Communicating the viability of your business (2)
By Goke Ilesanmi
Last week, we said a business plan is a formal document that communicates the direction of a business in a bid to accomplish its most important goal, that is, profitability. We added that whether you want to start a business or grow one, attract investors or obtain a loan, attempting to do it without a well-composed business plan is like a stranger going to a place without a prior direction. We educated that to reduce this risk of failure and losing money, potential entrepreneurs need to go through the different aspects of running their business in discussions with friends and advisers before they commit funds or try to obtain a loan. We said this process is known as “feasibility study” and when the results are written down, the document is known as a “business plan”. We also discussed the market analysis halfway. We said market analysis covers the sub-concepts of product quality survey; survey of market size and value; and market share and competition.
Market analysis
…Although telephone or posted questionnaires are possible, in most developing countries, it is better to conduct a market survey by going out into areas where the producers expect to find consumers and asking people for their views. There are two types of information that are needed as regards market analysis: (a) information about the product and its quality; and (b) information about how much people will buy, how often and for what price.
It is important to think in advance about the type of information you need to ask and ask people the same questions each time, so that their answers can be compared and summarised. A convenient way of doing this is to prepare simple questionnaires, which can be used by entrepreneurs to remind themselves of the questions to ask.
Product quality survey
As regards the choice of fruit or vegetable product business mentioned last week, consumers are familiar with the types of fruit or vegetable products that are already on sale and surveys on these products are therefore easier than those for a completely new food. Questions can therefore focus on the things that consumers like or dislike about existing competitors’ products.
However, if prospective producers want to produce products that are new to an area, they need to have samples for potential consumers to taste and give their opinion on whether or not they like the products and would be willing to buy them. For the purpose of hygiene, when asking people to taste a product, a supply of spoons should be provided so that each person interviewed can use a clean one.
Although initially, new products have the advantage of not having competitors, the process of assessing demand is longer and costlier than that for products that are already in existence. Additionally, because about 80 per cent of new products fail, the risks are higher. When you want to go to a new area of business and want to do your feasibility study, explain to each person you interview that you want to start a new business, and that you have prepared a sample for people to try. Ask them if they would like to taste the sample and give you their opinion on what it is like.
Market size and value survey
A different set of questions are needed when assessing the size of the market for a particular type of food (the total volume bought per month or year) and the value of the market (the amount of money spent on the products each month or year). At the same time, it is possible to gather information about the type of people that buy a particular type of food and where they buy it from. The information gathered from potential consumers, using appropriate questionnaires can be analysed by the entrepreneur to get a good idea of the quality characteristics of the product that consumers prefer, the total demand for the product and the total value of the market.
Market size and value questions
These are some of the questions you can ask regarding different segments of the market size and value:
About the market size: How often do you buy this product? Do you buy different amounts at different times of the year? When do you buy most? How much do you buy each time? When do you buy the least? How much do you buy each time? What is the amount of food in the pack?
About the market value: How much do you pay for a pack of the food? What is the price difference for larger or smaller packs? Does the price change at different times of the year? When is the price highest? When is the price lowest?
About the customer: Would you say that you have a low, medium or high income in your family? In which age group do you belong?
About sales outlets: Where do you usually buy this food? (Market stall?; Supermarket? etc.). However, this process involves making a number of assumptions and it is important to consider the following: (1) are the people interviewed really representative of all potential consumers? (2) were enough people interviewed? (3) were people giving accurate information?
If a producer is unsure of the quality of information that has been given, he or she should ask more people the same questions to check the answers obtained. Clearly, the more people that are interviewed, the more accurately the information will reflect the real situation. However, a balance has to be drawn between the time and cost of interviewing a large number of people and the accuracy of the data obtained. As a guide, 50 to 75 interviews should result in a good idea about the market for a product in a particular area.
When analysing data collected about market size and value, it is often helpful to find official statistics about the people who are expected to be the customers for a new product. Similar information is sometimes available from local government offices, tax authorities and chambers of commerce, although it may not always be up to date.
Market share and competition
Market surveys and calculation of market size and value are important to finding out whether the demand for a product really exists. But the figures should not be assumed to represent the scale of production that could be expected. Even if nobody is currently producing a product locally, it is likely that once a new business begins production and is successful, competition will start. It is therefore important from the outset to estimate the proportion of the total market that a new business could reasonably expect to have. This is known as the market share. It is often difficult to estimate a realistic market share and the figure depends on a large number of variables. In many cases, new entrepreneurs over-estimate the share that they could expect.
Competitors are very important to the success or failure of a new business and the entrepreneur should recognise that there are different types of competitors. Using the example of someone wishing to make fruit juices, it is helpful to think how the consumers might view the available products: for example when they are thirsty, they have a choice of hot drinks (tea, coffee, etc.); cold soft drinks, such as milk, juices, squashes, etc. These are all general competitors that are able to satisfy the consumers’ thirst. Assuming the consumers choose cold soft drinks that can be drunk straight from the bottle, they then have a choice between carbonated soft drinks and juices. These are known as type competitors or different kinds of soft drinks. Finally, on choosing juices, there are different juices and different brands of the same type of juice, which are brand competitors.
Although the appearance and quality of food are important, competitors do not only compete with their products but also compete with the profit margin, level of service they offer retailers, special offers or incentives to customers, etc. New entrepreneurs must therefore assess each of these factors when deciding what the competition is and how to deal with it. This is conveniently done using a SWOT analysis, an acronym which its S stands for “Strengths”; “W” stands for “Weaknesses”; “O” stands for Opportunities” and “T” stands for “Threats”.
The technique involves looking at each aspect of the new business and comparing it to other producers’, particularly type and brand competitors’. Many new entrepreneurs do not appreciate the importance of finding information about competitors and even if they do, they may not know where to find it. In addition to the direct questions to consumers in market surveys, entrepreneurs can get information about competitors by: (a) Discussing with retailers, the amount of sales of different brands and any seasonality in demand; (b) Looking at competitors’ advertising and retail displays, getting a copy of their price lists; (c) Asking the local Chamber of Commerce for any information it has on the market for similar products; (d) Looking in trade journals, manufacturers’ association magazines and newspapers for information about the market and competitors’ activities, etc.
To be continued
PS: For those making inquiries about our Public Speaking, Business Presentation and Professional Writing Skills programme, please visit the website indicated on this page for details.
GOKE ILESANMI (FIIM, FIMC, CMC), CEO of Gokmar Communication Consulting, is an International Platinum Columnist, Professional Public Speaker, Career Mgt Coach and Certified Mgt Consultant. He is also a Book Reviewer, Biographer and Editorial Consultant.
Tel: 08055068773; 08187499425
Email: [email protected]
Website: www.gokeilesanmi.com.ng
