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Chapter 4 Study Questions: 1. What are the 5 steps to formulate a successful marketing plan? 2. How would you apply and use Google digital tools?   (100 words) 3. Describe the keyword lists to test the plan. 4. How would you use digital channels to create demand? 5. List 3 kinds of segmentation. For what kinds of products or services would one kind be more important than another? 6. Define and describe are product positioning and perceptual mapping? 7. Define and describe viral marketing? Provide an example NOT referred to in the textbook. Why do you think a viral effect was created in your example? 8. How can a small company use Google AdWords for market research? 9. What factors determine whether the business would offer discounts? 10. What are the 3 pricing objectives? give an example of an industry that would use each. 11. You own a coffee shop in a large urban area that carries a total of US$500,000 per year in fixed costs (rent, electricity, heating, cooling, etc.) Your cafe sells only coffee for US$2.50 per cup. The average variable cost per cup is US$1.00. How many cups do you need to sell per day to break even? If the price of the coffee is decreased by 10\% for a special promotion (with all costs staying the same), how many cups would you need to sell to break even? Chapter 6 Study Questions: 1. What are the benefits of preparing the canvas model first before a written business plan? 2. What are the components of a business plan? 3. What are the different types of business plans? 4. How long does it take to write a business plan? 5. Why do business plans fail? (100 words) 6. Why should the executive summary be written last? Copyright 2015 Jack M. Kaplan & Anthony C. Warren Patterns of Entrepreneurship Management 5th Edition, Chapter 4 Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Customers, Markets, Competitors in a Digital World Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Presentation Outline • Customer/Market Analysis – Niche or target markets – One to One Marketing – Define the Market Segmentation – Market Research • Evaluate the Competition-Sample Evaluation • Prepare the Pricing Plan • Position the Product or Service • Using The Internet for Market Research Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Niche, Verticals and Target Markets ➢ A niche market is a small segment of a large market ignored by other companies ➢ A vertical market is a specific sector or class of customers that may require different products and/or be acquired through different marketing channels ➢ Target marketing is a strategy to focus on segments of a market and prepare a plan for each market segment or vertical. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Rogers’ Bell-Curve - Customer Adoption Patterns When introducing a new product or service, you should target customers who are more likely to try something new – the innovators and early adopters. They are usually not price-sensitive. These customers can usually be found and attracted using social media methods. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Identifying Customers--Consider the 4 factors • Market Identification--Current market and service needs determined • Current and Best Customers--to allocate resources to segment the market • Potential Customers--target by geographical or industry wide, or ease of reaching via social media platforms • Outside factors --identify changing trends Prepare the Marketing Analysis and Plan Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren One to One marketing Learn the profile or details about customers to identify the most valuable ones. • Identify customers or get them to identify themselves • Link customers identities to their transactions • Calculate individual customer lifetime value • Strengthen a customer satisfaction program • Social media methods, such as on-line advertising, “click through” links, search engine optimization and networking on social platforms are excellent for finding individuals at low cost. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Internet Market Research Accessing potential customers using the internet is a low-cost way of researching customer needs and behaviors. Here are a few examples: ➢ Research sites such as “Ask Your Target Market” have a large network of motivated potential customers that they can question ➢ Using a “smoke-screen” web-site that probes customers found on chat rooms on social media platform ➢ Explore search engine key-words on Google to drive potential customers to your informative web-site ➢ Posting Blogs about your company and its products in on-line discussion groups ➢ Creating informative video content to post on Youtube or Vimeo ➢ Launching an MVP for testing with a small group of early adopters ➢ Using a crowd-sourcing site to “pre-sell” products before complete development (See Chapter 5) ➢ Creating informative content to stimulate relevant “influencers” to post comments on their web-sites and in blogs. Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Define the Market Segmentation There are Several Ways to Segment a Market ➢ Demographic Segmentations-divide the market into groups,based on age,income level and gender ➢ Geographic Segmentation- divide people or businesses into regional and by location ➢ Psychographic Segmentation-divides into cultural groups,value or social categories ➢ Tech-savvy segmentation – heavy users of devices and the internet ➢ Ethnic Segmentation- divide by ethnic group Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren ➢ Do potential customer groups have different needs? ➢ Can the customers that fit into a given segment be identified? ➢ Are customers both willing and able to pay? ➢ Is the segment large enough to be profitable? ➢ Can the segment be reached in a cost- effective manner? For example, directly via the internet? Questions for Effective Segmentation Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren • It is particularly important to identify which businesses will provide the most significant competition and predict what they will likely do. • Analyze the situation by asking the questions provided below regarding six key areas of competition. Conduct A Competitive Analysis Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Competitive Analysis: Porter’s 5 Forces Potential Entrants Threat of New Entrants Industry Competitors Rivalry Among Existing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Business to Consumers Business to Business Internet Companies Suppliers Buyers •Switching Costs of Suppliers •Importance of Volume to Suppliers •Cost Relative to Total Purchases •Impact on Cost or Differentiation •Access to Distribution •Government Policies •Expected Retaliation •Economics of Scale •Proprietary Product Differences •Brand Identity •Buyer Concentration vs. Firm •Buyer Volume •Buyer Switching Costs •Substitute Products •Product Differences •Brand Identity •Impact on Quality/Performance •Buyer Profile •Industry Growth •Product Differences •Brand Identity •Exit Barriers •Diversity of Competitors Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Evaluating the Competition Sample Evaluation Factors Attractiveness High Low Competition among companies Competition is minimal but will become intense in 1year The industry is declining and is mature The power of customers Volume is high and willing to negotiate Customer has few switching costs The power power of suppliers Many substitutes and sources are available Limited supply; products differentiated Internet companies No competition defined on the internet Many companies are entering this market Potential threats Complex barriers and costs are high to enter market Few simple entry barriers to enter the business Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Measuring the Venture’s Strengths and Weaknesses Factor Attractiveness High Low Management t eam Proven People w it h right skills not available Financing You have comf ort able cushion or can raise capit al if needed You have a narrow t ime horizon t o make money Product development Complet e product line One product of limit ed lif e Sales f orce St rong cont act s; specialist skills Limit ed cont act s; generalist skills Market ing Deep and t ight ly- f ocused Unt arget ed Operat ions St rat egic alliances help improve execut ion Learning in a vacuum Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren • How is the competitive product or service defined? • How is it similar or different? • Does the competition cater to a mass, niche or vertically targeted market? • What features of the product are superior? • What strengths or weaknesses of the competition can be exploited? • Has the competitor developed a strong brand and image? Product and Service Questions Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Price Questions • What is the competitor’s pricing strategy? • Is the competitor’s price higher or lower? • What is the competitor’s gross margin for similar products? • Does the competitor offer terms, discounts, or promotions Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Industry Competitors • Define the competition in terms of new, Internet, or potential threats of existing companies. • What are the strengths and weaknesses of each? • How will internet-centric companies affect the business? • How can the suppliers or buyers affect the competition? Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren • How strong is the competitor’s management team? • What is their background or experience? • How do they recruit new key employees? • What skills have they been recruiting? • What consultants have they been using? Management Team Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren • Is the competitor profitable? • What volume are sales and market shares? • Do they spend money for R&D, Internet, and web development? • Are they properly capitalized? How strong is their cash flow? • How are they funded? Do they have access to additional capital if needed? Financial Questions Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Preparing the Pricing Plan Pricing Methods Value: Price should not be based simply on cost, plus a modest profit. Instead, price should be based on the value of the product or service. Rationale: Why prices differ from those of the competitors.For instance, does the new business perform a function faster or more efficiently? Differential: Can independent market sectors or verticals be priced differently to maximize value? Tiered: Customers are provided a basic version of the product at low cost, or even for free. After gaining confidence they purchase an upgrade (or upsell) for more features and benefits. Referred to as “Freemium” pricing. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren How to Position the Product or Service • One way to charge a high price is when competition and substitution products are minimal • Another is to “match competition” by pricing slightly under the competitor’s rates to expand one’s own market share (for example, Samsung or Apple Smartphones). • A third is to substantially under-price the market, so as to exclude competitors altogether • Early adopters usually are not price-sensitive, so beware entering the market with a unique product and under-price it – it is always harder to raise prices. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Market Research Using the Internet •The internet can be used to undertake initial market research cost effectively. • Using “web 2.0” tools and social networks, a campaign can be carried out in just a few days or even hours! • Here are just two examples of how the Internet can be used for market research….. Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Example 1: “Smoke-Screen Test” Problem: how can “early-adopters” be attracted to a web-site offering new methods for alleviating asthma, what is the price they will pay, and how likely they will buy? Cost effectively: • Gain website traffic by a social networking presence • Gather customer information and preferences Resource Requirements: • Daily monitoring of social networking (15 mins/day) • $500 – $1,000 funding for Google AdWords campaign to draw direct traffic to the site. Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Task 1: Build Web Presence via Social Networking • Establish Twitter account: “@breathesimple” • Continually track ‘tweet’ keywords: – Asthma attack – Nebulizer – Asthma emergency room • Sample tweets: Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Task 2: Build Dummy Website to Draw Traffic • www.breathesimple.com Home Page: Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research http://www.breathesimple.com/ Task 3: Track Website Traffic Using Google Analytics Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Task 4: Create Short Survey to Gather Customer Info Goal: Gather as much information as possible without being asking too much of the customer. Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Task 5: Track Survey Results Using Automatic Analysis Tool Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Results from Smoke-Screen Market Research •Cost of Market Research - $1200 •Duration of Market Research - 2 weeks •Number of visitors drawn to site – 2100 •Number that completed questionnaire and provided contact information for purchase – 143 •Cost per customer acquisition - $8.40 •Conversion rate buyer/visitor – 6.8\% •Acceptable price point for product - $300. The acquired data was sufficiently detailed for use in the business plan: Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Example 2: Primary Market Research Problem: How will current customers view improvements to an existing product, what will they pay for these, and how much time will they invest in learning the new features? Cost effectively: • Target users of existing products • Gather customer feed-back Resource Requirements: • Creating questionnaire (2 hours) • $50 per respondent up to 150 replies with analysis • 80 responses in 3 days, 150 within 2 weeks. Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Example 2: Primary Market Research Use the service of, for example “Ask Your Target Market” (www.aytm.com) • Over 2.5 million registered respondents. • Questionnaire screens randomly selected respondents to identify “targeted audience” e.g. Q 1. “I have just bought a pair of new shoes” or “I am planning a vacation in Thailand.” • Only those meeting the required audience get to the main questionnaire and get paid for their full response. • Survey results collected over a few days and analyzed using aytm tools. • Total costs are around 30\% of traditional market research interview methods and takes much less time. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Example 2: Problem Definition • Halare Inc. developed an improvement to the existing treatments of Sleep Disordered Breathing. • The current method to alleviate the symptoms is for the sufferer to wear a “Constant Positive Airway Pressure” mask (CPAP) in bed. • The company developed a short questionnaire to target existing users of CPAP machines in order to learn: a) current usage patterns b) reasons for dissatisfaction of existing products c) using a video example of the Halare product, how they viewed the potential improvements d) how much time they would devote to learning to use the additional features e) what percentage of respondents would purchase the new device and at what price. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Example 2: Results The next slide shows a typical chart derived from the questionnaire*. PQ is the pre-screening question, and eliminates any respondent that is not part of the target market. Q1 examines the current usage patterns of CPAP machines. It is shown that < 50\% of the users do NOT use their CPAP’s every night which can lead to serious health problems. The Questionnaire continued to explore the reasons for poor compliance and offer Halare’s alternative solution. The respondent number was capped at 150 which provided a statistically valid population while limiting total cost of the primary market research to $7500.00. * Another more complete example can be found in the book, chapter 4. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2012 Jack M. Kaplan & Anthony C. Warren Example 2: Typical Result Chart Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren and AYTM Inc. Copyright 2015 Jack M. Kaplan & Anthony C. Warren Patterns of Entrepreneurship Management 5th Edition Chapter 6 Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Writing the Business Plan Copyright 2015 Jack M. Kaplan & Anthony C. Warren Business Plan Fundamentals • Attracts Investors • Evaluates Feasibility of Business Concept • Serves as an Operating Guide • Attracts Potential Business Partners and Key Employees • Attracts Potential Customers and Suppliers • Business Plans are becoming more concise and more than 12 pages is considered too long • All really detailed content goes in the Appendices • Even the Business Model Canvas is being used to communicate plans Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Business Plan Development Guide Outline: • The Executive Summary • Business Description • Market Analysis • The Management Team • Operations • Critical Risks • The Financial Projections • Appendix Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren The Executive Summary - 1 Objective: • Capture interest of investors and other stakeholders • General overview of business idea • How will it work • Bullet form • Emphasize key issues • No more than 2 pages • Should be written LAST Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Include the following: • Company profile • Nature of the product or service offering emphasizing any competitive advantages • Identify foreign/domestic markets to be targeted • Size and growth trend of market • Make-up and background of the management team - include individual skills • Financing requirements • Key projections (i.e., sales, gross profits, net income.) The Executive Summary - 2 Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Business Description - 1 Objective: • Provide a detailed overview of the company and the nature of the product/service offering. • Show long-term commitment to developing the venture. • Show defensible competitive advantage. • No more than one page for this section. Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Business Description - 2 Include: • Mission statement • History behind the idea or current business • Company’s current or proposed legal form • Proposed entry strategy • Description of the initial product/service (including any anticipated competitive advantages) • Product/service research and development. Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Market Analysis - 1 Objective: • Prepare an opportunity marketing analysis. • Demonstrate how to capture a large share to support the venture. • Show how to support claims and customer interest. • No more than 2 pages for this section. Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Market Analysis - 2 Address: • Description of industry including size, trends • Description of region and/or countries (international business) • Targeted market segments • Primary and secondary market research • Competition • Barriers to entry • Marketing entry strategy to deliver products/services to the targeted markets. Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Management Team - 1 Objective: • Show that the team can effectively manage the product/service into foreign or domestic markets. • Does management have the background and skills to make the venture a success? • Highlight synergistic skills. • Show how deficiencies will be covered. • Do not give up more control than absolutely necessary. • No more than two pages for the whole section. Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2016 Jack M. Kaplan & Anthony C. Warren Address: • Background and primary responsibilities of the management team • Organizational structure • Board of directors/advisors/international trade specialists • Ownership structure • Future potential hires Management Team - 2 Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Exit Strategy if Investment is Sought Objective • To be determined and stated clearly up-front • No more than one page for this section. • Some options include: – going public – selling the business – a stock buy-back at the going rate – leveraged buy-out – second round of investment allowing some liquidity Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Operations - 1 Objective: • Focus on relevant cost. • Demonstrate ability to carry out implementation. • Integrate operation costs with the financial section. • Spell-out make/buy options. • Explain use of external partners if planned. • No more than 2 pages for this whole section. Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Address: • International Considerations – market development activities – transportation – export documentation – foreign contacts and personal relationships • Future Research and Development Plans – cannot be built around a single service or product – present the planned directions of R&D – extensions and new products/services – new markets to be considered – improve on existing production processes Operations - 2 Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Address: • Production Plan – procuring and transforming critical resources – internally – externally – time line of events • Customer Support – focus on getting and keeping customers – customer service – what role it plays in achieving sales goals Operations - 3 Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2012 Jack M. Kaplan & Anthony C. Warren Address: • Personnel – creating management and infrastructure charts – hiring – training – compensation plans – stock option plans Operations - 4 Chapter 5 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Critical Risks - 1 Objective: • Identify potential problems that could significantly affect the new company. • Let potential investors know up-front that there are risks associated with the venture. • No more than one page for this section. Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Critical Risks - 2 Internal – loss of key employees – inadequate working capital – unproductive R&D – breakdowns in plant and equipment – bottlenecks in the distribution channels – factors not covered by insurance policies Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2012 Jack M. Kaplan & Anthony C. Warren Critical Risks - 3 External – inability to protect IP and patent violations – changes in technology, government regulation or protectionist legislation – adverse economic conditions, market changes – failure to procure sufficient funding – unstable banking/financial and transportation/distribution systems – potential effects on financial plans Chapter 5 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Address: • Contingency Plans – probabilities • Insurance Provisions – fire – liability – automobile – worker’s compensation – key person Critical Risks - 4 Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2012 Jack M. Kaplan & Anthony C. Warren Financial Projections - 1 Objective: • Convince investors or bankers that the venture makes sense from a financial standpoint. Address: • Projections must address: – allocation of expenses – return on investment – cash flow management Chapter 5 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Examples: • Historical financial data, if any • First year financial projections by month • Balance Sheet • Income Statement • Cash Flow Statement • Second year financial projections by quarter • Five year annual forecasts • Break-Even Analysis • Ratio Analysis Financial Projections - 2 Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Valuation - 1 • “Residual Value” commonly used by investors. • Should be done before meeting with investors. • Will help you to assess what ownership you may have to give up based on the expected ROI for your type of venture. • Use the “time value of money” equation: n Future Value = Present Value (1+i) i = estimated rate of return investors will require based on the perceived risk associated with your type of venture n = number of years Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren • Calculate the future value of the up-front investment needed. Example: Funds needed = $500,000 Average annual return on investment (ROI) = 45\% 4 FV = $500,000 (1+.45) FV = $500,000 (4.4205) FV = $2,210,253 Valuation - 2 Chapter 5 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2006 Jack M. Kaplan & Anthony C. Warren Example: • Determine the point in time that will be used in the valuation calculations. Example: 4 years • What are the projected after-tax profits? Example: $1,855,050 (year 4) • Determine the valuation factor by looking at similar companies in your industry. Example: 10 times after tax earnings $1,855,050 x 10 = $18,550,500 Valuation - 3 Chapter 5 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2012 Jack M. Kaplan & Anthony C. Warren • Determine the amount of equity you may have to give up, based on the value of the venture, and the future value of the potential investors’ initial investment. Example: $2,210,253 -------------- = 12\% $18,550,500 Valuation Chapter 5 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2012 Jack M. Kaplan & Anthony C. Warren Balance Sheet • Working Capital Position • Capital Asset Position • Capital Structure Pro Forma Balance Sheet: Current Assets Current Liabilities Fixed Assets Long-term Debt Intangible Assets Equity Total Assets = Total Liabilities + Equity Chapter 5 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Cash Flow Statement - 1 Objective: • Demonstrate that you have sufficient cash to run the operation. • Assess the timing of future cash flows. • Develop a plan for subsequent rounds of financing. Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Cash Provided (used) from Operations Net income (loss) Depreciation Adjusted net income (loss) Cash Provided by Working Capital Accounts receivable (increases) decreases Inventories (increases) decreases Accrued liabilities (decreases) increases Prepaid expenses (decreases) increases Cash Provided (used) by Continuing Operations Cash Flow Statement - 2 Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Continued: Cash Provided (used) from Financing Activities Long-term debt (decreases) increases Interest on notes Cash dividends paid Issuance of stock Total Cash Provided (used) from Financing Activities Cash Flow Statement - 3 Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Continued: Cash Provided (used) from Investment Activities Purchase of property, plant and equipment Proceeds from sale of assets Other acquisitions Cash Provided (used) from Investment Activities Increase (decrease) in cash Cash at beginning of period Cash at end of period Cash Flow Statement - 4 Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Income Statement - 1 • Revenue Projections • Cost Relationships • Tie into the Operating Strategy Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Income Statement - 2 Pro Forma Income Statement Revenue - Cost of Goods Sold Gross Profit Margin - Operating Expenses Net Income Before Interest and Taxes - Interest - Taxes Net Income (Loss) Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Appendix What goes here? – Detailed financials, the sections covering all financial issues should be no longer than 2 pages of SUMMARY in the main text. – Detailed research – Mock-Ups – More Technical/Complex information Chapter 6 Executive Summary Business Description Market Analysis Management Team Critical Risks Operations Financial Projections Appendix Copyright 2015 Jack M. Kaplan & Anthony C. Warren Patterns of Entrepreneurship Management 5th Edition, Chapter 4 Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Customers, Markets, Competitors in a Digital World Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Presentation Outline • Customer/Market Analysis – Niche or target markets – One to One Marketing – Define the Market Segmentation – Market Research • Evaluate the Competition-Sample Evaluation • Prepare the Pricing Plan • Position the Product or Service • Using The Internet for Market Research Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Niche, Verticals and Target Markets ➢ A niche market is a small segment of a large market ignored by other companies ➢ A vertical market is a specific sector or class of customers that may require different products and/or be acquired through different marketing channels ➢ Target marketing is a strategy to focus on segments of a market and prepare a plan for each market segment or vertical. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Rogers’ Bell-Curve - Customer Adoption Patterns When introducing a new product or service, you should target customers who are more likely to try something new – the innovators and early adopters. They are usually not price-sensitive. These customers can usually be found and attracted using social media methods. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Identifying Customers--Consider the 4 factors • Market Identification--Current market and service needs determined • Current and Best Customers--to allocate resources to segment the market • Potential Customers--target by geographical or industry wide, or ease of reaching via social media platforms • Outside factors --identify changing trends Prepare the Marketing Analysis and Plan Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren One to One marketing Learn the profile or details about customers to identify the most valuable ones. • Identify customers or get them to identify themselves • Link customers identities to their transactions • Calculate individual customer lifetime value • Strengthen a customer satisfaction program • Social media methods, such as on-line advertising, “click through” links, search engine optimization and networking on social platforms are excellent for finding individuals at low cost. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Internet Market Research Accessing potential customers using the internet is a low-cost way of researching customer needs and behaviors. Here are a few examples: ➢ Research sites such as “Ask Your Target Market” have a large network of motivated potential customers that they can question ➢ Using a “smoke-screen” web-site that probes customers found on chat rooms on social media platform ➢ Explore search engine key-words on Google to drive potential customers to your informative web-site ➢ Posting Blogs about your company and its products in on-line discussion groups ➢ Creating informative video content to post on Youtube or Vimeo ➢ Launching an MVP for testing with a small group of early adopters ➢ Using a crowd-sourcing site to “pre-sell” products before complete development (See Chapter 5) ➢ Creating informative content to stimulate relevant “influencers” to post comments on their web-sites and in blogs. Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Define the Market Segmentation There are Several Ways to Segment a Market ➢ Demographic Segmentations-divide the market into groups,based on age,income level and gender ➢ Geographic Segmentation- divide people or businesses into regional and by location ➢ Psychographic Segmentation-divides into cultural groups,value or social categories ➢ Tech-savvy segmentation – heavy users of devices and the internet ➢ Ethnic Segmentation- divide by ethnic group Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren ➢ Do potential customer groups have different needs? ➢ Can the customers that fit into a given segment be identified? ➢ Are customers both willing and able to pay? ➢ Is the segment large enough to be profitable? ➢ Can the segment be reached in a cost- effective manner? For example, directly via the internet? Questions for Effective Segmentation Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren • It is particularly important to identify which businesses will provide the most significant competition and predict what they will likely do. • Analyze the situation by asking the questions provided below regarding six key areas of competition. Conduct A Competitive Analysis Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Competitive Analysis: Porter’s 5 Forces Potential Entrants Threat of New Entrants Industry Competitors Rivalry Among Existing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Business to Consumers Business to Business Internet Companies Suppliers Buyers •Switching Costs of Suppliers •Importance of Volume to Suppliers •Cost Relative to Total Purchases •Impact on Cost or Differentiation •Access to Distribution •Government Policies •Expected Retaliation •Economics of Scale •Proprietary Product Differences •Brand Identity •Buyer Concentration vs. Firm •Buyer Volume •Buyer Switching Costs •Substitute Products •Product Differences •Brand Identity •Impact on Quality/Performance •Buyer Profile •Industry Growth •Product Differences •Brand Identity •Exit Barriers •Diversity of Competitors Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Evaluating the Competition Sample Evaluation Factors Attractiveness High Low Competition among companies Competition is minimal but will become intense in 1year The industry is declining and is mature The power of customers Volume is high and willing to negotiate Customer has few switching costs The power power of suppliers Many substitutes and sources are available Limited supply; products differentiated Internet companies No competition defined on the internet Many companies are entering this market Potential threats Complex barriers and costs are high to enter market Few simple entry barriers to enter the business Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Measuring the Venture’s Strengths and Weaknesses Factor Attractiveness High Low Management t eam Proven People w it h right skills not available Financing You have comf ort able cushion or can raise capit al if needed You have a narrow t ime horizon t o make money Product development Complet e product line One product of limit ed lif e Sales f orce St rong cont act s; specialist skills Limit ed cont act s; generalist skills Market ing Deep and t ight ly- f ocused Unt arget ed Operat ions St rat egic alliances help improve execut ion Learning in a vacuum Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren • How is the competitive product or service defined? • How is it similar or different? • Does the competition cater to a mass, niche or vertically targeted market? • What features of the product are superior? • What strengths or weaknesses of the competition can be exploited? • Has the competitor developed a strong brand and image? Product and Service Questions Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Price Questions • What is the competitor’s pricing strategy? • Is the competitor’s price higher or lower? • What is the competitor’s gross margin for similar products? • Does the competitor offer terms, discounts, or promotions Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Industry Competitors • Define the competition in terms of new, Internet, or potential threats of existing companies. • What are the strengths and weaknesses of each? • How will internet-centric companies affect the business? • How can the suppliers or buyers affect the competition? Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren • How strong is the competitor’s management team? • What is their background or experience? • How do they recruit new key employees? • What skills have they been recruiting? • What consultants have they been using? Management Team Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren • Is the competitor profitable? • What volume are sales and market shares? • Do they spend money for R&D, Internet, and web development? • Are they properly capitalized? How strong is their cash flow? • How are they funded? Do they have access to additional capital if needed? Financial Questions Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Preparing the Pricing Plan Pricing Methods Value: Price should not be based simply on cost, plus a modest profit. Instead, price should be based on the value of the product or service. Rationale: Why prices differ from those of the competitors.For instance, does the new business perform a function faster or more efficiently? Differential: Can independent market sectors or verticals be priced differently to maximize value? Tiered: Customers are provided a basic version of the product at low cost, or even for free. After gaining confidence they purchase an upgrade (or upsell) for more features and benefits. Referred to as “Freemium” pricing. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren How to Position the Product or Service • One way to charge a high price is when competition and substitution products are minimal • Another is to “match competition” by pricing slightly under the competitor’s rates to expand one’s own market share (for example, Samsung or Apple Smartphones). • A third is to substantially under-price the market, so as to exclude competitors altogether • Early adopters usually are not price-sensitive, so beware entering the market with a unique product and under-price it – it is always harder to raise prices. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Market Research Using the Internet •The internet can be used to undertake initial market research cost effectively. • Using “web 2.0” tools and social networks, a campaign can be carried out in just a few days or even hours! • Here are just two examples of how the Internet can be used for market research….. Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Example 1: “Smoke-Screen Test” Problem: how can “early-adopters” be attracted to a web-site offering new methods for alleviating asthma, what is the price they will pay, and how likely they will buy? Cost effectively: • Gain website traffic by a social networking presence • Gather customer information and preferences Resource Requirements: • Daily monitoring of social networking (15 mins/day) • $500 – $1,000 funding for Google AdWords campaign to draw direct traffic to the site. Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Task 1: Build Web Presence via Social Networking • Establish Twitter account: “@breathesimple” • Continually track ‘tweet’ keywords: – Asthma attack – Nebulizer – Asthma emergency room • Sample tweets: Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Task 2: Build Dummy Website to Draw Traffic • www.breathesimple.com Home Page: Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research http://www.breathesimple.com/ Task 3: Track Website Traffic Using Google Analytics Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Task 4: Create Short Survey to Gather Customer Info Goal: Gather as much information as possible without being asking too much of the customer. Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Task 5: Track Survey Results Using Automatic Analysis Tool Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Results from Smoke-Screen Market Research •Cost of Market Research - $1200 •Duration of Market Research - 2 weeks •Number of visitors drawn to site – 2100 •Number that completed questionnaire and provided contact information for purchase – 143 •Cost per customer acquisition - $8.40 •Conversion rate buyer/visitor – 6.8\% •Acceptable price point for product - $300. The acquired data was sufficiently detailed for use in the business plan: Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Example 2: Primary Market Research Problem: How will current customers view improvements to an existing product, what will they pay for these, and how much time will they invest in learning the new features? Cost effectively: • Target users of existing products • Gather customer feed-back Resource Requirements: • Creating questionnaire (2 hours) • $50 per respondent up to 150 replies with analysis • 80 responses in 3 days, 150 within 2 weeks. Copyright 2015 Jack M. Kaplan & Anthony C. Warren Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Example 2: Primary Market Research Use the service of, for example “Ask Your Target Market” (www.aytm.com) • Over 2.5 million registered respondents. • Questionnaire screens randomly selected respondents to identify “targeted audience” e.g. Q 1. “I have just bought a pair of new shoes” or “I am planning a vacation in Thailand.” • Only those meeting the required audience get to the main questionnaire and get paid for their full response. • Survey results collected over a few days and analyzed using aytm tools. • Total costs are around 30\% of traditional market research interview methods and takes much less time. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Example 2: Problem Definition • Halare Inc. developed an improvement to the existing treatments of Sleep Disordered Breathing. • The current method to alleviate the symptoms is for the sufferer to wear a “Constant Positive Airway Pressure” mask (CPAP) in bed. • The company developed a short questionnaire to target existing users of CPAP machines in order to learn: a) current usage patterns b) reasons for dissatisfaction of existing products c) using a video example of the Halare product, how they viewed the potential improvements d) how much time they would devote to learning to use the additional features e) what percentage of respondents would purchase the new device and at what price. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren Example 2: Results The next slide shows a typical chart derived from the questionnaire*. PQ is the pre-screening question, and eliminates any respondent that is not part of the target market. Q1 examines the current usage patterns of CPAP machines. It is shown that < 50\% of the users do NOT use their CPAP’s every night which can lead to serious health problems. The Questionnaire continued to explore the reasons for poor compliance and offer Halare’s alternative solution. The respondent number was capped at 150 which provided a statistically valid population while limiting total cost of the primary market research to $7500.00. * Another more complete example can be found in the book, chapter 4. Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2012 Jack M. Kaplan & Anthony C. Warren Example 2: Typical Result Chart Chapter 4 Customer/ Market Analysis Competitive Analysis Pricing & Positioning Internet Market Research Copyright 2015 Jack M. Kaplan & Anthony C. Warren and AYTM Inc.