What is market for an entrepreneur?

You've come up with a great idea for a business but you're not ready to roll yet. Before you go any further, the next step is figuring out who your market is.

There are two basic markets you can sell to: consumer and business. These divisions are fairly obvious. For example, if you are selling women's clothing from a retail store, your target market is consumers; if you are selling office supplies, your target market is businesses (this is referred to as "B2B" sales). In some cases -- for example, if you run a printing business -- you may be marketing to both businesses and individual consumers.

No business -- particularly a small one -- can be all things to all people. The more narrowly you can define your target market, the better. This process is known as creating a niche and is key to success for even the biggest companies. Walmart and Tiffany are both retailers, but they have very different niches: Walmart caters to bargain-minded shoppers, while Tiffany appeals to upscale jewelry consumers.

"Many people talk about ‘finding' a niche as if it were something under a rock or at the end of the rainbow, ready-made. That is nonsense," says Lynda Falkenstein, author of Nichecraft: Using Your Specialness to Focus Your Business, Corner Your Market & Make Customers Seek You Out.Good niches do not just fall into your lap; they must be very carefully crafted.

Rather than creating a niche, many entrepreneurs make the mistake of falling into the "all over the map" trap, claiming they can do many things and be good at all of them. These people quickly learn a tough lesson, Falkenstein warns: "Smaller is bigger in business, and smaller is not all over the map; it's highly focused."

Practicing Nichecraft
Creating a good niche, advises Falkenstein, involves following a seven-step process:

1. Make a wish list.
With whom do you want to do business? Be as specific as you can: Identify the geographic range and the types of businesses or customers you want your business to target. If you don't know whom you want to do business with, you can't make contact. "You must recognize that you can't do business with everybody," cautions Falkenstein. Otherwise, you risk exhausting yourself and confusing your customers.

These days, the trend is toward smaller niches. Targeting teenagers isn't specific enough; targeting male, African American teenagers with family incomes of $40,000 and up is. Aiming at companies that sell software is too broad; aiming at Northern California-based companies that provide internet software sales and training and have sales of $15 million or more is a better goal.

2. Focus.
Clarify what you want to sell, remembering: a) You can't be all things to all people and b) "smaller is bigger." Your niche is not the same as the field in which you work. For example, a retail clothing business is not a niche but a field. A more specific niche may be "maternity clothes for executive women." To begin this focusing process, Falkenstein suggests using these techniques to help you:

• Make a list of things you do best and the skills implicit in each of them.
• List your achievements.
• Identify the most important lessons you have learned in life.
• Look for patterns that reveal your style or approach to resolving problems.

Your niche should arise naturally from your interests and experience. For example, if you spent 10 years working in a consulting firm, but also spent 10 years working for a small, family-owned business, you may decide to start a consulting business that specializes in small, family-owned companies.

3. Describe the customer's worldview.
A successful business uses what Falkenstein calls the Platinum Rule: "Do unto others as they would do unto themselves." When you look at the world from your prospective customers' perspective, you can identify their needs or wants. The best way to do this is to talk to prospective customers and identify their main concerns.

4. Synthesize.
At this stage, your niche should begin to take shape as your ideas and the client's needs and wants coalesce to create something new. A good niche has five qualities:

• It takes you where you want to go -- in other words, it conforms to your long-term vision.
• Somebody else wants it -- namely, customers.
• It's carefully planned.
• It's one-of-a-kind, the "only game in town."
• It evolves, allowing you to develop different profit centers and still retain the core business, thus ensuring long-term success.

5. Evaluate.
Now it's time to evaluate your proposed product or service against the five criteria in Step 4. Perhaps you'll find that the niche you had in mind requires more business travel than you're ready for. That means it doesn't fulfill one of the above criteria -- it won't take you where you want to go. So scrap it, and move on to the next idea.

6. Test.
Once you have a match between niche and product, test-market it. "Give people an opportunity to buy your product or service -- not just theoretically but actually putting it out there," suggests Falkenstein. This can be done by offering samples, such as a free miniseminar or a sample copy of your newsletter. The test shouldn't cost you a lot of money: "If you spend huge amounts of money on the initial market test, you are probably doing it wrong," she says.

7. Go for it.
It's time to implement your idea. For many entrepreneurs, this is the most difficult stage. But fear not: If you did your homework, entering the market will be a calculated risk, not just a gamble.

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Opinions expressed by Entrepreneur contributors are their own.

Marketing strategies are the result of a meticulous market analysis. A market analysis forces the entrepreneur to become familiar with all aspects of the market so that the target market can be defined and the company can be positioned in order to garner its share of sales. A market analysis also enables the entrepreneur to establish pricing, distribution, and promotional strategies that will allow the company to become profitable within a competitive environment. In addition, it provides an indication of the growth potential within the industry, and this will allow you to develop your own estimates for the future of your business.

Begin your market analysis by defining the market in terms of size, structure, growth prospects, trends, and sales potential.

The total aggregate sales of your competitors will provide you with a fairly accurate estimate of the total potential market. For instance, within the beer brewing industry, the total market potential would be the total sales of malt beverages in the United States, which is $15.2 billion.

Once the size of the market has been determined, the next step is to define the target market. The target market narrows down the total market by concentrating on segmentation factors that will determine the total addressable market -- the total number of users within the sphere of the business's influence. The segmentation factors can be geographic, customer attributes, or product-oriented.

For instance, if the distribution of your product is confined to a specific geographic area, then you would want to further define the target market to reflect the number of users or sales of that product within that geographic segment.

Once the target market has been detailed, it needs to be further defined to determine the total feasible market. This can be done in several ways, but most professional planners will delineate the feasible market by concentrating on product segmentation factors that may produce gaps within the market. In the case of a microbrewery that plans to brew a premium lager beer, the total feasible market could be defined by determining how many drinkers of premium pilsner beers there are in the target market.

It is important to understand that the total feasible market is the portion of the market that can be captured provided every condition within the environment is perfect and there is very little competition. In most industries this is simply not the case. There are other factors that will affect the share of the feasible market a business can reasonably obtain. These factors are usually tied to the structure of the industry, the impact of competition, strategies for market penetration and continued growth, and the amount of capital the business is willing to spend in order to increase its market share.

Projecting Market Share

Arriving at a projection of the market share for a business plan is very much a subjective estimate. It is based on not only an analysis of the market but on highly targeted and competitive distribution, pricing, and promotional strategies. For instance, even though there may be a sizable number of premium pilsner drinkers to form the total feasible market, you need to be able to reach them through your distribution network at a price point that is competitive, and then you have to let them know it's available and where they can buy it. How effectively you can achieve your distribution, pricing, and promotional goals determines the extent to which you will be able to garner market share.

For a business plan, you must be able to estimate market share for the time period the plan will cover. In order to project market share over the time frame of the business plan, you will need to consider two factors:

1. Industry growth which will increase the total number of users. This is determined by growth models as described in the "Market Research" chapter. Most projections utilize a minimum of two growth models by defining different industry sales scenarios. The industry sales scenarios should be based on leading indicators of industry sales which will most likely be industry sales, industry segment sales, demographic data and historical precedence.

2. Conversion of users from the total feasible market. This is based on a sales cycle similar to a product life cycle where you have five distinct stages: early pioneer users, early users, early majority users, late majority users, and late users. Using conversion rates, market growth will continue to increase your market share during the period from early pioneers to early majority users, level off through late majority users, and decline with late users.

Defining the market is but one step in your analysis. With the information you've gained through market research, you need to develop strategies that will allow you to fulfill your objectives.

When discussing market strategy, it is inevitable that positioning will be brought up. A company's positioning strategy is affected by a number of variables that are closely tied to the motivations and requirements of customers within the target market as well as the actions of primary competitors.

The strategy used to position a product is usually a result of an analysis of your customers and competition. Before a product can be positioned, you need to answer several strategic questions such as:

1. How are your competitors positioning themselves?

2. What specific attributes does your product have that your competitors' don't?

3. What customer needs does your product fulfill?

4. Is there anything unique about the place of origin?

Once you've answered your strategic questions based on research of the market, you can then begin to develop your positioning strategy and illustrate that in your business plan. A positioning statement for a business plan doesn't have to be long or elaborate. It should merely point out just how you will want your product perceived by both customers and the competition.

Pricing Your Product

How you price your product is important because it will have a direct effect on the success of your business. Though pricing strategy and computations can be complex, the basic rules of pricing are straightforward:

1. All prices must cover costs.

2. The best and most effective way of lowering your sales prices is to lower costs.

3. Your prices must reflect the dynamics of cost, demand, changes in the market, and response to your competition.

4. Prices must be established to assure sales. Do not price against a competitive operation alone. Rather, price to sell.

5. Product utility, longevity, maintenance, and end use must be judged continually, and target prices adjusted accordingly.

6. Prices must be set to preserve order in the marketplace.

There are many methods of establishing prices available to you:

Cost-plus pricing -- Used mainly by manufacturers, cost-plus pricing assures that all costs, both fixed and variable, are covered and the desired profit percentage is attained.

Demand pricing -- Used by companies that sell their product through a variety of sources at differing prices based on demand.

Competitive pricing -- Used by companies that are entering a market where there is already an established price and it is difficult to differentiate one product from another.

Markup pricing -- Used mainly by retailers, markup pricing is calculated by adding your desired profit to the cost of the product. Each method listed above has its strengths and weaknesses.

Distribution

Distribution includes the entire process of moving the product from the factory to the end user. The type of distribution network you choose will depend upon the industry and the size of the market. A good way to make your decision is to analyze your competitors to determine the channels they are using, then decide whether to use the same type of channel or an alternative that may provide you with a strategic advantage.

Some of the more common distribution channels include:

Direct Sales -- The most effective distribution channel is to sell directly to the end-user.

OEM (Original Equipment Manufacturer) Sales -- When your product is sold to the OEM, it is incorporated into their finished product and it is distributed to the end user.

Manufacturer's Representatives -- One of the best ways to distribute a product, manufacturer's reps, as they are known, are salespeople who operate out of agencies that handle an assortment of complementary products and divide their selling time among them.

Wholesale Distributors -- Using this channel, a manufacturer sells to a wholesaler, who in turn sells it to a retailer or other agent for further distribution through the channel until it reaches the end user.

Brokers -- Third-party distributors who often buy directly from the distributor or wholesaler and sell to retailers or end users.

Retail Distributors -- Distributing a product through this channel is important if the end user of your product is the general consuming public.

Direct Mail -- Selling to the end user using a direct mail campaign.

As we've mentioned already, the distribution strategy you choose for your product will be based on several factors that include the channels being used by your competition, your pricing strategy, and your own internal resources. Distribution will be covered in greater detail in the "Distribution" chapter.

Promotion Plan

With a distribution strategy formed, you must develop a promotion plan. The promotion strategy in its most basic form is the controlled distribution of communication designed to sell your product or service. In order to accomplish this, the promotion strategy encompasses every marketing tool utilized in the communication effort. This includes:

Advertising -- Includes the advertising budget, creative message(s), and at least the first quarter's media schedule.

Packaging -- Provides a description of the packaging strategy. If available, mockups of any labels, trademarks or service marks should be included.

Public relations -- A complete account of the publicity strategy including a list of media that will be approached as well as a schedule of planned events.

Sales promotions -- Establishes the strategies used to support the sales message. This includes a description of collateral marketing material as well as a schedule of planned promotional activities such as special sales, coupons, contests, and premium awards.

Personal sales -- An outline of the sales strategy including pricing procedures, returns and adjustment rules, sales presentation methods, lead generation, customer service policies, salesperson compensation, and salesperson market responsibilities.

Sales Potential

Once the market has been researched and analyzed, conclusions need to be developed that will supply a quantitative outlook concerning the potential of the business. The first financial projection within the business plan must be formed utilizing the information drawn from defining the market, positioning the product, pricing, distribution, and strategies for sales. The sales or revenue model charts the potential for the product, as well as the business, over a set period of time. Most business plans will project revenue for up to three years, although five-year projections are becoming increasingly popular among lenders.

When developing the revenue model for the business plan, the equation used to project sales is fairly simple. It consists of the total number of customers and the average revenue from each customer. In the equation, T represents the total number of people, A represents the average revenue per customer, and S represents the sales projection. The equation for projecting sales is:

T A = S

Using this equation, the annual sales for each year projected within the business plan can be developed. Of course, there are other factors that you'll need to evaluate from the revenue model. Since the revenue model is a table illustrating the source for all income, every segment of the target market that is treated differently must be accounted for. In order to determine any differences, the various strategies utilized in order to sell the product have to be considered. As we've already mentioned, those strategies include distribution, pricing, and promotion.

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