Understanding Your Business Market
Question #1: Who will be your business competition? What product or service does your business compete with?
About this question: All businesses compete with other businesses for customers. Having competition is good for businesses and customers, because it forces a business to be different from their competitors, offer better prices, or distinguishes them to appeal to groups of customers. Knowing who your competitors are and the details of why customers go to that business will help you in finding a way to operate a similar business. Start your answer with identifying who your main competitors are. You can also talk about how fierce the market is with your competitors. Describe what you see between your competitors and customers. Are there customer needs not being met by any competitors, are customers satisfied with the existing businesses? Your answer should take at least one paragraph or more to answer.
Definitions: Competition = a rivalry between two entities or the struggle for trade. A business competitor can be another business or product that takes customers away from your business. For instance, a movie theatre competes with other businesses that offer entertainment, including concert venues, performing arts venues, athletic events, restaurants, video rentals, and so on.
Direct competitors are businesses with similar products or services — Wendy’s and McDonald’s are direct competitors. Indirect competitors are businesses that compete for the same dollars with different products — miniature golf and movies are indirect competitors, since on any given evening, money spent on one may not be spent on the other.
Helpful Activity: You know what business you want to open by now, but what competes with you in winning customers? Look in your local phone book or search the internet and see who runs a business similar to yours in your community. See how many competitors you can identify? Did you look at businesses that may attract customers away who do not offer the same or similar product or service (see movie theatre example above)? Once you identify at least five competitors, visit the business or talk with someone there to see what makes their business special. What can you do to improve their business or do differently from them?
Remember, it is okay to have competition, in some cases its good, but the more you know aboutyour competition the better for your business. You will be more successful if you know a lot about your competition. With this question, you go further if you can show how well you know your competition.
If you have a product, it is important to understand how to differentiate yourself from megastores like Walmart—the REAL activity Toys are Us or Them helps students think about how to compete in ways other than price.
Question #2: Remember identifying your business customers (also known as markets)?
Now, figure out what market volumes you expect to see in each market you are targeting. (NOTE: if you are planning to sell more than one product, you will have more than one market volume to configure.)
About this question: Before a business opens the door, an entrepreneur needs to see if his/her business idea will actually make money. If a business is not able to make money, then the business can’t survive. This question is asking you to see how much your product or service will make in a year. (The more you work towards getting a realistic value for this question; the better off you will be for the next Round.) The Helpful Activity below is strongly recommended for this question. Answer these questions in a paragraph or more.
Definitions: Market volume = the total amount you expect to earn in selling your product or service. For each product you intend to sell, you will need to find how much you anticipate your customers will spend at your business for a year (12 months).
Helpful Activity: Tell us how much money is spent on a yearly basis for similar products or services your competitors offer. Do this by searching for this information in your library, on the internet, by asking your competitors. You can also talk to a group of your potential customers and ask them how much they tend to spend on “x” in a year. Next, evaluate your product/service to determine how much you want your product or service to make in a year?
Question #3: What will influence growth in the market segment(s) you have chosen?
About this question: Sales can be influenced by our government, fads, or other outside events. Think about what influences sales of clothing: famous people wearing something on MTV, and shortly after that you see the fashion on your friends. What outside factors will influence the sales growth or decline of your business? Look into the buying patterns of your customers for the answer to this question. Answer the questions in a paragraph or more. Note: this question is asked, because lenders/investors want to see if the business has growth potential within its industry. Lenders/investors also want to know if there is growth potential for your particular product or service within the target market.
Definitions: Market Segment = similar to target markets, a market segment is the portion of the population who are your customers. Growth in market segments means that you are growing the number of customers from a particular portion of the population. When your market segment in growing, your sales should also be growing.
Helpful Activity: Ask a handful of your potential customers what influences their decision to spend money. Ask each person a list of at least five questions that you came up with about their spending habits as related to the type of product or service you intend to sell. See what types of answers you receive.
The REAL Activity Gail’s Great Outdoors give students practice developing a customer survey form for an outdoor supply store. This will introduce skills that can be used in creating a customer survey for their own business.
Question #4: What price do you want to charge for your product or service? How did you arrive at this price?
About this question: Price is very important to your business, and it has a lot to do with the image you would like to project about your company as well as with whether people will buy from you. Don’t assume that lower prices are good for your business. Each business has an image it wants to portray to the public, and pricing helps to reinforce that image. So if you are looking into selling custom made handbags, then you’ll probably want to price the bags higher than a handbag you can buy at Target. If you want to be known as a discount retailer, then you should look at lower prices to convey that image to your customers. In all, you should choose a price based on what your customers tell you they’re willing to spend, taking into account that you need to earn enough money to keep the business open, make a profit and sell the company’s image (or the way the public perceives the company).
Definitions: Price = the market cost for goods or services to customers. Whole sale price = the price goods or products cost (usually in larger quantities) to retailers or resellers.
Keeping in mind that the price you charge customers will also help portray the image of your company, begin figuring out the price of your products or services by calculating what it takes to provide that product or service. For example, if you were creating a “widget” – the word for an imaginary product. You would gather a list of what you need to make that widget, and then get prices for each of those items. Add the costs together to calculate a raw cost for materials. Next add in how much time it takes you to make that product and calculate what your time is worth. Add that to the raw cost of materials. Next, figure out if you need space, electricity or other utilities to help make your product. If so, how much would that cost per widget? Lastly, how much profit do you want to make on each item? Add up all the numbers and you will come to price for your product or service. NOTE: for a service, follow the same steps as above, you just need to skip the raw material calculations. Keep in mind that you may still have supplies involved to provide your service. If you are interested in a retail operation, the price of your products will be dictated by the types of products you are selling. For this type of business, focus on how much profit you would like to make and add that to the cost of the wholesale products you intend to buy for your business.
For example: Sarah makes beaded earrings and sells them to local retail shops. Sarah needs earring posts and backings, beads and beading wire to make her earrings. She buys the products in bulk from a beading supply company, so she is able to make 24 sets of earring per order she makes with the beading supplier. Sarah has calculated the cost per set of earrings by dividing her cost by how many earrings she can make and adding the amount of labor it takes to make each pair, and the following is the result:
Earring posts - $12.95 per package of 24 posts or $12.95/24=.54 per pair = $1.08 Earring post backings - $5.95 per pack of 24 or $5.95/24=.25 or $.50 per pair Beads - $15.99 per strand that can make 24 earrings or $15.99/24=.67 or $1.34 a pair Beading wire - $3.00 per spool or $3.00/24=.13 or $.26 per pair of earrings Labor is charged per hour at $20.00 and it takes Sarah an hour to make three pairs of earrings, so $20.00/3=$6.67 per pair of earrings
Add of the cost of making a pair of earrings: 1.08+.50+1.34+.26+6.67 = $9.85 is the raw cost of making a pair of earrings. However, Sarah wants to make a 15% profit on her earrings, so she adds $1.48 to the cost of for a total of $11.33 per set of earrings to her customers.
Figuring out the Breakeven for a good or service is a good way to check that the price covers the cost of manufacturing and the overhead costs (such as rent, electricity, etc.) the REAL Activity Toni’s T-shirts(Part 1, Part 2) has students divide expenses into fixed and variable costs and then calculate a breakeven amount for selling t-shirts. There is also a excel spreadsheet that can be used for calculating breakeven for the activity and to use for the Hop on the BUS! businesses.
Question #5: What sales volume are you targeting?
About this question: Estimate the total sales (also known as gross sales) you plan to have in the first, second and third years. Hopefully your estimate will grow in the three years, even if by a small margin. Estimate these sales to the best of your ability, be realistic and hopeful, but know that these numbers are estimates. Please explain how you came up with these numbers in your answer. You may answer this question in an Excel spread sheet or chart. Label your numbers so that the judges will understand your calculations. (Note: this activity will help you prepare financial statements called forecasts in the next round.)
Definitions: Sales Volume = the total amount of money your product makes through sales. Forecasting = the art of predicting the future with the use of reliable information. Your forecasted sales volume, then, is the amount of gross (total) sales that you believe you can attain. Use the answers to the previous questions to help you “forecast” your gross sales volume.
Helpful Activity: Think about how much money you would like the business to make in the time periods stated above, and then figure out how much you will need to sell in order to meet those goals. To figure that out, take an estimate of how much money you will need to run your business, add to that number how much money you would like to make. That will give you the forecasted sales volume that your business will need to accomplish for each time segment.
Question #6: How will you advertise or promote your product or service to your customers?
About this question: Now that you have an estimate on how much of a market you need to sell too, how much to charge in order to make the money you need to keep the business profitable, now you need to decide how to attract customers to your business. Will you advertise through television, radio or newspaper ads? Those are some common places you see advertising, however many businesses do not use these methods to advertise. Banner ads on a website, an ad in the yellow pages, handing out business cards to people you meet, sponsoring an event, putting flyers up around school or your neighborhood are just a few ways in which you can advertise your business.
Be creative and think about what will be the best way to tell other people about your business.
You don’t have to spend a lot of money to advertise unless you want to. Just know that if you do want to spend a lot of money on advertising, you must sell enough to justify it. Please answer this question in two paragraphs or more.
Definitions: Advertise = make publicly know or give information concerning a company, product or service. Advertising is one component of “marketing” that is critical in helping customers learn about a specific business.
Helpful Activity: You’ve asked some potential customers about their spending habits, do you know of any advertising techniques that would help influence they way they shop? Let the customer information that you already have help you in coming up with ideas on how to inform customers about your business. Have another brainstorming session with your team to come up with ideas to advertise or promote your business. Challenge the team to come up with at least ten ideas.
The REAL activity Online Marketing will help students brainstorm about ways to use the internet to market their product or service. http://www.sba.gov/starting_business/marketingbasics.html, http://www.mindyourownbiz.org