Forecasting with the Breakdown Method Estimating Value Market Potential* Linking Variable Source 1. Idaho state population U. S. census of population 100% 1, 000 2. State population in target age category Sales & Marketing Management Survey of Buying Power 12% 120, 000 3. Target age enrolled in colleges and universities Idaho Department of Education 30% 36, 000 4. Target age college students preferring convenience over price Student survey in a marketing research class 50% 18, 000 5. Convenience-oriented students likely to purchase new felt-tip pen within next month Personal telephone interview by entrepreneur 75% 13, 500 6. People who say they are likely to purchase who actually buy Article in Journal of Consumer Research 35% 4, 725 7. Average number of pens bought per year Personal experience of entrepreneur 4 18, 900 SALES FORECAST FOR IDAHO *Figures in this column, for variables 2 -7, are derived by multiplying the percentage or number in the Estimating Value column times the amount on the previous line of the Market Potential column. Copyright © by South-Western College Publishing. All rights reserved. 22

The Formal Marketing Plan • Market Analysis – Customer profile ØA description of potential customers in a target market – Sales forecasts Ø“most likely, ” “pessimistic, ” and “optimistic • The Competition – Profile of key management personnel – Overall strengths and weaknesses – Related products being marketed or tested – Likelihood of competitors’ entry into target market Copyright © by South-Western College Publishing. All rights reserved. 23

The Formal Marketing Plan (cont’d) • Marketing Strategy – Total product and/or service plan ØDecisions affecting the total product – Distribution plan ØDecisions regarding product delivery to customers – Pricing plan ØSetting an acceptable value on the product – Promotional plan ØCommunicating information to the target market Copyright © by South-Western College Publishing. All rights reserved. 24