| Planning is a critical function in any business. Banks
need a business plan outlining your plan for profitability
before lending capital. So do venture capitalists when they
seed new start ups. Business planning is not just a one-off
process; it needs to be done annually.
The business plan derives from a market plan, an
understanding of the market you are in and your position in
that market. The profitability and the feasibility of your
business largely depend on the following things:
1. The size of the market and its rate of growth
2. Your share of the market
3. The effectiveness of your market- ing plan to keep or
grow your share
4. The efficiency of operations to generate a healthy
margin on your sales
Market Planning is the process of sizing up your
market and calculating your share versus your competitors. A
Marketing Plan is the tool used to increase your
share of the market through marketing activities such as
advertising, branding, and promotions.
A key component of Market Planning is market share
forecasting. In the manufacturer to retailer to consumer
model, what matters most is the shelf take-away or sales at
retail. Marketing Strategies aim to maximize shelf
consumption (and usage) and thus increase your share of that
consumption.
The first step is calculating the total market potential
for your products. The second step is to estimate your
retail sales and derive your share of the total market. The
third step is to forecast your base case market share as
well as target market share given your advertising budget
and your marketing plan. Let us use the case of a infant car
seat manufacturer to illustrate this process.
If you are a baby seat manufacturer, you need to
understand the total market potential of infant car seats in
both units and dollars. In this case, the entire population
of infants is your market. If two million babies are
expected in a year, the market for infant seats is 2m units.
However, some of the households may be two car households
and decide to buy two seats. If 50% of the households buy
two seats, then the market is really 3m units.
Now what is the market potential for infant car seats in
dollars? It depends on the price segments of car seats.
There may be different types of car seats with different
features commanding varying prices. Let us assume that there
are two kinds of seats one being a simple no-frills car seat
and the other a fancier seat with additional features like a
cup holder, sun shade, diaper holder, etc. Different
consumer segments may demand these car seats at different
price ranges.
We can apply several market analysis techniques to
understand price points and calculate the average price of
these two market segments. Let us say our studies show the
average prices to be $40 for the basic seat and $50 for the
fancy seat.
The total market potential in dollars is the sum of the
basic seat segment and the fancy seat segment. Suppose the
basic seat segment is 2m units. At a price of $40, this
potential is $80m. The fancy seat has 1m units at a price of
$50 and a market potential of $50m. The total dollar market
potential is then $130m. |
Estimating Market Share
In simple terms, your market share equals total retail take-away
of your products divided by the total market potential. This is
just a calculation of your share of the total retail sales.
Your total retail sales depend on which segment you participate
in and who the other players are in that segment. Retaining and
growing your share depends on a number of marketing factors including
product differentiation, advertising, brand value, etc. The size
and the marketing budget of your competitors also are key determinants
of your market share.
In the infant car seat manufacturer example, let us say, you
compete in the basic seat segment of the market. If you own 50%
of the basic seat market, which is 2m units, then your total annual
retail sales is 1m units compared to a total market of 3m units.
Your share of the infant car seat market is then 33.3%.
We can calculate the dollar share using the following steps:
| 1. |
Your retail dollars equal your retail unit sales
x your average price. In this case your dollar retail sales
is given by (1m units x $40) which gives $40m. |
| 2. |
The total dollar market potential is $130m (calculated above).
|
| 3. |
Your dollar market share is then $40m over $130m which is
31%. |
Although your unit share is 33.3%, the dollar share is 31% because
you play in the low-price segment of the market.
How can you retain or increase your market share?
The Marketing Plan is an outline of your strategy to increase
your market share. It may cover a number of marketing and brand
building techniques as well as the budget dollars allocated to
each activity. Generally, the following tools are used to retain/gain
market share:
| 1. |
Advertising and Sales programs to increase unit
share while keeping prices constant. |
| 2. |
Building Brand Value to move to the high-end segment of
the market. This will result in higher selling prices without
hurting unit sales. (In our example, you may be able to sell
the same basic seat for $45 because consumers are willing
to pay a premium price for your brand.) |
| 3. |
Sales Promotions through discounts and coupons will increase
unit share but may compromise the dollar share. |
| 4. |
Aggressive Price cutting may also be used as a strategy
to capture a higher market share from your competitors. |
| 5. |
The last and perhaps the most often used strategy in the
Consumer Packaged Goods sector is to capture market share
through new product introductions. |
Practical Steps to Forecasting your Market
Share
| 1. |
Depending on the industry, forecasting the
total market for a particular product may be as easy as
obtaining the market potential from externally syndicated
sources. And it may be complex to the point of estimating
the market by extrapolation based on your own point of sale
data. |
| 2. |
We can forecast our retail sales independently and derive
the market share as a ratio of own retail sales forecast over
forecasted market potential. This is the base case share forecast.
For example, if we observe the share to be 25% over the last
few years, we can assume a stable forecast at 25% for the
next year. |
| 3. |
We can then come up with an objective or a target market
share estimate based on the promotional plans and budgets.
If we estimate additional advertising investment can produce
a 3% gain in share, our forecast will be a 28% share. |
| 4. |
When the total market potential is increasing, our retail
sales forecast may be growing even with constant market shares.
|
|
Market share forecasts are important in order to
understand the return on investment of advertising dollars
and the budget needed to retain versus grow market share.
But truly, market share forecasts tell us the long-term
demand for our products. They are early warnings of what and
how much to produce and distribute to be successful in the
marketplace.
In practice, large CPG companies use share forecasts to
guide their demand planning and supply chain operations.
This gives them a competitive advantage in running a lean
operation, controlling inventories, and maximizing customer
service. |
Adapted from the Artcile Know your market and learn your
potential from Baby shop Magazine written by Mark Chockalingam,
Ph. D.
|