How-To-Guide Series How to Develop Marketing Plan For your Business Commissioned by: Data Management and Research Department 2005
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How-To-Guide Series
How to Develop Marketing Plan For your Business
Commissioned by:
Data Management and Research Department
2005
Published by Dubai Chamber – Data Management & Business Research
Tel. 04 2028410 Fax: 04 2028478
www.dubaichamber.ae
ISBN 9948 – 8547 – 7 - 2
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TABLE OF CONTENTS
Guide to the Reader 5
Chapter 1: Introduction 6
1.1 Why Prepare a Marketing Plan? 6
1.2 Parts of Marketing Plan 7
1.3 Tips on writing marketing plan for beginners 10
1.4 How to avoid ten biggest marketing mistakes that businesses make? 11
Chapter 2: Situation Review 14
2.1 Internal Environment 14
2.2 SWOT Analysis 14
2.3 Macro Environment (PESTLE) 16
2.4 Micro Environment (the five forces) 17
Chapter 3: Market Research 20
3.1 Strategies for Researching the Market 20
3.2 Methods of Market Research 21
3.3 Sources of Market Research: 24
Chapter 4: Market Strategy and Objectives 26
4.1 Product / Service Strategy 26
4.2 Pricing Strategy 27
4.3 Promotion Strategy 28
4.4 Distribution Strategy 29
4.5 Marketing Strategy 31
4.6 Marketing Objectives 31
Chapter 5: Financial Analysis 33
5.1 What is financial analysis and how is it relevant for your marketing plan? 33
5.2 The Break-even Analysis 36
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5.3 Using CVP analysis for decision making 38
5.4 Sensitivity Analysis and Uncertainty 40
5.5 CVP Analysis in Service and Nonprofit Org 41
Chapter 6: Marketing Action Programs 42
6.1 Marketing Communications Activities 42
6.2 Customer Service Activities 46
Chapter 7: Performance Tracking 47
7.1 Budgets and the Budgeting Cycle 47
7.2 Steps in Developing an Operating Mkg Budget 49
7.3 Preparing Cash Budget 52
7.4 Preparing Budgeted Income Statement 56
7.5 Preparing Budgeted Balance Sheet 56
The following format is suggested for preparing the budgeted balance sheet (Coffee table example in thousand AED) 56
7.6 Computer-based Fin. Models for Performance Tracking .............................56
7.7 Performance Analysis and Accountability 56
7.8 Feedback 57
7.9 Measure performance from a fin perspective 58
7.10 Performance Incentives 61
Appendices 62
Appendix 1 62
Sample Marketing Plan of Product 62
Appendix 2 71
Sample Marketing Plan of an Online Company 71
Appendix 3 79
Sample Marketing Plan of Product Company 79
Appendix 4 85
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Sample Marketing Plan of Service Company 85
References & Useful Text Books for Marketing Planning 93
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Guide to the Reader
Marketing is an essential part of business operations. It often times determines how successful your business will be. For this reason preparing a marketing plan is essential for any business. Many businesses, particularly small ones, operate without a marketing plan. A few of the lucky ones might even be successful. But why rely on luck when with some thought and planning you could greatly increase the chances of success? Having a plan is important, but the act of making a plan is also extremely helpful. Making a marketing plan forces you to organize your thoughts, allows you to see new opportunities and probable pitfalls and helps you recognize your own strengths and weaknesses.
It is expected that this guide on “How to develop a marketing plan” will be equally beneficial to young entrepreneurs as well as an existing business wanting to improve the marketing plan to achieve efficiency and effectiveness in business operations.
Chapter 1 is an introduction to developing marketing plan. Chapter 2 discusses the situation “as is” in reference to current marketing objectives of the organization. Chapters 4 – 7 deals with major parts of the marketing plan which are supported by the information obtained through market research in Chapter 3.
The Appendices includes four sample-marketing plans. There is a growing interest among young entrepreneurs in Dubai about starting businesses online. For this reason, a sample-marketing plan of an online business has also been included. It demonstrates how to integrate the offline and online marketing strategies. Please note that overseas marketing plans have been included due to the lack of availability of live marketing plans locally. In each section of this guide, some advice has been provided. Additional references for developing marketing plan have been provided for readers that are more interested.
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Chapter 1: Introduction
The Marketing Plan is a detailed, heavily researched and, hopefully, well written report that many inside and possibly outside the organization will evaluate. It is an essential document for both large corporate marketing departments and for startup companies. Essentially the Marketing Plan:
- Forces the marketing personnel to look internally in order to fully understand the results of past marketing decisions.
- Forces the marketing personnel to look externally in order to fully understand the market in which they operate.
- Sets future goals and provides direction for future marketing efforts that everyone within the organization should understand and support, and
- key component in obtaining funding to pursue new initiatives.
The Marketing Plan is generally undertaken for one of the following reasons: - Needed as part of the yearly planning process within the marketing
functional area. - Needed for a specialized strategy to introduce something new, such as
new product planning, entering new markets, or trying a new strategy to fix an existing problem. This guide is aimed at individual products and product lines; however, it
can be adapted fairly easily for use in planning one or more strategic business units (SBU). 1.1 Why Prepare a Marketing Plan?
The Marketing Plan is the means of planning ahead. It establishes the
key guidelines for directing your company’s resources to achieve profitable sales and consumer satisfaction. It also becomes the principal means through which you as the owner delegate responsibility to the marketing management for the achievement of annual objectives. It is a part of overall corporate strategic business plan. It expresses your company’s hopes and desires for succeeding in the market place. It becomes a working document containing the operational tools, procedures and the overall business control mechanisms.
The purpose of the marketing plan is to define your market, i.e., identify
your customers and competitors, to outline strategies for attracting and keeping customers, and to identify and anticipate change, and why are customers so important? Ultimately the customers are the means by which you will generate the income needed for daily operations, to repay debt and to earn a profit. In essence, the customers are your lifelines and the marketing plan is the pipeline that allows you access to them -- i.e., to fulfill their needs and expectations. Your business will not succeed simply because you want it to succeed. It takes careful planning and a thorough understanding of the marketplace to develop strategies to ensure success.
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The marketing plan is essential to any successful business. It is the heart of the business, the basis from which all other operational and management plans are derived. Marketing plan offers you a wealth of information that if applied correctly can ensure your success. Attempting to market products without first creating a marketing plan is like trying to build a house without a blueprint.
An effective marketing plan certainly boosts your sales and increases your profit margins, which are the goals of every business owner. It is a milepost down the road to success and, as such, care and time should be put into its development. You must be able to convince customers that you have the best product or service for them at the best affordable price. If you cannot convince potential customers of this, then you are wasting your time and money. This is where the marketing plan comes into play, and this is why it is so important. A Marketing Plan typically should answer the following questions:
- Who are your target buyers? - What sources of uniqueness or positioning in the market do your
products have? - Where will you implement your marketing spending plans? - When will marketing spending plans occur? - How much sales, spending, and profits will you achieve?
1.2 Parts of Marketing Plan
A marketing plan details key issues and specific plans for
implementation and control. Hence it is helpful to follow a standard format (with the stated ceiling on the length (single-line on A-4 page) of each part as follows: Executive Summary
This should capture the key points of the plan, with a stress on
recommendations. Although it appears first, it is written last. (Length of this section should be a maximum of 2 pages.) Part. 1: Purpose and Mission
Part 1 of the plan is designed to provide the reader with the necessary
information to fully understand the purpose of the marketing plan. This part also includes organizational background information, which may be particularly important if the audience for the plan is not familiar with the company, such as potential financiers. Some of the information, in particular the mission statement, may require the input of upper-management. The information in this part will prove useful later in the plan as a point of reference for material that will be introduced (e.g., may help explain pricing decisions). In cases in which there are separately operated divisions or SBU, there may also be mission statements for each. Part 1 typically contains the following sections:
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1.2.1 Purpose of the Marketing Plan
- Offer brief explanation for why this plan was produced e.g., introduce new product, enter new markets, continue growth of existing product, yearly review and planning document, etc.
- Suggest what may be done with the information contained in the plan e.g., set targets to be achieved in the next year, etc.
1.2. 2. Mission Statement
For larger firms this may already exist in a public way (e.g., found in annual report, found on corporate website) but for many others like you this may need to be formulated. The mission statement consists of a short, finely honed paragraph that identifies a stable (i.e., not dramatically changing every year), long-run vision of the organization that can answer such questions as:
- Why is the company in business? - What markets do you serve and why do you serve these markets? - In general terms, what are the main benefits you offer your customers?
e.g., a low price software provider may state that, it offers “practical and highly affordable business solutions”
- What does your company be known for? - What is your company out to prove to the industry,
customers, partners, employees, etc.? - What is your general philosophy for doing business? - What products/services does your company offer?
In developing the vision presented in the mission statement consider:
- Your Company History - How your company started and major events of the company, products,
market served, etc. - Resources and Competencies
(Length of Part.1 should be a maximum of 2 pages.) Part. 2: Current Marketing Situation
This is a highly descriptive phase, which should help the reader to
understand the environment for the business. Key players, major market characteristics and the current marketing strategy for the firm should all be here. It examines the broad environment. It describes the market trends and discusses the consumer behavior, particularly segments. Specifically this part should consider what the company currently possesses by answering the following:
- What are you good at? - What is special about your products compared to current and future
competitors? - What do you do that gives you a competitive advantage?
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(Length of this section should be a maximum of 5 pages.) Part. 3: SWOT Analysis
Strengths and weaknesses (internal issues) reflect issues unique to the firm; strengths are areas one can build on while weaknesses should be overcome. Opportunities and Threats describe external issues, which affect the industry as a whole. Opportunities are typically emerging segments and should be identified and exploited. Specifically this should address the following issues:
- People, products, financial position, technical and research capabilities,
partnership/supply chain relations, others - Environment - Consider the conditions in which company operates including: physical
(e.g., facilities), equipment, political regulatory, competitive, economic, technological, and others.
(Length of this section should be a maximum of 5 pages.) Part. 4: Issue Analysis
This section sets the stage for the rest of the marketing plan. It shows which markets segments one believe most closely match the firm’s strengths and weaknesses. The most important opportunities and threats are prioritized at this stage. It also states which opportunities / segments are not pursued and why. (Length of this section should be a maximum of 3 pages.)
Part. 5: Marketing Objectives
This section sets marketing objectives. All objectives should be SMART: specific, measurable, achievable, realistic and time-based. They should also be linked to the issue analysis. For example one of the objectives might be “Achieve sales of Dh. 500,000 by the end of the year.” (Length of this section should be a maximum of 2 pages.)
Part. 6: Marketing Strategy
The broad plan to achieve the marketing objectives is detailed in this section. It identifies the target market(s). The positioning strategy as well as a very brief sketch of the marketing mix (4P’s) is stated. Alternate strategies are also discussed. This section flows clearly from the analysis and objectives. (Length of this section should be a maximum of 3 pages.)
Part. 7: Financial Analysis
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In this section costs, expected sales and revenues are given. Also, monthly cash flow for next one to two years as well as profits and return on investment (ROI) estimates is provided. (Length of this section should be a maximum of 6 pages.) Part. 8: Marketing Action Plans (Tactics)
This section deals with the very practical issues of implementing the strategies. For example “New product launches will, occur in January and September.” This section must be kept around the strategies. This is where one demonstrates whether the plans are achievable. (Length of this section should be a maximum of 2 pages.) Part. 9: Evaluation Procedures (Controls)
This section closes the loop of the marketing plan’s objectives, since it looks at how the firm is doing in terms of achieving those objectives. It details the management control and reporting system, with the appropriate metrics, that will ensure sound management of the plan so that the chance of success is maximized. (Length of this section should be a maximum of 3 pages.)
Total length of a marketing plan should be a maximum of 30-35 pages excluding tables, graphs and related references.
Remaining chapters will guide you on preparing each of these parts of
the marketing plan. 1.3 Tips on writing marketing plan for beginners
Following tips would help you in developing an effective marketing plan:
- Concentrate your efforts on finding customers who provide you with ongoing or repeat business.
- Create a customer profile based on interviews as a way to understand existing clients. When you know why a customer comes back, you will be able to identify more of the same.
- Stay focused on your target markets.
- Don’t scatter your efforts. This is especially important for directing a
particular marketing strategy to a specific group.
- Be persistent. Marketing projects are the sorts of things that often need to be repeated over and over before permanent change is achieved.
- Be prepared to revise your plan as you learn what works and what doesn’t.
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- Don’t be afraid of failure. When a strategy fails, view it as part of
learning experience and improve your marketing plan.
1.4 How to avoid ten biggest marketing mistakes that businesses make?
The following discussion should help you to be cautious of the pitfalls
in not following systematic marketing plan in your business:
Mistake #1: Not Developing a Marketing Plan
A marketing plan is a critical part of every successful business. It helps you design your product and service to fill a market niche, identify your target audience, and then see what you need to do to get your target audience to buy your product or service. Also, when creating a marketing plan, you design the objectives and tactics to further develop your marketing efforts in the future.
Mistake #2: Not Planning a Marketing Budget
You need to spend money to publicize, market, and advertise your business to make it successful. As a general rule of thumb, you may spend at least ten percent of your revenue on marketing efforts. Essentially, these costs keep your company going and your products selling. No matter what size is your company; you need to have a marketing budget.
Mistake #3: Not Targeting a Specific Target Audience
You need to understand that your market doesn't include everyone. No matter what product you have, not everyone is going to buy it. So decide your target audience and use appropriate media outlets to reach that audience. For example, if you have a diet product, you may target women aged 25 to 54, who are 10 pounds or more overweight. Then you need to advertise in women's magazines or during women-oriented television and radio programs. Trying to appeal to everyone doesn't work.
Mistake #4: Not Developing a Clear and Consistent Marketing Message
All your marketing materials, advertisements, and promotions need to convey a consistent look and message. You want your target audience to know what you do or sell no matter where they see your name; you want to be recognizable. This helps you achieve more from your marketing budget because the message is reinforced throughout all the media you advertise in.
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Mistake #5: Believing Your Product will Sell Itself
Many companies make the mistake of thinking that their product is so great and so different that they don't need to market it at all. However, no one will know how great your product is, or whether it even exists, if you don't tell them. Word of mouth and referrals can only take you a little distance. No matter how great your product, you need to advertise and market to get it sold.
Mistake #6: Not Clearly Defining the Product Benefits
The highly competitive marketplace is constantly changing and offering consumers more and more choices. For example, if you need laundry detergent, you have a whole aisle of different brands to choose from. So how do you base your decision? Something has to get your customer attention to make them choose one brand over another. And you need to create this differentiation in your product as well.
Defining the unique selling proposition for your product will help your target audience differentiate it from your competitors. Then work this uniqueness into your marketing plan and strategy to reach the specific audience who will buy your product.
Mistake #7: Not Diversifying Your Media Mix
Media today is very fragmented, so you need to reach your audience through more than one outlet. In the past, you could advertise on the three big television networks and reach 80 percent of the population. But now viewers have hundreds of different networks and channels to choose from just on television, including satellite or cable television, print, radio, satellite radio, and the Internet media.
Mistake #8: Not Understanding the Lifetime Value of a Customer
If you can earn a customer and keep him or her for life, then the value of that customer multiplies. For example, imagine you own a supermarket. If you have a customer who spends AED 10,000 a year shopping in your store, then over the lifetime of the relationship (assuming he stays in the neighborhood for ten years) that customer will have given you AED 100,000. So what is it worth to earn that customer's business? Assuming your margin is 10%, even if you spend 10 percent of the margin, to get the customer's business, you'll earn a 10 to one return on your investment, which is great.
Mistake #9: Not Having a Back End Revenue Program
A back end revenue program creates additional streams of income for your business. For example, if you sell someone a cosmetic product on television, back end revenue would be to sign them up for a continuity program where you send them more of the product on a regular
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schedule and charge their credit card automatically. This type of program allows you to bring in additional revenue and maintain your customer relationships.
Mistake #10: Not Up-Selling the Customer
Up-selling means taking advantage of the sales opportunity and incremental revenue by adding additional or related products to a customer's purchase. For example, adding French fries to an order at a fast food restaurant or adding additional features, such as a sunroof on a car sale, are up-sells.
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Chapter 2: Situation Review 2.1 Internal Environment
Here, you as the marketer assess the situation, which faces your
organization. The first half of the situation review (or audit) will encompass the internal situation of your organization and its performance. The second half involves analyzing the external situation facing your organization. The most frequently used framework for combining the internal and external audit assessment and analysis procedures is the development of SWOT analysis. 2.2 SWOT Analysis
The internal and external audit allows the marketer to produce a
systematic SWOT analysis. Widely known and used in marketing planning, these initial letters stand for: Strengths, Weaknesses, Opportunities, and Threats.
The strengths and weaknesses part of the SWOT analysis come from the
internal half of the marketing audit. In conducting the internal marketing audit, the objective is to assess company resources, activities and skills with regard to establishing the extent to which the company is strong or weak in these resources viz., financial, managerial, marketing, production and research and development.
Figure 2.1 is a typical SWOT analysis for an organization. Try and
develop one for your own organization, taking into consideration the peculiar challenges of the environment in Dubai in the 21st century. Completing the strengths and weaknesses part of the SWOT analysis helps to point out what is possible in terms of marketing objectives and strategies. For example, it would be pointless to pursue a marketing strategy in which innovative products feature strongly while your company is not strong in R&D.
The opportunities and threats half of the SWOT analysis is derived from the analysis of the marketing environment including the PESTLE factors which we shall be looking at next. It is relatively easy to find examples of how the marketing environment might give rise to opportunities and threats. For example: A decline in disposable income may threaten the demand for, say, luxury products. A change in government policy may give rise to opportunities for more environmentally friendly products. A decline in the birth rate may threaten the baby food manufacturer. Developments in information technology may provide opportunities for direct marketing.
Having identified the company's weaknesses and threats, one of the
main aims of SWOT analysis is, to look at ways in which the weaknesses can be converted into strengths; and similarly to convert
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Figure 2.1 SWOT Analysis
the threats into opportunities. Decision makers like you can then decide the best ways through which these conversion processes can be achieved. For example, when your organization is weak in respect of a skilled workforce then, it is essential that training be identified as a key objective of the internal marketing strategy, which is to be supported by financial investment and resource. Look at your own SWOT analysis for your business in Dubai and decide how you could turn all of your weaknesses into strengths and how you could make your threats become opportunities. This is a difficult task, but once done properly will form a solid foundation for your marketing plan. When undertaking a SWOT analysis, you should also be aware of the differences between controllable and uncontrollable factors. Essentially the controllable factors are those relating to internal issues. By and large your organization does have control on ‘micro’ issues relating to technology, skills, investment, resources, innovations, morale, motivation, etc.
External factors, however, are often uncontrollable, and while you
might be able to influence their outcomes you will not be able to control them. When establishing future opportunities and to improve upon weaknesses, you will be required to work on the controllable variables, i.e. those factors which you can change. It is, however, essential to realize that an organization cannot aim to address all controllable issues within the SWOT analysis. The SWOT analysis should be used to prioritize the critical issues that have been identified during the auditing process. Essentially it acts as a summary of the audit and not a replacement for it. Thus, SWOT analysis aims to identify highly critical
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areas, in order to focus attention on them during strategy development. We will now examine the uncontrollable factors for your business in Dubai, while discussing the macro and micro-environments. 2.3 Macro Environment (PESTLE)
A PESTLE (Political/Policy, Economic, Social/Societal, Technological,
Legal and Environmental) analysis is a logical framework for identifying and assessing the various influences on the present and future development of your organization. It is usually an aid to match the internal strengths and weaknesses of the organization (from SWOT analysis) with the opportunities and threats (constraints) in the external environment for strategy development.
2.3.1 Political Factors
This can include changes in government and the ramifications of policies such as indirect tax levels, education and training issues, employment and visa legislation. Also think of the relationships between Dubai emirate and neighboring and farther countries. List the factors that are favorable and unfavorable for your marketing efforts. 2.3.2 Economic Factors
These are most important and can include the impact of the trade cycle, change in foreign exchange rates, rising/lowering interest rates, GNP growth, changes in the leading indicators, levels of disposable income, unemployment and inflation. Typical questions to ask are: What are the effects of competitors, both in Dubai and abroad (their products, services, technologies) on your operation? What major developments in income, prices, savings, taxation and credit will affect the organization? List the factors that are favorable and non favorable for your marketing efforts.
2.3.3 Social / Cultural Issues
Some of the factors such as: evolution of individual values, evolution of family structure, ageing consumer, changing cultural values, attitudes and beliefs, and the large amount of expatriate residents here in Dubai may be favorable and some may be unfavorable. Consider them carefully in your marketing plan. Typical questions to ask are: What population trends are expected to affect existing and planned strategy? What social and psychological patterns (attitudes, lifestyle) are expected to affect buyer behavior patterns? How are environmental trends monitored? How are present and pending legal developments affecting your operation in Dubai? Also consider demographic changes such as population increases, changes in age, changes in income, changes in family formation and growth changes in homogeneity of people as other demographic factors that could affect customer profile for your products.
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2.3.4 Technological Factors
These can include the increased rate of computer capability, production methods and communications technology. Think about recent developments in Dubai Media city, Dubai Internet city, business and IT parks in Dubai relative to technology and the production facilities in the region. Ask questions on to how these developments impact your business.
2.3.5 Legal Issues
These are especially important in Dubai and can include government regulation, government deregulation, consumer protection legislation, environmental regulation and international issues besides changes in advertising legislation for tobacco, legislation on culturally prohibited products, and codes of practice for market promotions.
2.3.6 Environmental Issues
These include attitudes towards pollution, energy use, fair trade, slave labor and re-cycling. Ask questions such as: What incentives do Dubai Government and Dubai Municipality offer to your organization with a strong policy on environmental issues?
The foregoing PESTLE analysis is sometimes called a PEST study for simplicity. Figure 2.2 is a diagram of the PEST framework with some of the typical factors. Create one for your own macro environment in Dubai and the larger global trading arena. 2.4 Micro Environment (the five forces)
Once your organization has undertaken an analysis of the macro
environment you can move on to analyze the microenvironment. A key component of this is the industry within which your company is operating in Dubai. It is important that your marketing managers have a good understanding of the industry dynamics and the relationships that exist in Dubai. A useful framework for undertaking this type of analysis is five forces model of Michael Porter, which enables companies to gain greater insight into the level of competition and where the balance of power lies within a particular industry. The five forces are briefly described below:
2.4.1 Buyers’ power
Buyer power relates to the bargaining power of your customers. If your customers have relatively more power than you,
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Figure 2.2 The PEST Framework (Johnson and Scholes, 1999)
they can put pressure on you to reduce prices. Buyer power will be greater in situations where a few buyers hold a large proportion the market. Think about markets here in Dubai where one or a few large buyers tend to dominate in your business. How will this affect your business?
2.4.2 Suppliers’ power This is concerned with the bargaining power of suppliers like you.
Supplier power will be stronger when there are few suppliers that sell to a range of customers in diverse markets. For example, software trading is concentrated in the hands of a few powerful companies in Dubai. So think about what other software trades you can do in Dubai, and how this will affect your business?
2.4.3 Substitutes
Substitutes are concerned with the products that compete indirectly with an organization’s product offering. The intensity with which substitute products compete is generally less intense than for direct competitors. For example, the increased use of e-mail could threaten traditional mailing systems. How important is e-commerce to your business in Dubai? How could the effective use of the Internet make your business more effective and efficient?
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2.4.4 Potential Entrants
The extent to which new players may enter your market is determined by the number of barriers to entry that may exist in an industry. These may include level of capital investment required to enter the market, economies of scale, ability to access distribution channels, brand strength and other factors such as patent protection or government policy. The Internet has had a major impact on barriers to entry and new competitors that have used the Internet to break down the barriers to entry have attracted many traditional competitors. For example, new retailers have become established that do not have to rely on traditional distribution channels such as those selling books, CDs and toys.
2.4.5 Competitive Rivalry
This relates to the intensity of competition that exists within your industry. This will be determined by factors such as number and size of competitors, level of exit barriers, ability to differentiate, industry life cycle and presence of high fixed costs. It is therefore most important to be aware what your competition is doing and what it plans to do in the near future.
Consider how these five forces can affect your organization trading in Dubai and how can you use these forces to your advantage? The industry analysis provides a broad understanding of the microenvironment in which your organization is operating; however, it is necessary to undertake a more detailed analysis of competitors within that industry. In order to gain a sustainable competitive advantage, it is essential that you know your competitors and develop effective competitor information systems to monitor their activity.
For both the ‘macro’ and ‘micro’ environment, analysis is essential, as is monitoring and reacting to changes. It is important that your organization is not just reactive, but that it is proactive, managing the components in the ‘micro’ environment, to provide the basic infrastructure for an organization to meet the demands of your customers and the marketing environment. Once you have completed a thorough and comprehensive situation review of your organization, its marketing operation and its operating environment, you are now ready to start developing the next stage of the marketing plan i.e. customer research.
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Chapter 3: Market Research 3.1 Strategies for Researching the Market
Researching your market is perhaps the easiest way to assess your marketing environment. Market research can be simple and easy by surveying a cross-section of your customers to get their opinions about the product you will be offering, or conducting a telephone or mail survey. The disadvantages of using the telephone or mail survey method are that the individuals you contact may not be interested in responding to a survey. Other market research techniques include analyzing demographic data, such as population growth/decline rate; age range, sex, income/educational level; brainstorming with family and friends, and focus group interviews. Whatever method you use, your focus should be on gathering following information:
1. Who are your customers and potential customers? 2. What kind of people are they? 3. Where do they live? 4. Is there demand for your product? 5. What are their expectations? 6. Can and will they buy the product you're offering? 7. Are you offering the kinds of goods they want -- at the best
place, the best time, the best price, and best quantities? 8. Are your prices consistent with what the buyers view as the
products' values? 9. Are you applying the promotional programs in a way that will
bring about success? 10. Who are your competitors and how well are they doing?
Benefits of market research are:
1. Learning who your customers are and what they want. 2. Learning how to reach your customers and how frequently you
should try to communicate with them. 3. Learning which sales and promotion appeals are most effective
and which ones aren't. 4. Learning the relative successes of different marketing strategies
in relation to their return on investment.
Some disadvantages to market research are: 1. It is costly, 2. Time-consuming process, 3. Builds in biases that distort information, 4. Ignores answers or lets arrogance or hostility cut off
communications at some point in the marketing process. The advantages, however, outweigh the disadvantages. While market
research may appear to be a tedious, it is necessary if you want to be successful. Don't forego this process or stop halfway because you are not getting the desired results. This may be an indication that you are going in the wrong direction in your business or that there isn't a market for your product. Don't be
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discouraged of there are facts unfavorable to you from the market research. You simply may need to modify your original marketing plan. Think of market research as a method of finding out what catches customers' attention by observing their actions and drawing conclusions from what you see. It is an organized way of finding objective answers to your questions in order to succeed. Market research focuses and organizes marketing information, ensuring that it is timely and that it provides what you need to:
1. Reduce business risks, 2. Spot problems and potential problems in your current market, 3. Identify and profit from sales opportunities, and 4. Get basic facts about your markets to help you make better
decisions and set up plans of action. Thus, market research is an invaluable tool that can minimize your risk, save you time, effort, and money over a period of time.
3.2 Methods of Market Research
Market research can occur at almost any point in a product’s life cycle.
Typically, however, it’s used in developing new or altered products. Following are the five steps in performing market research for your marketing plan:
3.2.1 Study the current situation: It attempts to answer what the
customers’ needs are and what is being done to meet the demand.
3.2.2 Select a research method: In choosing from a wide range of methods, marketers must consider the effectiveness and costs of following different options:
3.2.2.1 Desk research: It is advisable to start with desk research. It can
help in researching market surveys, trade statistics, country overviews, and consumer surveys.
3.2.2.2 Desk research by using the Internet: The Internet contains a lot of
information such as data on markets, industries, companies and products. It is increasingly being used to conduct desk research because most of the information is freely available.
3.2.2.3 Field research: Field research can be used to gather any missing
information. For preparation of a marketing plan, the focus has to be on consumer or buyer motives.
3.2.3 Collect Data: There are two types of research data: secondary and
primary. Secondary data are already available from previous research. For example, trade statistics obtained using the Internet from DCCI (Dubai Chamber of Commerce and Industry) website. Secondary data can save time, effort, and money. When secondary data are unavailable or inadequate, Primary Data is collected, which yields information from newly performed research.
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In the context of your marketing plan, the Collection of data should specifically cover the following issues:
- Current Product Analysis (May be able to skip this section if plan is for
a new product and no related products exist.)
- Describe the company’s current product(s) offerings in terms of: o Product Attributes: Describe the main product features, major
benefits received by those using the product, current branding strategies, etc.
o Pricing: Describe pricing used at all distribution levels such as
pricing to final users and to distributors, incentives offered, discounts, etc.
o Distribution: Describe how the product is made accessible to
final users including channels used, major benefits received by distributors, how product is shipped, process for handling orders, etc.
o Promotion. Describe promotional programs and strategies in
terms of advertising, sales promotion, personal selling and public relations, how product is currently positioned in the market, etc.
o Services Offered. Describe support services provided to final
users and distributors before, during and after the sale
- Describe the Current Target Market(s) o Examine in detail the company’s current target market(s).
Obviously this section takes a great deal of customer-focused research.
o Describe the target market approach: What general strategy is
used to reach targeted customers? General approaches include: Mass market – aim to sell to a large broad market. Segmentation approach – aim to selectively target one
(niche) or more markets.
- Describe demographic/psychographic profile of the market: Profile criteria may include:
o Gender, income, age, occupation, education, family life cycle, geographic region, lifestyle, attitudes, purchasing characteristics, etc.
- Describe the following characteristics of targeted customers:
o Needs/benefits sought by market and product usage
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- Consider answers to these questions related to customers using the product such as:
o Who is using the product? o Why do they use the product? o When do they use the product? o How is the product used?
- Describe Product positioning:
o Evaluate how customers perceive the product in relation to competitor’s products or to other solutions they use to solve their problems
o What is the target market’s attitudes and perceptions to the company’s product?
o What is the target market’s attitudes and perceptions to the general product category? i.e., Examine the general attitudes and perception to how products from all companies serve the target market’s needs.
- Describe the purchasing process:
o How does the target market make their purchase? o What does the decision-making process involve? o What sources of information are sought? o What is the timeline for a purchase (e.g., impulse vs. extended
decision-making)? o Who makes the purchase? o Does users purchase or is other party responsible (e.g., parent
purchasing for children)? o Who or what may influence the purchase?
- Provide market size estimates: (Keep in mind these are estimates for the
market not for a specific product) o Provide size estimates for the potential market o What is the largest possible market if all buy? o Provide estimates of size for the current target market o What percent of the potential market is actually purchased by
buyers? o Provide estimates of future growth rates at least through the
timeframe for the plan (e.g., 1 year) but most likely longer (e.g., 3-5 year projections)
- Describe Current Distributor Network (if appropriate)
o Evaluate how the company’s product(s) is distributed. Clearly marketing plans for a service company may not have much detail here but this section will most likely have some relevance even for service firms (e.g., package delivery services, online legal service, etc,).
o Describe the channels/supply chain employed to sell and deliver the product: Options may include:
Direct to customer Indirect via a distributor
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Combination of both
o What are the needs/benefits sought by distributors? o Describe the product’s role within the distributor network: o How is this product used within the distributor’s business? o How important is product within the distributor’s strategy? o How is product positioned? e.g., how does distributor view
product in relation to competition o Describe Distributors’ Purchase process:
How does distributor network make their purchase? Who or what influence distributor’s purchases?
o Describe Distributors’ Demographics: Who makes up the distributor network?
Types Size Geographic region markets served
3.2.4 Analyze the data: Data are of no use until organized into
information.
3.2.5 Prepare a report: This report should sum up the study’s methodology and findings. It should also identify alternative solutions and, where appropriate, make recommendations on a course of action.
3.3 Sources of Market Research:
There are many sources of information for marketing research. This
information ranges from simple trade statistics to in-depth market surveys. Some of the useful links to Dubai, UAE and Regional Websites are provided below:
http://www.gitex.com/ Annual IT&T trade exhibition
site http://www.banksindubai.com/ Guide to banking in Dubai http://www.uae.org.ae/business/contents.htm
UAE business guide
http://www.eebizguides.com/
Guide to Doing Business in the UAE
http://www.theemiratesnetwork.com/uae/ Business guide in UAE http://uae4business.net/forums/index.php?c=2 Trade guide and index http://www.traderscity.com/abcg/abcg-ord.htm
Arabian business and cultural guide ultural guide
http://www.middleeastdirectory.com
Guide to Middle-East business websites
www.dafza.gov.ae Dubai airport free zone www.ddia.ae Dubai Development &
Investment Authority http://www.dubaitourism.co.ae Department of Tourism &
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Commerce http://www.dcci.gov.ae
Dubai Chamber of Commerce & Industry (DCCI)
http://www.duc.ac.ae Dubai University College, the educational arm of DCCI
http ://www.dubai.ae e-government site http://www.dm.gov.ae Dubai Municipality http://www.dpa.co.ae/ Dubai Ports Authority http://www.DubaiTouristGuide.com A comprehensive tourist guide
of Hotels in Dubai http://www.knowthis.com Free tutorials for preparing
marketing Plan http://www.excelco.com Budgeting software for
monitoring performance
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Chapter 4: Market Strategy and Objectives
This section of the marketing plan will include your specific objectives for your business. Often, these objectives concern achieving a desired sales or profit level. Other potential objectives include obtaining a certain amount of market share, increasing retention of customers, maintaining a certain amount of cash flow, expanding into new markets, etc. Each of your marketing objectives should include both a narrative description of what you intend to accomplish along with numbers to give you something concrete to aim for. Whatever your objectives, they will be more useful to the extent that they are specific, measurable and include a specific time period. Note that with this section of the plan, your focus changes from an analysis of the current and expected future situation to recommendations for action. Here are some typical marketing objective categories:
- Introduce new products - Extend or regain market for existing product - Enter new territories for the company - Boost sales in a particular product, market or price range. Where will
this business come from? Be specific. - Cross-sell (or bundle) one product with another - Enter into long-term contracts with desirable clients - Raise prices without cutting into sales figures - Refine a product - Enhance manufacturing/product delivery
This section of your plan should include perhaps half a dozen such
objectives, spelled out with specific goals. Following are some examples:
- Objective: Introduce your accounting and audit services in Dubai. By the end of the first year, you want to have six clients of significance and billed time of AED 75,000.
- Objective: Reverse the decline in your package of Emirates winter tour sales in Dubai and Oman, which has declined by 11 percent in the last three years. You may intend to increase sales 5 percent this year and 10 percent next year.
- Objective: You may like to introduce lunch fax business at the west side restaurant and deliver 420 lunches per week by June 1.
- Objective: You may like to demonstrate updated X-ray crystallography at selected trade exhibitions in the summer of 2005, capture 250 leads per show and secure 75 on-site demos.
4.1 Product / Service Strategy
In this part of the marketing plan focus should be on the uniqueness of your product or service, and how the customer will benefit from using the products or services you're offering. Write a paragraph on the following questions and summarize them for your marketing plan:
a. What are the features of your product or service?
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Describe the physical attributes of your product or service, and any other relevant features, such as what it does, or how your product or service differs from competitive products or services.
b. How will your product or service benefit the customer?
Remember that benefits can be intangible as well as tangible; for instance, if you're selling a cleaning product, your customers will benefit by having a cleaner house, but they may also benefit by enjoying better health. Discuss as many benefits as possible to begin with, and then choose to emphasize the benefits that your targeted customers will most appreciate in your marketing plan.
c. What is it that sets your product or service apart from all the
rest?
What is your Unique Selling Proposition (USP), the message you want your customers to receive about your product or service that is the heart of your marketing plan? The marketing plan is all about communicating this central message to your customers.
4.2 Pricing Strategy
The pricing strategy portion of the marketing plan involves determining how you will price your product or service; the price you charge has to be competitive but still allow you to make a reasonable profit. The keyword here is "reasonable"; you can charge any price you want to, but for every product or service there's a limit to how much the consumer is willing to pay. Your pricing strategy needs to take this consumer threshold into account.
The most important question is, "How do you know what price to
charge?" Basically you set your pricing through a process of calculating your costs, estimating the benefits to consumers, and comparing your products, services, and prices to others that are similar. Set the price by examining how much it cost you to produce the product or service and adding a fair price (your share of profit) for the benefits that the customer will enjoy.
The pricing strategy you outline in your marketing plan will answer the
following specific questions:
- What is the cost of your product or service? Make sure you include all your fixed and variable costs. The cost of labor and materials are obvious, but you may also need to include freight costs, administrative costs, and/or selling costs.
- How does the pricing of your product or service compare to the market
price of similar products or services? Explain how the pricing of your
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product or service is competitive. For instance, if the price you plan to charge is lower, why are you able to do this? If it's higher, why would your customer be willing to pay more? This is where the "strategy" part of the pricing strategy comes into play; will your business be more competitive if you charge more, less, or the same as your competitors and why?
- What kind of ROI (Return on Investment) are you expecting with this
pricing strategy, and within what time frame? Tools to answer these questions are provided in detail in the financial section (Chapters 5 and 7) of this guide. 4.3 Promotion Strategy
Essentially the Advertising and Promotion section of the marketing plan describes how you are going to deliver your USP to your prospective customers. While there is literally thousands of different promotion avenues available to you, the focus should be on, what distinguishes a successful Advertising and Promotion Plan from an unsuccessful one and what your USP provides to your company? So think first of the message that you want to send to your targeted audience, then look at the following promotion possibilities and decide which to emphasize in your marketing plan:
Advertising: The best approach to advertising is to think of it in terms of media. Which media will be most effective in reaching your target market? Then you can make decisions about what percentage of your annual advertising budget you are going to spend on each of the following media:
- The Internet - Television - Radio - Newspapers - Magazines - Telephone books/directories - Business directories - Billboards - Bench/bus/ ads - Direct mail - Cooperative advertising with wholesalers, retailers or other businesses?
Include not only the cost of the advertising but your projections about how much business the advertising will bring in. Sales Promotion: If it's appropriate to your business you may want to incorporate sales promotion activities into the advertising and promotion plan, such as:
- Offering free samples - Coupons - Point of purchase displays
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- Product demonstrations Marketing Materials: Every business will include some of these in their promotion plans. The most common marketing material is your business card, brochures, pamphlets and service sheets. Publicity: This is another avenue of promotion that your business should use. Describe how you plan to generate publicity. While press releases spring to mind, that's only one way to get to the people spreading the word about your business. Consider:
- Product launches - Special events, including community involvement - Writing articles in news papers and business magazines - Getting and using testimonials from existing customers
Your Business' Web Site: If your business has or will have a Web site, describe how your Web site fits into your advertising and promotion plan. In today’s technological development, business promotion has no international boundaries and hence your website promotion is extremely important. Tradeshows - Tradeshows can be incredibly effective promotion and sales opportunities – provided you pick the right ones and go equipped to put your promotion plan into action. Other Promotion Activities: Your promotion activities are truly limited only by your imagination. If you plan to teach a course, sponsor a community event, or conduct an email campaign, you'll want to include it in your advertising and promotion plan. Remember, sporadic unconnected attempts to promote your product or service are bound to fail; your goal is to plan and carry out a sequence of focused promotion activities that will communicate with your potential customers.
While small businesses often have miniscule (or non-existent) promotion budgets, that doesn't mean that small businesses can't design and implement effective promotion plans. No business is too small to have a marketing promotion plan. After all, no business is too small for customers or clients. And if you have these, you need to communicate with them about your products and/or services.
4.4 Distribution Strategy
Remember, the primary goal of the marketing plan is to get people to buy your products or services. The Sales and Distribution part of the marketing plan details how this is going to happen. Traditionally there are three parts to the Sales and Distribution section of the marketing plan, although all three parts may not apply to your business. They are: 4.4.1 Outline the distribution methods to be used by covering the following issues:
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- How is your product or service going to get to the customer? For instance, will you distribute your product or service through a Web site, through the mail, through sales representatives, or through retail?
- What distribution channel is going to be used? In a direct distribution channel, the product or service goes directly from the manufacturer to the consumer.
- What are the costs associated with distribution? - What are the delivery terms? - How will the distribution methods affect production time frames or
delivery? (How long will it take to get your product or service to your customer?)
- If your business involves selling a product, you should also include information about inventory levels and packaging in this part of your marketing plan. For instance:
1. How are your products to be packaged for shipping and for display?
2. Does the packaging meet all regulatory requirements (such as labeling)?
3. Is the packaging appropriately coded, priced, and complementary to the product?
- What minimum inventory levels must be maintained to ensure that there is no loss of sales due to problems such as late shipments and back orders?
4.4.2 Outline the transaction process between your business and your customers by covering the following issues:
- What system you will use for processing orders, shipping, and billing? - What methods of payment your customers will be able to
use? - What credit terms will you offer to your customers? Do you offer
discounts for early payment or impose penalties for late payment. These should be mentioned in this part of your marketing plan.
- What is your return policy? What warranties you will offer your customers? Describe these or any other service guarantees.
- What after-sale supports will you offer to your customers and what will you charge (if anything) for this support?
- Do you have a system for obtaining customer feedback so that customer satisfaction (or the lack of it) can be tracked and addressed by you?
4.4.3 If it's applicable to your business, outline your sales strategy by covering the following issues:
- What types of salespeople will be involved (commissioned salespeople, product demonstrators, telephone solicitors, etc.) in your marketing activities?
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- Describe your expectations of these salespeople and how sales effectiveness will be measured.
- Will a sales training program be offered? If so, describe it in this section of the marketing plan.
- Describe the incentives salespeople will be offered to encourage their achievements (such as getting new accounts, the most orders, etc.).
4.5 Marketing Strategy
In this section identify the general marketing strategy under which this plan is being developed. It is possible that a product will follow more than one strategy (e.g., sell more of same product to current customers but also find new customers in new markets). Plan developers may get some guidance and also rationale for strategy by examining results from the Situational Analysis. In particular, planners may look to strategies that are suggested within the scope of Product/Market Analysis Tools. Additionally, planners should refer to the Mission Statement in Step 1 to ensure strategies are in line with how the company views itself. Strategies generally fall under one of the following (or in some cases more than one) ideas: 1. Market growth 2. Higher market penetration
a. Sell more to same market (i.e., get current customers to buy more or buy more frequently).
b. If overall market is growing this may not necessarily mean a growth in your overall market share.
c. If overall market is not growing this means there is a growth in your overall market share.
3. Find new markets
a. Sell to markets or market segments not previously targeted b. Develop new products for existing customers c. Develop new products for new customers d. Ensure market stability
4.6 Marketing Objectives Marketing success can be measured through several non-financial market metrics. These measure are important since these often shed light on underlying conditions and circumstances facing the company that are not easily seen within financial measures. For instance, a company may report strong sales for a product but market share information may suggest the product is losing ground to competitors. The marketing objectives section will indicate targets to be achieved across several marketing decision areas. To add additional strength to this section include following marketing objectives metrics where possible. - Target market objectives:
o market share total by segments
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by channel
o customers total number/percentage new number/percentage retained
o purchases
rate of purchases size/volume of purchases
- Promotional objectives
o level of brand/company awareness o traffic building (e.g., store traffic, website traffic) o product trials (e.g. sales promotions, product
demonstrations) o sales force (e.g. cycle time, cost per call, closing rate, customer visits, etc.)
- Channel objectives
o dealers total number/percentage new number/percentage retained
o order processing and delivery
on-time rate shrinkage rate correct order rate
- Market research objectives
o studies initiated o studies completed
- R&D objectives
o product development - Other objectives
o partnerships developed
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Chapter 5: Financial Analysis 5.1 What is financial analysis and how is it relevant for your marketing plan?
Cost-volume-profit (CVP) financial analysis is an important tool for you
to prepare a realistic marketing plan. Because, it examines the behavior of total revenues, total costs, and operating income as changes occur in output level, the selling price, the variable cost per unit, and/or the fixed costs of a product. You can use CVP analysis to help answer questions such as:
- How will total revenues and total costs be affected if the output level (the
volume in CVP analysis) changes – for example, if you sell 1000 more units of the product?
- If you raise or lower selling price, how will that affect the output level? - If you expand your business into foreign markets, how will that affect the
output level? These questions have a common “what-if” theme. CVP analysis illustrates the profits performance by examining the results of these what-if possibilities and alternatives. 5.1.1 CVP assumptions and terminology
CVP analysis is based on following assumptions:
a. Changes in the levels of revenues and costs arise only because of changes in the number of product (or service) units produced and sold – for example, the number of TV sets produced and sold by Sony Corporation. The number of output units is the only revenue driver and the only cost driver. Just as a cost driver is any factor that affects costs, a revenue driver is a variable, such as volume, that influences revenues.
b. Total costs can be separated into a fixed component (FC) that does not vary with the output level and a variable component (VC) that is variable with respect to the output level.
c. When represented graphically, the behaviors of total revenues and total costs are linear (meaning they can be represented as a straight line) in relation to output level within a relevant range (and time period).
d. Selling price, variable cost per unit, and fixed costs (within a relevant range and period) are known and constant.
e. The analysis either covers a single product or assumes that the proportion of different products when multiple products are sold will remain constant as the level of total units sold changes.
f. All revenues and costs can be added and compared without taking into account the time value of money.
5.1.2 Relevancy of CVP analysis to your marketing plan
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Many companies (and divisions and plants of companies) in industries such as airlines, automobiles, chemicals, plastics and semiconductors have found that even the simplest possible CVP analysis can be helpful in making decisions about strategic and long-range planning, as well as decisions about product features and pricing. Therefore will not your business benefit from such an analysis? To know the basics of CVP analysis, you need to understand some simple but key terms:
Operating income =Total revenue from operations – Cost of goods sold
(COGS) & Operating Costs Net income is operating income plus non-operating revenues (such as
interest revenue) minus non-operating costs (such as interest costs) minus income taxes. For simplicity, throughout this section, you can assume non-operating revenue or non-operating costs are zero. There are no income taxes in Dubai. Thus, net income is computed as:
Net income = Operating income
For example, consider that you are dealing in home-office software. You can purchase this software from a computer software wholesaler at AED 120 per package, with the privilege of returning all unsold packages and receiving a full AED 120 refund per package. You will sell the packages for AED 200 each. You have already paid AED 2,000 to GITEX (Gulf Information Technology Exhibition) in Dubai for booth rental for the two-day exhibition. Assume there are no other costs. What profits will you make for different quantities of packages sold?
The booth rental cost of AED 2,000 is a fixed cost because it will not change no matter how many packages you sell. The cost of the package itself is a variable cost because it increases in proportion to the number of packages sold. For each package that you sell, you incur a cost of AED 120 to purchase it. If you sell 5 packages, the variable purchase costs are AED 600 (AED120x5).
You can use CVP analysis to examine changes in net/operating income
as a result of selling different quantities of packages. If you sell 5 packages, you will receive revenues of AED 1,000 (AED 200x5 packages), incur variable costs of AED 600 (AED120 per package x 5 packages), incur fixed costs of AED 2,000 and report an operating income of AED 1,200 (AED 8,000 – AED 4,800 – AED 2,000).
The only numbers that change from selling different quantities of
packages are total revenues and total variable costs. The difference between total revenues and total variable costs is called contribution margin (CM). CM indicates how net/operating income changes as the number of units sold change. The CM when you sell 5 packages is AED 400 (AED 1,000 in total revenues minus AED 600 in total variable costs); the CM when you sell 40 packages is AED 3,200 (AED 8,000 in total revenues minus AED 4,800 in total variable costs). Be sure to subtract all variable costs when computing CM. For
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example, if you had variable selling costs because you paid salespersons a commission on each package they sold at the GITEX, variable costs would include the cost of the package plus the sales commission.
CM per unit is a useful tool for calculating CM. The CM per unit is the
difference between the selling price and the variable cost per unit. In your example, the CM per package, or per unit is AED 200 – AED 120 = AED 80. CM can be calculated as CM = CM per unit x Number of Units sold. For example, when 40 packages are sold, CM = AED 80 per unit x 40 units = AED 3,200
CM represents the amount of revenues minus variable costs
that contributes to recovering fixed costs. Once fixed costs are fully recovered, the remaining CM increases operating income. Exhibit 5.1 tabulates CM for different quantities of packages sold and shows how CM recovers fixed costs and generates operating income with increasing numbers of packages sold. The income statement in exhibit 5.1 is called contribution income statement because it groups costs into variable costs and fixed costs to highlight the CM. See how each additional package sold from 0 to 1 to 5 increases CM by AED 80 per package, recovering more of the fixed costs and reducing the operating loss. If you sell 25 packages, the CM equals AED 2,000 (AED 80 per package x 25 packages), exactly recovering the fixed costs and resulting in AED 0 operating income. This point is called breakeven point where there is neither operating income nor operating loss to your business. If you sell 40 packages, the CM increases by another AED 1,200 (AED 3,200 – AED 2,000), all of which becomes operating income.
0 1a. Revenues at AED 200 per package
0 20
b. Variable costs at AED 120 per package
0 12
c. Contribution margin at AED 80 per package = (a-b)
0 80
d. Fixed costs 2,000 2,e. Operating income (AED) (c+d)
-2,000 -1
Exhibit 5.1 Contribution Income Statement for Different Quantities of Software Packages Sold by You. Number of packages sold As you look across exhibit 5.1 from left to right, you see that the increase in CM exactly equals the increase in operating income (or the decrease in operating loss).
You can also express CM as a percentage. CM percentage (also called CM ratio) is CM per unit divided by selling price. In the above example, CM percentage = AED 80 ÷ AED 200 = 0.40 or 40%. CM percentage is CM per one AED of revenue. In this example, it indicates that 40% of each one AED of revenue (i.e., 40 Phils) is CM.
You can calculate the total CM for different output levels by
multiplying the CM percentage by the total revenue shown in exhibit 5.1. For example, if you sell 25 packages, revenues would be AED 5,000 and CM would equal 40% of AED 5,000 or 0.4 x AED 5,000 = AED 2,000, exactly offsetting fixed costs. You are breaking even by selling 25 packages for a total revenue of AED 5,000.
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5.2 The Break-even Analysis
The break-even point (BEP) is that quantity of output sold at which total revenues equal total costs – i.e., the quantity of output sold at which the operating income is AED zero. Business firms are interested in the BEP because they want to avoid operating losses. The BEP guides them how much output they must sell to avoid a loss. We will examine three methods for determining the BEP. Become familiar with the following abbreviations. You will find them helpful in CVP analysis:
SP = Selling price per unit VCU = Variable cost per unit CMU = Contribution margin per unit (SP-VCU) CM (%) = Contribution margin percentage (CMU ÷SP) FC = Fixed costs Q = Quantity of output units manufactured and sold OI = Operating income TOI = Target operating income TNI = Target net income
1. Equation Method: To use the equation method to determine BEP, the
income statement is expressed as the following equation: Revenues -Variable Costs - Fixed Costs = Operating Income (SP x Q) - (VCU x Q) - FC = OI
This equation provides the most general and easier to remember approach to any CVP situation. Using the software example data and setting operating income equal to AED zero, you obtain: AED 200 Q - AED 120 Q - AED 2000 = 0
80Q = AED 2000 Q = AED 2000 ÷AED 80 per unit = 25 units
If you sell fewer than 25 units, you will have a loss; if you sell 25 units, you will breakeven, and if you sell more than 25 units, you will make a profit. This BEP is expressed in units. It can also be expressed in terms of revenues: 25 units x AED 200 selling price = AED 5,000.
2. Contribution Margin Method: In this method, equation in first method is rearranged as below:
(SP x Q) - (VCU x Q) - FC = OI Q [SP – VCU] = FC +OI That is, Q x CMU = FC + OI Q = [FC + OI] ÷ [CMU]
At the BEP, operating income is AED zero by definition, Setting OI = 0, you obtain:
Q = FC ÷ CMU or Breakeven number of units = Fixed costs ÷ CMU
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The calculation in the equation method and the calculation in the contribution margin method appear similar because one equation is merely a restatement of the other. In your software example, fixed costs are AED 2,000, and the contribution margin per unit is AED 80 (AED 200-AED 120]. Therefore, BEP = 2,000 ÷ AED 80 per unit = 25 units. Similarly, BE revenue = FC ÷CM% = AED 2000 ÷ 0.40 = AED 5,000
3. Graph Method
In the graph method, we represent total costs and total revenues graphically. Each is shown as a line on a graph. The point where they intersect is the BEP. Exhibit 5.2 illustrates the graph method for the software example. Because, we have assumed that total costs and total revenues behave in a linear fashion, you need only two points to plot the line representing each.
Total costs line: The total costs line is the sum of the fixed costs and the
variable costs. Fixed costs are AED 2000 at all output levels within the relevant range. To plot fixed costs, measure AED 2,000 on the vertical axis and extend a line horizontally to the right from AED 2,000 on the vertical axis. Variable costs are AED 120 per unit. To plot the total cost line, use as one point the AED 2,000 fixed costs at zero units sold, because variable costs are AED zero when no units are sold. Select a second point by choosing any other convenient output level (say, 40 units sold) and determining the corresponding total costs. The total variable costs at this output level are AED 4,800 (40 units x AED 120 per unit). Because fixed costs are AED 2,000 at all output levels within the relevant rage, total costs at 40 units sold are AED 6,800 (AED 2,000 + AED 4,800).
Total revenue line: One convenient starting point is AED zero revenues
at zero units sold. Select a second point by choosing any other convenient
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output level to determine corresponding total revenues. At 40 units sold, total revenues are AED 8,000 (AED 200 per unit x 40 units).
The BEP is the quantity of units sold at which the total revenues line
and total costs line intersect. At this point (25 units sold in exhibit 5.2), total revenues equal total costs. Exhibit 5.2 however, shows the profit or loss outlooks for a wide range of quantities of units sold besides the BEP. The vertical distances between the two lines at those levels can determine the profits or losses at sales levels other than 25 units. For quantities fewer than 25 units sold, total costs exceed total revenues, and the enclosed area indicates operating losses. For quantities greater than 25 units sold, total revenues exceed total costs, and the enclosed area indicates operating incomes/profit. To account for uncertainty and business scenarios, show breakeven points over various level of sales volume (from zero through best scenario sales level). Show also breakeven points over time.
Target Net/Operating Income
We introduce a profit element into our CVP analysis for your software example by asking, how many units must be sold to earn an operating/net income of AED 1,200. Using first method, we need to find Q where:
AED200Q – AED120Q – AED2000 = AED1200. Solving for Q yields, Q = 40 units
Alternatively, we could use the CM method in method 2, in which the numerator consists of fixed costs plus target operating income:
Q = [FC + TOI] ÷ [CMU] = [AED 2,000 + AED 1,200] ÷ [AED 80 per unit] = 40 units
5.3 Using CVP analysis for decision making
Besides its usefulness to determine breakeven quantities and to determine the quantities for achieving target net/operating income, CVP analysis also guides you in other strategic decisions. Consider a decision about which features to add to an existing product. Different choices can affect selling prices, variable costs per unit, fixed costs, units sold and net/operating income. CVP analysis guides you to make this decision by estimating the expected long-term profitability of the alternative choices. CVP analysis also helps businesses decide how much to advertise, whether to expand to new markets and to how to price the product.
Strategic decisions invariably entail risk. CVP analysis evaluates how
operating income will be affected if the original predicted data are not achieved – say, if sales are 10% lower than estimated. This is called scenario analysis. Evaluating this risk affects other strategic decisions a company might make. For example, if the probability of a decline in sales seems high, you may take action to shift the cost structure to have more variable costs and fewer fixed costs.
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5.3.1 Decision to advertise
Consider your software example. Suppose you anticipate selling 40
units. Exhibit 5.1 indicates that your operating income would be AED 1,200. You are considering placing an advertisement describing the product and its features in the GITEX brochure. The advertisement will cost AED 500. This cost will be fixed because it must be paid and will not change regardless of the number of units you sell. You anticipate that advertisement will increases sales by 10% to 44 packages. Should you advertise? The following is the CVP analysis for this decision-making situation:
40 packages sold 44 packages sold Differ- with no advertising with advertising ence (1) (2) (3) =2-1 Contribution margin 3,200 3,520 320 (AED80x40; AED 80x44) Fixed costs 2,000 2,500 500Operating income 1,200 1,020 -180
Operating income decreases by AED 180, so you do not advertise. Note that you could focus on the difference in column 3 and come to the same conclusion. 5.3.2 Decision to reduce selling price
Having decided not to advertise, you are contemplating whether to reduce the selling price to AED 175. At this price, you think you will sell 50 units. At this quantity, the software wholesaler will sell the package to you for AED 115 per unit instead of AED 120. Should you reduce the selling price? No, as shown by the following CVP analysis: - Contribution margin from lowering price to AED 175: (175-115) per unit x
50 units =3,000 - Contribution margin from maintaining price at AED 200: (200-120) per unit
x 40 units = 3,200 - Change in contribution margin from lowering price= -200 AED Decreasing the price will reduce contribution margin by AED 200 and, because the fixed costs of AED 2,000 do not change, it will also reduce operating income by AED 200. You can examine other alternatives to increase operating income, such as simultaneously increasing advertising and lowering selling prices. In each case, you will compare the changes in contribution margin (through the effects on selling prices, variable costs, and quantities of units sold) to the changes in fixed costs, and you will choose the alternative that gives the highest operating income.
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5.4 Sensitivity Analysis and Uncertainty
Before choosing alternatives, you should frequently analyze the sensitivity of your marketing decisions to changes in underlying assumptions. Sensitivity analysis is a “what-if” technique that you use to examine how a result will change if the original predicted data are not achieved or if an underlying assumption changes. In the context of CVP analysis, sensitivity analysis answers such questions as, what the net/operating income will be if the quantity of units sold decreases by 5% from the original prediction and what will net/operating income be if variable cost per unit increases by 10%. The sensitivity of net/operating income to various possible outcomes broadens your perspective about what might actually occur before you commit marketing costs.
Exhibit 5.3 Spreadsheet analysis of CVP relationships for software example
Revenues required at AED 200 SP to earn operating income of AED
FC VC 0 1,200 1,600 2,000 2,000 100 4,000 6,4001 7,200 8,000
120 5,000 8,000 9,000 10,000 150 8,000 12,800 14,400 16,000 2,400 100 4,800 7,200 8,000 8,800 120 6,000 9,000 10,000 11,000 150 9,600 14,400 16,000 17,600 2,800 100 5,600 8,000 8,800 9,600 120 7,000 10,000 11,000 12,000 150 11,200 16,000 17,600 19,200
Electronic spreadsheets enable you to conduct CVP-based sensitivity analysis in a systematic and efficient way. Using spreadsheets, you can conduct sensitivity analysis to examine the effect and interaction of changes in selling price, variable cost per unit, fixed costs and target net/operating income. Exhibit 5.3 displays a spreadsheet for the software example. You can immediately see the revenues that need to be generated to reach particular net/operating income levels, given alternative levels of fixed costs and variable costs per unit.
For example, revenues of AED 6,400 (AED 200 per unit x 32 units) are
required to earn an operating income of AED 1,200 if fixed costs (FC) are AED 2,000 and variable costs (VC) per unit are AED 100. You can also use exhibit 5.3 to assess what revenues you need to break even if for example, the booth rental at the GITEX exhibition is raised to AED 800 (increasing fixed costs to AED 2,800) or if the wholesale software supplier raises his price to AED 150 (increasing variable costs to AED 150 per unit).
1 Number of units required to be sold = [FC +TOI]÷CMU = [2000+1200]÷[200-120]= 32 units Revenues required = Number of units required to be sold x selling price = 32 units x AED 200 = AED 6,400
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An aspect of sensitivity analysis is the margin of safety, which is the amount of budgeted revenues over and above breakeven revenues. Expressed in units, margin of safety is the sales quantity minus the breakeven quantity. The margin of safety answers the “what-if” question: if budgeted revenues are above breakeven and drop, how far can they fall below budget before the breakeven point is reached?
Such a fall could be due to a competitor introducing a better product, or
to poorly executed marketing programs and so on. Assume that you have fixed costs of AED 2,000, a selling price of AED 200, and variable costs per unit of AED 120. For 40 units sold, the budgeted revenue is AED 8,000 and the budgeted operating income is AED 1,200.
The BEP for this set of assumption is 25 units (AED 2,000 ÷ CM AED
80 per unit), or AED 5,000 (AED 2,000 x 25 units). The margin of safety is 15 (40-25 units) units or AED 3,000 (AED 8,000 – AED 5,000).
5.5 CVP Analysis in Service and Nonprofit Org
Thus far we focused CVP analysis on a merchandising company. CVP
can also be applied to decisions by manufacturing, service and nonprofit organizations. For this, we need to focus on measuring their output, which is different from the tangible units sold in a merchandizing company. Examples of output measures in various service and nonprofit industries are:
Industry Measure of Output Airlines Passenger miles Hotels/motels Room-nights occupied Hospitals Patient days Universities Student credit-hours
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Chapter 6: Marketing Action Programs 6.1 Marketing Communications Activities
In this section of the marketing plan, you will provide a blueprint for your marketing operations. Include the following sections:
6.1.1. Product Issues
This section describes the products and/or services to be offered by your company, including planned roll out dates for new products and services (if any). The following issues may be addressed:
- Product Design: What does your company’s product look like? How does
it taste, smell, sound and feel? What is it made of? What size(s) does it come in? How long should it last under normal use? How many different colors and models will be offered? What options are available?
- Service Options: Is your company product warranted or guaranteed? What
repair or maintenance services are available? - Brand name: What name should your company product be sold under?
You'll want a name that is legally clear, easy to pronounce and consistent with your product image. You may also want a name that describes the benefits of the product.
- Package: Should your company’s products be packaged? What should the
package look like? What are the legal requirements concerning labeling? NOTE: Of course, marketing plans should be done for services as well as physical products. In the case of a service, some of the issues listed above will have to be tweaked. You will still need to design the service (what should be included? How much time will it take to render the service? Exactly how will it be performed?), decide whether to offer a guarantee, decide on a name for the company and the service, figure out when and how often the service should be performed. 6.1.2. Pricing Issues
This section describes the prices to be charged for the products and/or services for both the end user and channel intermediaries. The following issues may be addressed:
- Cost of product: What is the minimum price necessary to cover your
product costs? What is your desired margin of profit? What markups are your channel members likely to add?
- Competitors’ prices: What are your competitors charging for the product?
What is your desired relative price/quality positioning?
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- Price elasticity: Elasticity states the extent of percentage change in
products demanded by the customers for a 1 percent change in its price. Are your target customers elastic or inelastic? If they are inelastic, you may charge higher premium on the prices due to the uniqueness of your products. If the target customers are elastic then, drastic changes in your prices affect your company sales and revenue. Relevant questions to be answered are: How much is your target market willing to pay for the product? How will changes in price affect demand for your product?
- Purchase policies: What payment terms will you offer to your customers?
Will the price be fixed or negotiated? 6.1.3. Distribution Issues
This section describes the distribution decisions for your company. The following issues may be addressed: - Location: In which geographic markets will you compete? - Channels: What types of selling intermediaries, if any, will you use? How
many intermediaries will you use? How will you recruit and motivate your intermediaries?
- Push or Pull: Should you push the product through intermediaries by
offering selling incentives, or pull the product through intermediaries by stimulating customer demand?
- Selling outlets: How many selling outlets should you have? Which specific
outlets should you use?
6.1.4. Selling Issues
This section describes your personal selling policies. It is possible for this section to be included in the plan as a subsection of the Promotion section. We have separated it because many companies have separate sales and promotions departments. The following issues may be addressed: - Available funds: How much money do you have available for recruiting
and hiring a sales force? How much can you afford to pay each salesperson? - Size of the sales force: How many salespeople should you have? Will you
have a smaller, better paid sales force or a larger, lesser-paid sales force? - Territory allocation: How should the geographic area be divided into sales
territories? How many territories will you have? How many salespeople should be assigned to each territory? Which salespeople should be assigned to each area?
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- Compensation of sales force: Should the sales force be compensated with a salary, by commission or a combination? What other types of incentives will be offered?
- Measurement and evaluation: How will you evaluate the performance of
your sales force? Will you use sales calls per person? Sales closed per call? Average transaction size? Number of repeat purchases? You can compare these figures with industry averages, historical data from your company or results from other salespeople in your company.
6.1.5. Marketing Communication Issues
This section describes your marketing communications programs. You might include the following sections: - Basic selling idea: As stated in earlier chapters, what is your "unique
selling proposition (USP)?" This is the one unifying message that you want all your marketing communications to express. Your USP is a concise statement of your positioning. It is your competitive advantage expressed so that your customers understand the benefit to them.
- Communications budget: In this section, you should justify the total
amount of money that should be spent on marketing communications and justify allocating specific amounts to your communications programs. To set the total amount, you can use a percentage of sales or expected sales (basing the percentage on your company's history or industry averages), a comparative parity method (basing the amount on estimates of competitors’ spending), or an objective task method (basing the amount on what you think is necessary to achieve your objectives). The best thing to do is to determine, as best as you can, all three amounts and accordingly set the budget.
- Discussion of communications’ alternatives: In this section, you may
analyze and justify your decision to spend your communications budget on the particular activities you choose rather than on other possible activities. There are many possible ways to spend your communications’ budget. For example, your target audience may include both end consumers and/or channel members. What proportion of your budget will you spend on each? Your communications activities may include mass media advertising, direct marketing, electronic marketing, sales promotions, trade allowances, public relations, etc. Which are best for you?
- Consumer-oriented communications: In this section, describe the
communications programs that you choose in the previous section. It makes sense to concentrate on consumer-oriented and trade-oriented programs separately. We placed consumer-oriented communications first, but you wouldn't have to. If most of your money is being spent on trade promotions, you might describe those first.
6.1.6. Mass Advertising Issues
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Advertising is paid, non-personal communication to consumers by an
identified sponsor. Mass advertising is done via mass media that allow a message to be sent to many individuals at one time. It is distinguished here from direct marketing in which personalized messages are mailed enmass. This section should contain the following elements: - Objectives: These are the objectives that you want your mass advertising
programs to accomplish. They are usually more communication oriented than your overall marketing objectives (e.g., "build awareness" rather than "increase profit"). Objectives should be measurable and include a benchmark, the degree of change sought and a time period in which the change should occur.
- Target audience(s): The target audience for a mass advertising program is
usually a subset of your target market(s). Not every communication has to be directed at everyone in your target market. Sometimes different subgroups are reached most efficiently in different ways.
- Message Strategies: This section describes the specific message that your
mass advertising programs will communicate. It should be consistent with your basic selling idea.
- Discussion of media alternatives: In this section, you will discuss and
justify which mass advertising media you will use. Mass advertising can be done using television, radio, magazines, newspapers or out-of-home media. You should first decide what message(s) you want to communicate and then chose the media and vehicles that are best suited to your target market for communicating that message about your product.
- Allocation of Funds: Earlier, you decided how much of your total
communications budget should be spent on mass advertising. You also need to decide how this money will be allocated to each mass advertising medium (e.g., how much on television, how much on out-of-home, etc.). Don't forget to account for estimated production costs.
- Media calendar: This section specifies how many ads will run in each
mass advertising medium, which specific vehicles will be used with each medium, and when each ad will run. You may want to put this information in a table so that it looks like a calendar.
- Reach and frequency analysis: Reach is the number of people exposed to
your message at least once and frequency is the average number of times people are exposed. State them in this section.
- Evaluation: This section specifies how the effectiveness of your mass
advertising programs will be evaluated. Advertising is considered successful if it achieves the specific objectives that were set for it.
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6.1.7. Direct Marketing Issues
Direct mail is the most common media used in direct marketing. It involves direct interaction with individual customers. Using a database obtained from secondary sources or internal records, you and potential customers communicate directly. The benefits of this type of communication over other programs are that it can be narrowly targeted, it can be personalized, and it can be directly linked to sales. It can be expensive on a cost per thousand basis and suffers from a poor image.
6.2 Customer Service Activities
The rules of business success are changing fundamentally. Forces such as globalization, technological change and the rising power of the customer are stimulating marketers to find ways to retain satisfy and work with customers so that their needs can be met and products and services customized more accurately on the basis of continuous improvement. One of the most reliable indicators of services of a company is whether it retains its customers. For this reason it is recommended that a section in the marketing plan be devoted to customer service plan. It could be in the form of manual, which outlines the customer service goals including the following documents and facts:
- Service objectives - Lead times - Delivery notes - Invoices - The names and telephone number of key people - Hotline services - Order status enquiry systems.
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Chapter 7: Performance Tracking
This implementation and monitoring section links to the issues discussed in Chapter 2. In many ways this part of the marketing plan is the area that will ultimately “sell” the plan to those who have the power to give final approval. This step consists of two key topics. First, a budget for marketing expenses will present a clear picture of the financial implications of the plan. Second, a performance analysis will be presented that shows the expected results of the marketing plan including its financial impact.
7.1 Budgets and the Budgeting Cycle
Budgeting is the common financial tool that you must use for planning and controlling what your business must do to satisfy your customers and succeed in the market place. Budgets provide a measure of the financial results you expect from its planned activities. By planning for the future, you learn to anticipate potential problems and how to avoid them. Instead of subsequently facing problems, you can focus your energies on exploiting opportunities. Remember that, “Few businesses plan to fail, but many of those that flop, failed to plan.”
Simply stated, a budget is: (a) the quantitative expression of a proposed plan of action by management for a specified period and (b) an aid to coordinating what needs to be done to implement that plan. A budget can cover both financial and nonfinancial aspects of the plan and serves as a blueprint for you to follow in an upcoming period. A budget that covers financial aspects quantifies your expectations regarding income, cash flows, and financial position. Just as financial statements are prepared for past periods, so can financial statements be prepared for future periods – for example, a budgeted income statement, a budgeted statement of cash flows and a budgeted balance sheet. Underlying these financial budgets can be nonfinancial budgets for, say, units manufactured or sold, number of employees, and number of new products being introduced to the market place. Well-managed companies usually cycle through the following budgeting steps: - Planning the performance of the company as a whole, as well as planning
the performance of its subunits (such as departments or divisions). Management at all levels agrees on what is expected.
- Providing a frame of reference, a set of specific expectations against which
actual results can be compared. - Investigating variations from plans. If necessary, corrective action follows
investigation. - Planning again, in light of feedback and changed condition. - Budgeting is most useful when it is an integral part of your company’s
strategy analysis.
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Strategy specifies how your organization matches your capabilities with the opportunities in the marketplace to accomplish its objectives. It includes consideration of such questions as:
- What are the objectives of your company? - Are the markets for a company’s products local, regional, national or
global? What trends affect your company’s markets? How do the economy, the industry, and your competitors affect your company?
- What form of organization and financial structure serves your company
best? - What are the risks of alternative strategies, and what are your company’s
contingency plans if your preferred plan fails?
Your company’s strategy affects both short-run and long-run planning. And the company’s planning is expressed through short-run and long-run budgets. Planning is setting goals and developing strategies to achieve those goals. Budgets show how resources will be deployed to implement strategy. The master budget is the initial plan of what the company intends to accomplish in the period. The master budget reflects the impact of both operating and financing decisions. The master budget is not in itself a strategic plan; rather, it helps managers implement their strategic plans. The master budget helps coordinate the various business functions, such as production and marketing. Budget Practices around the Globe2
Surveys of financial officers of the largest industrial companies in the
United States, Australia, Holland, Japan, and the United Kingdom indicate some interesting similarities and differences in budgeting practices across countries. The use of master budgets is widespread in all countries. Differences arise with respect to other dimensions of budgeting. U.S. controllers and managers prefer more participation and regard return on investment (ROI) as the most important budget goal. In contrast, Japanese controllers and managers prefer less participation and regard sales revenues (SR) as the most important budget goal. Surveys of Australian3 and Japanese4 managers report that budgeting is the management accounting practice that has the highest benefit to them.
2- Asada, T. J. Bailes, and M. Amano, “An Empirical Study of Japanese and American Budget Planning and Control Systems,” Working paper, Tsukaba University and Oregon State University, 1989; - Blayney, P and I. Yokoyama, “Comparative Analysis of Japanese and Australian Cost Accounting and Management Practices,” Working paper, The University of Sydney, 1991;
- deWith and E. Ijskes “Current Budgeting Practices in Dutch Companies,” Working paper, Vrije Universiteit, 1992, Amsterdam, Netherlands. 3 Chenhall, R.H., and KLangfield-Smith, “Adoption and Benefits of Management Accounting Practices an Australian Study,” Management Accounting Research, March 1998. 4 Inoue, S., “A Comparative Study of Recent Development of Cost Management Problems in U.S.A., U.K., Canada, and Japan.” Kagawa University, Economic Review June 1988
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Survey response U.S Japan Australia U.K Holland Percentage of companies that prepare a complete master budget (%)
91 93 100 100 100
Percentage of companies reporting Division Manager participation in Budget Committee discussions (%)
78 67 NA NA 82
Ranking of the most important budget goals for Division Managers (1) is most important: Return on Investment (ROI) Operating Income (OI) Sales Revenue (SR) Production Costs
1 2 3 4
4 2 1 3
In the context of marketing budget, this section should lay out spending
requirements necessary for meeting the marketing plan’s objectives:
- Outline spending requirements for each tactical marketing decision. - Breakdown each tactical category e.g., types of advertising, types of
services offered, marketing research expense, etc. - Show detailed spending timetable by:
Month Year
- Show spending by: Product (if plan is for more than one) Segment/Geographic area Distribution Network/Channel
What reduces the effectiveness of the planning and budgeting processes of the companies? A survey of chief financial officers in the United States reported the following four factors in order of importance:5
- Lack of a well-defined strategy - Lack of a clear linkage of strategy to operational plans - Lack of individual accountability of results - Lack of meaningful performance measures 7.2 Steps in Developing an Operating Mkg Budget
Most companies have a budget manual; it contains a company’s particular instructions and relevant information for preparing its budgets. Although the details differ among companies, the following basic steps are common for developing the operating marketing budget. Beginning with the revenues budget, each of the other budgets follow step by step in logical sequence.
5 Lazere, C. “All Together Now.” CFO, February 1998.
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Step.1: Prepare the revenue budget. This is the starting point for
budgeting because, the production level and the inventory level – and hence manufacturing costs – as well as non-manufacturing costs, generally depend on the forecasted level of unit sales or revenues. Many factors influence the sales forecast, including the sales volume in recent periods, general economic and industry conditions, market research studies, pricing policies, advertising and sales promotion, competition and regulatory policies. Regression and trend analysis are statistical techniques that use sales data from recent periods to fit a line that best represents how sales have changed over those periods. Extending this line into the future helps in predicting future sales reasonably well. For more information on what these techniques are, please refer to any standard business statistics textbook under the forecasting section. For example, consider that, 52,000 Coffee tables are produced and marketed at a selling price of AED 392 each with the total revenue of AED 20,384,000.
Step.2: Prepare the production budget (in Units). The total finished
goods (FG) units to be produced depend on budgeted sales and expected changes in inventory levels: Budgeted = Budgeted + Target FG - Beginning FG Production Sales inventory inventory (Units) (Units) (Units) (Units) For example, 50,000 Coffee = 52,000 + 3,000 - 5,000 Tables
Step.3: Prepare the direct materials usage budget and direct materials purchases budget. This requires you to know the units to be produced.
The number of units to be produced = Number of units needed - Units on hand
= (Budgeted sales - Beginning FG inventory + ending FG inventory)
The same model applies to the purchase of each type of direct material. Keep all these computations in units and then multiply by the cost per unit at the end. Once you determine the number of units to be produced from the production budget, you can budget manufacturing inputs – direct materials, direct labor and overhead.
Step.4: Prepare the direct manufacturing (mfg.) labor budget. These
costs depend on wage rates, production methods, and hiring plans.
Step. 5: Prepare the manufacturing overhead budget. The total of these costs depends on how individual overhead costs vary with respect to the cost driver. As discussed under Chapter 5 in CVP analysis, total variable costs fluctuate in proportion to the quantity of cost-allocation base, whereas total fixed costs remain constant over a relevant range of output.
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Step. 6: Prepare the ending inventories budget.
Ending inventory = (Direct materials in inventory x Cost per unit) + (FG x Cost per unit)
Step. 7: Prepare the cost of goods sold (COGS) budget in AED (in our Coffee table example) COGS = (A) Beginning FG inventory x cost per unit = 1,375,000 (B) COG manufactured = sum of (a) + (b) + (c) below (a) Direct materials used x cost per unit = 4,793,000 (from step 3) (b) Direct Mfg. labor x cost per unit=5,937,500 (from step 4) (c) Mfg overhead x cost per unit=3,500,000 (from step 5) (C) Cost of goods available for sale (A) + (B) =15,605,500 (D) Deduct ending FG inventory= 854,250 (from step 6) COGS = (C) + (D) = AED 14,751,250
Step. 8: Prepare the non-manufacturing costs budget as below (in our Coffee table example in AED) Value Chain function VC FC Total Costs R&D/ Product design 305,760 250,000 555,760 Marketing 1,630,720 290,000 1,920,720 Distribution 509,600 220,000 729,600 Customer service 264,992 240,000 504,992 Administrative 40,768 400,000 440,768 Total 2,751,840 1,400,000 4,151,840
Step. 9: Prepare the budgeted income statement as below (in our Coffee table example in AED) a. Revenues 20,384,000 from step 1 b. COGS 14,751,250 from step 7 c. Gross Margin (a-b) 5,632,750 d. Operating (non-mfg costs) 4,151,840 from step 8 e. Operating income (c-d) 1,480,910
Your strategies for achieving revenue and operating income goals influence the costs planned for the different business functions of the value chain. As strategies change, the budgeted costs for different elements of the value chain will also change. For example, a shift in strategy toward emphasizing product development and customer service will result in increased costs in these parts of the operating budget.
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7.3 Preparing Cash Budget
The next part of the master marketing budget is developing cash budget, which includes preparing the capital marketing expenditure budget, the cash budget, the budgeted balance sheet, and the budgeted statement of cash flows. Prepare schedule of expected cash receipts and disbursement in each month. It predicts the effects on cash position at the given level of operations. It reveals whether a company will have enough money to meet its needs on a monthly basis. In practice, some times weekly or even daily cash budgets are very helpful for cash planning and control. Cash budgets help avoid unnecessary idle cash and unexpected cash deficiencies. They thus keep cash balances in line with needs. Ordinarily, the cash budget has the following main sections:
- The beginning cash balance plus cash receipts equal the total cash available
before financing. Cash receipts depend on collections of accounts receivables (A/R), cash sales and miscellaneous recurring sources, such as rental or royalty receipts. Information on expected collectability of A/R is needed for accurate predictions. Key factors include bad-debt (uncollectible accounts) experience and average time lag between sales and collections.
- Cash disbursements include:
a. Direct material purchase; Includes making payment to suppliers on due dates.
b. Direct labor and other wage and salary outlays: Includes all payroll-related costs.
c. Other costs: These depend on timing and credit terms. d. Other disbursements: These include capital outlays for property,
plant, equipment and other long-term investments. e. Interest on long-term borrowing;
- Short-term financing requirement depend on how the total cash available
for needs compares with the total cash disbursements, plus the minimum ending cash balance desired. The financing plans will depend on the relationship between total cash available for needs and total cash needed. If there is a deficiency of cash, loans will be taken. If there is excess cash, any outstanding loans will be repaid.
- The ending cash balance.
The cash budget statement is displayed for a hypothetical XYZ firm in
the following format. You may add different receipts or disbursements, which are appropriate for your business. The cash receipt for each month of the first year should be provided. The heading notes the date of the end of the period covered by cash budget statement.
XYZ Company: Cash budget forecast for the first
3 months of year ended 31st December 200X (in AED) Items Jan Feb Mar Opening Cash Balance (A) 15,000 10,040 3,440 Cash received from sales* 0 900 1,000
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Cash from receivables collected 0 0 2.700 Loan Proceeds* 0 0 660 TOTAL RECEIPTS (B) 0 900 4,360 Accounts payable* 0 2,500 2,500 Rent 400 400 400 Supplies 120 30 30 Utilities 190 190 190 Telephone & insurance 200 30 30 Advertising & Promotion 500 500 400 Wages 1,800 1,600 2,000 Salaries 1,500 1,500 1,500 Loan repayment 0 500 500 Miscellaneous (including repairs) 250 250 250 TOTAL DISBURSEMENTS (C) 4,960 7,500 7,800 SURPLUS=A+B-C) or (DEFICIT=C-A-B)
10,040 3,440 0
* See the following for more information about methods for recording sales, loan proceeds, and method for recoding “Accounts Payable”. Method for recording sales
Some sales will be made in cash while others may be made on credit. Because sales made on credit will not result in the receipt of cash until a later date, they must not be recorded until the month in which the cash will actually be received. Therefore, the percentage of sales to be made in cash and the percentage to be made on credit must be estimated. The percentage of credit sales should be further broken down according to the business’ different collection periods (30 days, 60 days, etc). Loan proceeds
When a deficit appears on the final line in each column, the amount of the deficit will need to be borrowed. Record the amount appearing on the deficit line on the loan proceeds line, then, change the deficit to zero. This shows investors when you will have a cash shortage that will require you to borrow additional funds. For example, in March the actual deficit was AED 660 and this was included in loan proceeds in March to make deficit 0. Method for recording “Accounts Payable”
Accounts Payable must be broken down according to your suppliers’ terms of payment. For example, items purchased in January may have to be paid in 30 days or 60 days – meaning that the actual cash disbursement would not occur until March and April respectively. Accounts Payable is recorded in the month that they will actually be paid.
The following example will illustrate this: Sales of XYZ Company are 10% cash received immediately, 65% received in 30 days, and 25% in 60 days.
1. Sales in January are expected to be AED 100,000: - AED 10,000 (10% of 100,000) is recorded in January, under “Cash
Received from Sales.” - AED 65,000 (65% of 100,000) is recorded in February, under “Cash from
Receivables Collected.”
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- AED 25,000 (25% 100,000) is recorded in March, under “Cash from Receivables Collected.”
JAN FEB MAR APR Cash Received from Sales 10,000 0 0 0 Cash from Receivables Collected 0 65,000 25,000 0
2. Sales in February are expected to be AED 200,000
- AED 20,000 (10% of 200,000) is recorded in February, under “Cash
Received from Sales.” - AED 130,000 (65% of 200,000) is recorded in March, under “Cash from
Receivables Collected.” Since AED 25,000 from January sales has already been recorded in March, the two figures are added together and the total is recorded (25,000 + 130,000 = 155,000).
- Therefore, AED 155,000 is recorded in March, under “Cash from Receivables Collected.” AED 50,000 from February sales is recorded in April under “Cash from Receivables Collected.”
JAN FEB MAR APR Cash Received from Sales 10,000 20,000 0 0 Cash from Receivables Collected
0 65,000 155,000 50,000
The cash budget example has been extended as per the exhibit in the
next page, to forecast the cash surplus (deficit) for 12 months to identify the periods when cash deficit occur so that short-term bank borrowing are to be resorted. This is important to ensure that marketing plans and operations are uninterrupted. If there is a change in sales forecasts, then the cash budget forecast will reflect these changes.
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XYZ Company: Cash budget forecast for the year ended 31st December 200X (in AED)
JAN FEB MAR APR MAY JUN JUL AUG SEP OCOpening Cash Balance
15,000 10,040 3,440 0 710 3,050 5,290 8,930 17,670 26,5
RECEIPTS Cash rec’d from sales 0 900 1,000 1,200 1,200 1,800 1,900 1,600 1,200 1,6Cash from receivables
0 0 2,700 8,400 9,600 10,800 12,600 16,500 16,200 10,8
Loan proceeds 0 0 660 0 0 0 0 0 0TOTAL RECEIPTS 0 900 4,360 9,600 10,800 12,600 14,500 18,100 17,400 12,4DISBURSEMENTS Accounts payable 0 2,500 2,500 3,500 3,500 5,500 6,000 4,500 3,500 4,5Rent 400 400 400 400 400 400 400 400 400 4Supplies 120 30 30 30 30 30 30 30 30Utilities 190 190 190 180 150 150 150 150 150 1Telephone 50 30 30 30 30 30 30 30 30Insurance 150 0 0 0 0 0 0 0 70Advertising & promo 500 500 400 500 400 400 400 400 500 4Maintenance & repairs
50 50 50 50 50 50 50 50 50
Wages 1,800 1,600 2,000 2,000 1,700 1,600 1,600 1,600 1,600 1,8Salaries 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,5Taxes 0 0 0 0 0 0 0 0 0Loan repayment 0 500 500 500 500 500 500 500 500 5Miscellaneous 200 200 200 200 200 200 200 200 200 2TOTAL DISBURSEMENTS
4,960 7,500 7,800 8,890 8,460 10,360 10,860 9,360 8,530 9,6
SURPLUS (DEFICIT)
10,040 3,440 0 710 3,050 5,290 8,930 17,670 26,540 29,2
7.4 Preparing Budgeted Income Statement Using steps 1-8 discussed under preparation of marketing budget,
prepare a budgeted income statement. This is merely the budgeted net/operating income statement expanded to include interest expense with 0 income taxes in Dubai:
a. Revenues 20.384,000 from step 1 b. COGS 14,751,250 from step 7 c. Gross Margin (a-b) 5,632,750 d. Operating (non-Mfg costs) 4,151,840 from step 8 e. Operating income (c-d) 1,480,910 f. Interest expense 240,000 g. Net income (e-f) 1,240,910 7.5 Preparing Budgeted Balance Sheet
The following format is suggested for preparing the budgeted balance sheet (Coffee table example in thousand AED)
Assets (A) Liabilities (L) &
Equity (E)
Current Assets 3980 Current Liab 405 Cash 500 A/R 1,882 A/P 384 Direct materials 223 Taxes Payable 21 Finished Goods (FG) 1375 P P&E 2700 Long-term debt 2400 Land 1200 Equity (E) 3875 Building & equipment 2300 Common stock 3 Less accumulated Dep (800) Retained Earnings 3872 Total (A) 6680 Total (L+E) 6680
7.6 Computer-based Fin. Models for Performance Tracking
Web-based budgeting tools and software packages are available to reduce the computational burden and time required to prepare budgets. The software packages perform calculations for marketing budgets. Software packages assist you with sensitivity analysis in your marketing planning and budgeting activities. For more information on these software packages visit the site www.excelco.com 7.7 Performance Analysis and Accountability
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This section of the marketing plan should contain financial implications in terms of contributions to the company’s bottom line. To attain the goals described in the master budget, your company must coordinate the efforts of all your employees-from the top executive through all levels of management to every supervised worker. Coordinating the company’s efforts means assigning responsibility to managers who are accountable for their actions in planning and controlling human and physical resources. How your company structures your own organization significantly shapes how your company’s efforts will be coordinated.
Organization structure is an arrangement of lines of responsibility
within the organization. Each manager regardless of level is in charge of a responsibility center. A responsibility center is a part, segment or subunit of an organization whose manager is accountable for a specified set of activities. The higher the manager’s level in the hierarchy, the broader the responsibility center, and generally, the larger the number of his or her subordinates. Responsibility accounting is a system that measures the plans – by budgets – and actions – by actual results – of each responsibility center. Four types of responsibility centers are:
- Cost center – the manager is accountable for costs only. - Revenue center – the manager is accountable for revenues only. - Profit center – the manager is accountable for revenues and costs. - Investment center – the manager is accountable for investments, revenues,
and costs.
For example, the Maintenance department of the Marriott hotel is a cost center because the maintenance manager is responsible only for costs, so this budget emphasizes costs. The sales department is a revenue center because the sales manager is responsible primarily for revenues, so this budget emphasizes revenues. The hotel manager is in charge of a profit center because the manager is accountable for both revenues and costs, so this budget emphasizes revenues and costs. The regional manager responsible for investments in new hotel projects and for revenues and costs is in charge of an investment center, so this budget emphasizes revenues, costs and the investment base. 7.8 Feedback
Budgets coupled with responsibility accountability provide feedback to top management about the performance relative to the budget of different responsibility center managers. Differences between actual results and budgeted amounts (also called variances) if properly used, can be helpful in three ways:
- Early warning: Variances alert you early to events not easily or
immediately evident. You can then take corrective actions or exploit the available opportunities. For example, is a small decline in sales this period an indication of an even steeper decline to follow later in the year?
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- Performance evaluation: Variances inform you about how well the company has performed in implementing its strategies. Were materials and labor used efficiently? Was R&D spending increased as planned? Did product warranty costs decreased as planned?
- Evaluating strategy: Variances sometimes signal you that marketing
strategies are ineffective. For example, when you are seeking to compete by reducing cost and improving quality you may find that it is achieving these goals but having little effect on sales and profits. You may then want to reevaluate your marketing strategy.
7.9 Measure performance from a fin perspective
Many performance measures, such as operating income rely on internal financial information. Increasingly, companies are supplementing internal financial measures with measures based on (a) external financial information (such as stock prices), (b) internal nonfinancial information (such as defect rates, manufacturing lead times, and number of new patents), and (c) external nonfinancial information (such as customer satisfaction ratings and market share). These measures are all often benchmarked against other subunits within the company and other companies.
Some performance measures, such as the number of new patents
developed, have a long time horizon. Other measures, such as direct material efficiency variances and overhead spending variances, have a short time horizon. In this section, we focus on the most widely used internal financial measures covering intermediate to long time horizon. Designing such performance measures are important for an effective marketing plan and requires you to implement the following six steps:
Step.1: Choose performance measures that align with your financial
goals. For example, is operating income, net income, return on assets, or revenues the best measure of your subunit’s financial performance? Most companies widely use return on investment (ROI) measures to evaluate performance of the company.
Return on Investment (ROI) = Income ÷ Investments This is a popular measure because it blends all the ingredients of
profitability – revenue, costs and investments – into a single percentage; and it can be compared with the rate of return on opportunities elsewhere, inside or outside the company. You can increase ROI by either increasing income or by decreasing investments. ROI can provide more insight into performance when it is represented as its components: Income = Income x RevenuesInvestments Revenues Investments
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also written as (ROI)= Return on sales x Investment turnover
This component approach is known as the DuPont method of profitability analysis. The intuition behind the two ROI components is: (1) Return on sales tells how much of each revenue dollar becomes income; the goal is to get higher income per revenue dollar. (2) Investment turnover tells how many revenue dollars are generated by each dollar of investment; the goal is to make investment dollar “work harder” to generate more revenues. The following table presents representative examples6 of key financial performance measures (FPM) used in different countries: Company Country Product/Business Key FPM* Ford Motor U.S. Automotives Income, ROS &
ROI Quaker Oats U.S. Food products Income, RI,
EVA Guinness U.K. Consumer products Income, ROS Krones Germany Machinery/ Revenues and
Equipment Income
Mayne Australia Security/ ROI & ROS Nickless Transportation Mitsui Japan Trading Revenues &
Income
Pirelli Italy Tires/Mfg Income & cash Flow Swedish match Sweden Consumer products ROI
Step. 2: Choose the time horizon of each performance measure in step 1. For example, should performance measures, such as return on assets be calculated for one year or for a multiyear horizon?
6 - Schlank, R “Evaluating the Performance of International Operations,” New York: Business International Corporation, 1989; - Stewart, G.B., “EVA, Fact and Fantasy.” Journal of applied Corporate Finance, summer 1994.
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The ROI & Return on sales (ROS) calculations represent the results for a single period say one year7. You could take actions that cause short-run increases in these measures but conflict with the long-run interest of the company. For example, you may curtail R&D and plant maintenance in the last three months of a fiscal year to achieve a target level of annual operating income. Further, the benefits of actions taken in the current period may not show up in short-run performance measures. For example, the investment in a new hotel may adversely affect ROI in the short-run but benefit ROI in the long-run. For these reasons, you may evaluate subunits on the basis of ROI & ROS over multiple years. Another way to motivate your managers to take a long-run perspective is by compensating them on the basis of changes in the market price of the company’s stock. This extends your manager’s time horizon because stock prices more rapidly incorporate the expected future benefits of current decision.
Step. 3: Choose a definition of the components in each performance
measure in step 1. For example should assets be defined as total assets or net assets (total assets minus total liabilities.)
Companies that use ROI generally define investment as the total asset available, which includes all assets, regardless of their intended purpose. When you direct your subunit manager to carry extra or idle assets, total assets employed (which equals total assets available minus the sum of idle assets plus assets purchased for future expansion) can be more informative than total assets available.
Step. 4: Choose a measurement alternative for each performance
measure in step 1. For example, should assets be measured at historical cost or current cost?
To maintain matching principle, historical cost is often used to
calculate ROI. Current cost is the cost of purchasing an asset today identical to the one currently held if an identical one couldn’t be purchased. Current cost uses a specific cost-index if available for the industry. If not available, you may often use a general index such as CPI (consumer price index) to approximate current costs.
Step. 5: Choose a target level of performance. For example, should all subunits have identical targets, such as the required rate of return on assets?
Because older assets valued at historical cost inflate ROI (particularly
if investment is defined as net book value rather than gross book value), you may set higher target ROIs for divisions with older assets.
Step. 6: Choose the timing of feedback. For example, should manufacturing performance reports be sent to your top management daily, weekly, or monthly?
7 In addition to ROI analysis, perform ratio analysis relating to important marketing ratios that are common to the industry e.g., sales cycle, advertising-to-sales, conversions from trial to purchase, website traffic-to-search engine marketing, etc.
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Timing of feedback depends largely on (a) how critical the information is for the success of the organization, (b) the specific level of management receiving the feedback, and (c) the sophistication of the organization’s information technology. For example, hotel managers responsible for room sales want information on the number of rooms sold on a daily or weekly basis. That’s because a large percentage of hotel costs are fixed costs, so achieving high room sales and taking quick action to reverse any declining sales trends are critical to the financial success of each hotel. This requires computerized room reservation and check-in system. In general, lower level managers, who are responsible for day-to-day operations, usually require more frequent feedback than top management.
These six steps need not be done sequentially. The issues considered in
each step are interdependent, and you will often proceed through these steps several times before deciding on one or more financial performance measures. 7.10 Performance Incentives
You should also understand the role of salaries and incentives when rewarding managers for their performance. People who decide to become entrepreneurs (owners) are generally more risk-tolerant than those who decide to work for others (managers). It is more efficient for owners like you to bear risks than managers, because managers demand a premium (extra compensation) for bearing risk. The objective of many compensation plans is to provide managers with incentives to work hard while minimizing the risk placed on them.
When possible, you may use performance-evaluation measures tightly
linked to managers’ efforts. Managers are evaluated based on things they can affect, even if not completely controllable. For example, sales persons can affect the amount of sales they generate by working harder, but they cannot completely control the level of sales because other factors (such as the economy and competitors’ products) also affect sales.
The foregoing chapters illustrated various aspects of preparing a
comprehensive marketing plan. In practice, there may be some variations on issues covered in the various chapters in this guide. The appendices in the next section provide four samples of marketing plans for your ready reference.
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Appendices
Appendix 1
Sample Marketing Plan of Product
Company: Safeplay Systems, Inc. Executive Summary
Author’s note: This is an actual plan of a company; however the name of the company as well as some actual sales and budget numbers have been changed since the company considers that information proprietary.
Background: Safeplay Systems is a nine- year old multimillion-dollar
company that sells playground equipment primarily to day care centers. Its target market includes day care centers associated with private schools, churches, and small day care chains. The company has a full product line that focuses on equipment for younger children from two to five, although it is adding equipment for infants (age 12 months) in order to better serve its day care market.
The company’s major competitive advantage is that equipment is made
from recycled materials and sold under the EcoPlay brand name. The company markets its products through four outside company salespeople and a network of 30 representatives nationwide. Its primary nationwide marketing effort is through trade shows that are well attended by day care providers.
Problems and Opportunities: Safeplay has traditionally focused on
the day care market, which is much less competitive than the park and recreation market. More competitors are coming into young children market as day care centers continue to increase. Currently, over 20 million preschool children are in day care centers, and that number is expected to continue to grow. Safeplay’s major competitors include larger competitors such as Little Tykes Commercial Division, which is owned by Rubbermaid. Safeplay’s EcoPlay product line is well received by churches, which make up 21 percent of the day care market, and it provides one of the top product lines for young children. Its emphasis on children younger than five also improves its position in the days care market, as it is a product category some of the larger competitors are not concentrating on.
The two problems that Safeplay Systems will be attacking this year
are; first, the problem that purchase decisions for many churches and employer-connected day cares are made by people who have a limited amount of knowledge about the products available on the market; and second, that its representative network is not as strong as many competitors.
Year 200X Strategies: Safeplay will continue to expand its line of
products for young children, increase its presence in directories, especially construction directories, improve its representative network by introducing a representative advisory council and representative referral program, and
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emphasize at major trade shows the fact that its products are made from recycled plastic. Market Conditions
Market Segments: The overall playground market can be broken into several segments: (1) schools, (2) park and recreation playgrounds, (3) residential market, (4) large customer commercial market (i.e. playgrounds at McDonald’s), and (5) daycare centers. Safeplay has chosen to compete in the day care market because it is the least competitive of the markets, and it is a market where customers value, and will pay for, products that better meet the needs of their users. Safeplay also chose the day care market because there was, and still is, not much equipment for infant to two-year old children, who are most important to day care providers. Day Care Market Segments
According to Child Care News, the 100,000 licensed day care centers are divided into following categories:
Independents 26% Church Affiliated 21% Public/Private School 20% Head Start 7% Employer Based 4% Chains 3% Other 19% Safeplay’s main markets are independents, church affiliated, and private schools. These markets have smaller purchases and aren’t pursued quite as vigorously by big competitions, and they are interested in buying top-quality equipment with the best features. Safeplay Systems’ products are competitively priced, but staying with smaller, quality conscious buyers helps Safeplay avoiding bidding wars from its larger competitors. Competitive Analysis Safeplay has four major competitors in the day care market that are well established and have strong distribution networks of manufacturers’ representatives. These competitors also compete in the park and recreations and school markets. They are: Gametime, Inc. Fort Payne, Alabama: Gametime is one of the largest playground equipment suppliers in the United States. They have been in business since 1929, and are the number one supplier of community-built playgrounds. They offer fund-raising help for communities, generate 3-D drawings so communities can see what their playground will look like, and have introduced TotTime systems, which are geared toward both the park and
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recreation and day care market. They are just starting to target the day care market, but their size makes them a formidable competitor. Gametime has 375 employees and sales between $20 and $50 million. Landscape Structures, Delano, Minnesota: This Company is the leading innovator in the market, consistently producing innovative designs that kid like. One of the top two competitors in equipment for children two to five, and they also have products aimed at younger children. They also serve school and park and recreation markets. The company has a strong network of representatives and a strong presence throughout the country. Landscape has 300 employees and sales between $20 and $50 million. Little Tykes Commercial Play Systems: This is a division of Rubbermaid, and Little Tykes also sells playground equipment for residential, as well as playground, school, and day care use. The company has an established group of representatives. The company is well funded, well-known, and a major competitor. Little Tykes has 600 employees and sales in the $50 to $100 million range. Playworld Systems, Inc: The competitor has a well designed product line, places a heavy emphasis on day care and younger children and also has a strong representative network. This company is smaller than the other competitors and is also working hard to establish a pre-eminent national position in the day care market. Playworld has 150 employees, and sales of $10 to $20 million. There are also two catalogs that target day care centers that offer playground equipment. One is ABC and the other is Kaplan. Both companies offer a broad array of products and are popular with day care centers. They have their playground equipment made by outside manufacturers that otherwise are not in the playground market. Their sales in playground equipment aren’t known, but they are significantly larger than Safeplay’s. Market Trends Currently 20 million preschool children and 24 million school-age children spend time in 100,000 licensed day care facilities. According to Child Care News, there is a 20 percent growth rate in the number of licensed day care centers as the number of working mothers increases both from two-parent working families, and from mothers who are moving off of welfare. Many of the new children entering day care are from poor families leaving on welfare, and the one group picking up much of this day care load are churches, which is one of the best markets for Safeplay Systems.
The other major market trend that benefits Safeplay is the trend
towards playground equipment for infants and toddlers. This market is new and Safeplay has already placed several products into this market. Some large competitors are slowly introducing infant and toddler products and this delay gives Safeplay an opportunity to increase its shares of the add-on market, which are purchases day care centers make to add to their playground.
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Situation Analysis Product Line Safeplay has full product line for children from infants to 13 years old. The emphasis of its product line is on children under five. Safeplay plans to continue to offer its full product line, but places special emphasis on infant and toddler lines of equipment that are currently a strong seller among day care centers. Safeplay frequently custom-designs systems to meet the needs of day care centers, but it also offers a standard product line, which includes: The Charlestown Totville. A small tower and slide set designed for toddlers. The Peachtree Center. Large system with two slides, a store front, tower, and under-deck play area, for children aged two to five. Sand & Fun Play Islands. Shaded play area that combines with a variety of options including slides, crawl tubes, spiral climbers, tree climbers, and learning panels for children aged two to five. Fun & Activity Center. Ground-level activities for toddlers and infants. Swings, benches, and other standard playground items are also available. Competitive Positioning Safeplay Systems is the only manufacturer of playground systems that are made from recycled plastic. Plastic has major advantages over wood and metal because maintenance costs are eliminated, a major concern of day care centers which often may have only minimal custodial help. Safeplay EcoPlay line is the only one on the market that is made from recycled plastic. The environmental savings that EcoPlay represents is a major selling point to day care centers associated with churches. Marketing Strengths/Weaknesses
Safeplay’s major strengths are that EcoPlay offers a major benefit that is important to target customers, day care centers associated with churches. It also offers a strong product line that is safe, maintenance free, and backed up with sales and service. The product line is somewhat well known to day care providers through the company’s attendance over the last ten years to two key trade shows.
The company’s weaknesses include: small size, poor representative coverage in some areas, and their lack of name recognition. The last point, name recognition, is important because in many cases their target customers will have people buying equipment who may only buy once or twice. This is especially true at churches where the people on a day care center’s board will change every few years. Contributing to the company’s name recognition is the fact that it doesn’t have a prominent position in many fey directories and
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doesn’t attend park and recreation trade shows that its competitors attend. Safeplay doesn’t attend those shows because it doesn’t target that highly competitive market. Distribution Safeplay has four company sales people located at its headquarters in the Atlanta area as well as having thirty representatives, seven to ten of whom do an excellent job. Safeplay has a unique approach with its representatives. It sets a price that it charges the representatives and then allows them to set their own sales price. The representatives are really acting as distributors, and they are responsible for billing and collecting from customers. This approach has two benefits for its representatives. First it allows the representative to earn more money. Second, and more important, the system allows the representatives to offer, and charge for, the value-added services its customer wants. The representatives are free to charge for installation, yearly maintenance checks and assistance in designing the playground area. These services are highly valued by day care centers that purchase playground equipment frequently. The value-added services will allow representatives to keep closer contact with day care customers. While some representatives do an outstanding job, others don’t. Part of the problem is that there is not a good communication system between representatives. Pricing Safeplay is not able to compete in competitive pricing situations such as McDonald’s, large chains of day care centers, parks and recreation, and public school programs where the equipment is let out for bid. Instead it has focused on smaller day care accounts, especially those that are associated with churches, where pricing is competitive, and its features of being made out of recycled plastic, is especially prized by customers. The other benefit of Safeplay’s target market is that churches want the value-added installation and maintenance service that Safeplay’s representatives provide. The competitors do a poor job of follow-up and customer service after a sale has been made. Company Trends Safeplay originally had a retail store and concentrated on sales in Atlanta. The company has steadily increased its sales from 5 percent to 20 percent per year and has developed a national sales base. It has added representatives that concentrate on the church, private school, and small chain day care market niche. The company has focused on this market segment and has designed its products line and sales strategy to meet this markets needs. With this focus in place the company plans on fine-tuning its sales and distribution strategy to expand sales in its chosen market niche.
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Problems/Opportunities Problems 1. Most buyers of day care equipment only purchase an original setup
once or twice. They aren’t well informed of their choices and they may go to a well known brand or be swayed by a referral from another day care, or a park and recreation department.
2. Safeplay has a much smaller base of customers than other day care playground suppliers. This limits its ability to generate aid on business when a day care decides to add to its playground.
3. Only about 25 to 30 percent of Safeplay’s representative network is doing a good job marketing its products.
4. Safeplay has a much smaller marketing budget than many of its major competitors.
Opportunities 1. Safeplay does have a few highly motivated representatives who want
to help the company succeed. 2. Safeplay’s EcoPlay product line is the highest quality line on the
market made of recyclable plastic. 3. Smaller buyers such as day care centers associated with churches and
private schools place a premium on buying the best available equipment. These buyers typically aren’t looking for the lower price, and the fact that EcoPlay is made from recycled plastic is often n important feature to this market.
4. Safeplay is a leader in getting out infant and toddler playground equipment that is less than 16 inches from the ground. Day care centers are buying this equipment, as the young child is too small and is not fully physically developed enough to play on equipment built for children two to five.
5. Safeplay hasn’t been listed in construction directors such as the Blue Book. These directories are often the first source of information from new day care centers where buyers are unfamiliar with the market. Safeplay can get in these directories for a modest sum.
Strategy for 200X Positioning Statement
Safeplay produces the playground of the future, 100 percent made from recycled plastic geared toward the needs of church and private school-affiliated day care centers. Products are designed for children from 1 to 13 years, with most products geared to children from one to five. Safeplay Systems’ products meet safety specifications, are easy to install and maintain,
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and are the perfect product for day care centers with minimal custodial support.
Major New Activities in 200X 1. Set up a Representative Advisory Council composed of the top
Safeplay representatives. Representatives will provide guidance to the company, plus offer suggestions and mentoring to poor performance representatives. The members of the Representative Advisory Council will receive a 1.5 percent override for three years on additional sales made by the representatives they are mentoring. Safeplay will offer a 2.5 percent override for three years for new representatives who are recruited by members of the Representative Advisory Council.
2. Increase its listing in key directories that are used by day care centers, especially the Blue Book.
3. Increase attendance at local and regional shows through its representatives, such as the Minnesota Association for the Education of Young Children [MNAEYC] convention and the regional shows.
4. Put a new Web site online that can be accessed through a variety different Internet sources, including the Blue Book for people searching for ideas.
5. Put out a small booklet on the Internet site, and also make it available in print format, discussing how to choose equipment for infants and toddlers.
6. Concentrate on obtaining government GSA business. 7. Seek other applications for EcoPlay outside of the playground
business. Marketing Tactics Product
Safeplay plans on introducing several new products aimed primarily at younger children, with at least one or two of the products being for infants or toddlers. Several low-height learning panels for infants and toddlers will be included. The emphasis will continue to be EcoPlay and its recycled plastic feature, which is unique to Safeplay Systems. Pricing
Safeplay will continue its current pricing policies, which offers
competitive pricing for independent day care centers and church affiliated day cares. Safeplay won’t try to match the discounts for larger customers such as day care centers or fast-food chains like McDonalds. Safeplay will also keep its policy of selling its product to its representatives for a set cost and then allowing them to set their own final price. This allows the representatives to react to pricing from small local suppliers, drop prices at key accounts to
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penetrate a new market, and more importantly charge for value-added installation services that can be key in selling individual day care accounts.
Representative Advisory Council
The company will start a Representative Advisory Council effective
January 1, 200X. In the past the company has met with several of its top representatives to gain advice on market conditions, sale tactics, and product innovations. The representatives provided key information and they genuinely appreciated this input. This year the company will formalize the Representative Advisory Council to gain better information, but more importantly to help the company convert more of its representatives in the field into top producers. The company will offer a small commission override on sales to encourage the top representatives to assist the poor performing representatives. Safeplay will also offer its top representatives an override commission on any representatives they recruit to fill open territories.
Directory Listings
Safeplay will be listed in the Blue Book Construction Directory in the
year 200X. This directory includes products in a wide variety of categories including playground equipment. The Blue Book also has an excellent, easy to use, Web site. It is one of the first resources people use when looking for equipment that they don’t buy frequently. All of Safeplay’s major competitors are in the Blue Book. Safeplay will also be in the directory published by Early Childhood News and will look into other directories as they become known.
Website
The Company has started work on its Website and it will be on the Internet in 200X. It is a basic site that is geared toward day care center operators. The company has budgeted money to finish its site and to upgrade it over the next year. Domain Name Site Registration
The company will maintain the domain names: Safeplay Systems and
EcoPlay.
Publicity
The company will put together at least one article for Early Childhood News regarding playground equipment for children through 18 months old. The company will use an expert in the area to talk about what the equipment works best, and then have references to its equipment throughout the article. The article will also be placed into a pamphlet and made available through a variety of Web sites targeted at day care providers. The pamphlet will emphasize Safeplay’ s position as a leader in products for young children, it will also help generate additional leads for Safeplay, especially with new day
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care centers, that may have not heard of Safeplay. The company also hopes to make a presentation at NNAEYC Conference.
Advertising
Safeplay limits its advertising to directories in Early Childhood News,
which is widely read by day care providers. Safeplay will also hire a local Atlanta company specializing in setting
up interlinks to other Web pages geared toward day care providers. This company will be hired once the free pamphlet on playgrounds for young children is ready. Direct Mail
The company will not resort to any direct mailing this year.
Trade Shows Safeplay will attend the National Childcare Convention and the annual
convention of the National Association of Young Children. Through its Representative Advisory Council the company will also be working to encourage its representatives to attend state and regional shows.
Printed Informational Materials Safeplay will publish a pamphlet covering to the topic of designing
playgrounds for very young children. The article will include the publicity article written about Safeplay products as well as other articles written on the topic that have already been published.
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Appendix 2 Sample Marketing Plan of an Online Company
Oil – N- Gas, Inc.
Situation Analysis Market Size
25,000 to 35,000 wells in the United States are drilled per year with a peak of 90,000 in 1981 and a low of 18,000 in 1995. Worldwide market for upstream production and exploration cost in 1997 was $80 billion with a minimum of 15 percent of that number being U.S. activity. A significant percentage, in the range of 15 to 20 percent, is financed privately through the sale of direct participation investment programs to individual investors. In addition to new activity, the market includes variety of investments in oil and/or gas well drilling and production operations such as existing production royalty streams, offsets to exiting production, infield developments, re-entries, horizontal/directional drilling activity, seismic shoots, secondary recovery, tertiary recovery and a variety of other special programs.
The number of investment opportunities provided by the 7,500 oil and gas production companies operating in the United States is large, estimated to be at least 15,000 opportunities per year. The number of accredited investors in the United States is 3.5 million households, and while we can’t predict the exact potential market size for an information service, we know that it can be very large. We expect that the Internet listing of Oil-N-Gas, Inc. can significantly expand the market as it will both increase the number of people investing in gas and oil opportunities, as well as expand the number of opportunities offered to accredited investors. Right now the market size is limited by the lack of free flowing information regarding investment opportunities.
Market Need
Gas and oil well developers routinely try to sell opportunities to investors. The problem in the market currently is that it is inefficient; with gas and oil producers routinely having to cold call themselves, or has a broker cold call in order to raise money. It is common for producers to spend four to six months to raise the money, which delays the start of oil wells, as well as taking up an excess amount of management time. Investors are also shortchanged by the current sale techniques because they have access to only a limited number of potential investment opportunities. They can’t know whether or not they are getting the best deal in the market.
A second problem is that only a small number of the 3.5 millionaires in the country are fully aware of the opportunities that oil and gas investments offer. Most investors are in oil and gas producing states and most new investors to the gas and oil industry don’t have an independent, non-broker source of information. The result is that only a percentage of the nations
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accredited investors know enough about oil and gas investments to get started in the market.
The current inefficient system is not adequate to handle potential increases in business from two favorable market conditions. The first trend is the higher cost of oil and natural gas, which makes it economical for oil and gas producers to open a greater number of wells in the United States. In the first half of 1999 oil prices rose 30 percent, making all producing wells much more profitable, and opening up opportunities for many formerly unprofitable wells. The second trend is the apparent leveling off of the stock market. Investors selling stock to lock in profit are prime candidates for oil and gas investments, especially with the special tax benefits offered to oil and gas investors.
Target Customer Profile
Accredited customers: There are 3.5 million households in America
with assets (less liability) of over $1 million (U.S News and World Report, April 14, 1997). Their average age is 57, and 26 percent of their assets are invested in passive investments like stocks, bonds, and oil and gas investments. More of these individuals are clearly in a position to invest in oil and gas operations.
According to a survey by Trusts & Estates magazine, wealthy people
do not like a hard sell on potential investments, which is the technique commonly used by most oil and gas producer. Instead they prefer information, lots of alternatives, and a solution they feel tailored to their needs. And Oil-N-Gas membership allows wealthy investors to view information about selecting the right oil and gas investment, see many alternatives, and then choose which oil and gas producers to contact for more information.
Oil and gas producers: The majority of the companies selling oil and
gas investments are small companies that are not listed on a major exchange. They fund projects either by soliciting investors, or borrowing from banks and other financial institutions. When raising money for a project the companies can either pay a broker a commission of 2 to 5 percent, or have the company make direct mailings or pone calls to accredited investors who must invest a minimum of $25,000 in a project. Companies feel fund raising is a major obstacle for most projects, and they are receptive to any program that helps raise money. Oil and Gas Investment Benefits
Oil and gas investments buy part ownership in a project that will produce (hopefully) a future revenue stream. The project also has a significant tax benefits. Oil and gas investments have two components. The first is working interest, which includes drilling costs and all other costs associated with operating the well. These costs are typically 75 percent of the initial investment, and all of these costs can be written as a tax loss. The other costs of the project, which include tangible assets, can be written off over a three to
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five year period. Oil investments have particular appeal to most accredited investors at the moment because they can offset profits from stocks today, and take their profits from the oil and gas well later once the well starts operating. Oil-N-Gas Benefits to Investors
1. Low cost of $39.95 per year is small when compared to a typical minimum investment of $25,000
2. Access to many more oil and gas investment opportunities 3. Easy identification of different types of investments as they are
grouped by category 4. The best available market information from books, Oil-N-Gas
newsletter and other data posted on the Website. 5. Quick link to other related sites. 6. Discounts on a wide variety of services. 7. ROI software is discounted to members.
Oil-N-Gas Benefits to Production Companies
1. No monthly fees 2. Oil-N-Gas’s Internet Web site is by far the lowest priced marketing
program available to oil and gas producing companies 3. Direct links to other gas companies like HIS Energy Group, allow
quick verification of geological data. 4. Oil and gas companies’ members can list that fact in their literature 5. Oil-N-Gas is listed over 1,550 search engines, and the listing
guarantees potential investors to find Oil-N-Gas quickly 6. Oil-N-Gas owns over one hundred domain names related to oil and
gas production. This helps ensure that investors will come to the Oil-N-Gas Web site when searching for virtually any oil and gas related term.
Competition
There are several Internet sites that also list acquisition and divestiture opportunities for the gas and oil industry, including sites sponsored by Amoco and Exxon. These sites aren’t for individual investors, but instead are for complete purchases or sales by independent oil and gas producers. Individual producers may also have a Web site where they try to market their own investments. There are not any sites similar to Oil-N-Gas, which is simply a clearinghouse of information for investors. One step that Oil-N-Gas has taken to minimize competition is to obtain over one hundred domains names that consist of every conceivable term associated with oil and gas investments. This will lead people directly to the site for many Internet searches.
Oil-N-Gas Strengths and Weaknesses Strengths
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1. Only known clearinghouse for oil and gas investments. 2. Attractive pricing for investors and producers when compared to the
size of typical investments. 3. High information content is ideal for novice oil and gas investors. 4. Price comparison between different options helps ensure investors to
get a fair price. 5. Company founder has extensive experience in the gas and oil
investment business. 6. Company Web page is complete and ready for marketing effort. 7. Site doesn’t push any products other than memberships and postings.
It is simply an information source, which is what investors are looking for. The company doesn’t profit from any eventual investments. It is investor’s choice to contact the gas and oil producer.
Weaknesses
1. Oil-N-Gas is a new company and not related to an up-and-running brokerage within established reputation
2. Oil-N-Gas is a new start up that needs to build a base of both investors and postings so the site will have values to users
3. Oil-N-Gas doesn’t have its entire staff in place yet to maintain and monitor the activity level on the site
Market Trends
Oil prices hit a low in 1995 causing a drop-off in drilling activity. But since then prices have stabilized. Salomon Brothers expect the market to keep increasing at a 14 percent per year growth rate, although the latest increase in oil prices could create a much stronger rise in drilling activity. In addition, improved techniques of oil recovery make more existing wells profitable that are not currently operating. Marketing Strategy and Positioning Strategy
Oil-N-Gas’ goal is to be the complete, all-inclusive information site for people and companies interested in buying or selling oil and gas investment opportunities for accredited investors. Once it establishes that reputation the company will be able to add sites such as Oil-N-Gas Investment Trust. The key elements of this strategy are:
1. The site is only open to accredited investors. Oil-N-Gas will screen
investors prior to accepting their membership to ensure they are accredited. This feature is important to producers who don’t want to waste their time with people who aren’t qualified to invest.
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2. An alliance with Amazon.com has given Oil-N-Gas access to over six hundred titles regarding oil and gas investments.
3. Links to other sites offer producers access to key geological data that they need when preparing investment opportunities.
4. The information nature of the site places the burden for the actual sale ad necessary securities documentation onto the producer and investor. This keeps the amount of legal jargon on the site to a minimum.
5. Oil-N-Gas has deliberately tried to acquire as many oil and gas related domain names as possible. To date it has acquired over one hundred names. Those names are currently in search engines and lead to the Oil-N-Gas Web site.
6. Oil-N-Gas wants to establish a dominant market position before any competitor can enter the market.
Oil-N-Gas’s strategy is based on its desire to be the first place that investors come when they seek information about an oil and gas investment. Investors want a good informational source, and producers want access to a large pool of potential investors. Oil-N-Gas’s strategy is based on four factor: (1) be first into the market; (2) provide a complete information site; (3) be neutral site by avoiding any direct involvement with selling securities; and (4) make it difficult for competitors to enter the market. Competitive Positioning
Oil-N-Gas has the only comprehensive Web site for oil and gas investments on the Internet. It is also the only site that doesn’t have vested interest in trying to sell securities to investors. Its only goal is to help investors understand what their investment opportunities are and to give producers a low-cost method of posting their investment opportunities to a large group of potential investors. Marketing Tactics Product Oil-N-Gas will produce revenue from four different products:
1. Memberships for investors: The introductory price is $39 per year, which gives investors access to all the information on the sites as well as discounts on a variety of services.
2. Posting options for oil and gas producers: The options vary based on the amount of information that producers want on the sites. Posting will be categorized by type of investment and location.
3. Sales of information products through an alliance with Amazon.com, which is already in place.
4. Sale of advertising for banner pages and resource listings. Pricing
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Oil-N-Gas’s profitability depends on having a large number of
investments members, rather than depending on a high price per member. The membership dues are set low at $39 to encourage investors to sign up , if for nothing else, just to learn more about oil-and gas investments. To encourage more investor memberships, Oil-N-Gas wants to have as many postings of investment opportunities as possible. Prices for its postings start at $249 which represents a one-time fee. Since investments typically are in increments of $25,000 and up, $249 fee is easily covered if just one investor buys a share in a product. The books and informational products will be furnished by Amazon.com and sold to members at full retail pricing. Advertising on the site will be based on the number of hits the site obtains while the ad is running, probably $10 to $20 per thousand exposures. Website The company’s Web site is up and running. It is a basic site that operates well, but the company has budgeted $280,000 to upgrade its site over the next year. The goal is to improve the sites interactive nature for investors. Initial Sign-up Awards To initiate a rapid start for the site, Oil-N-Gas will put in place several initial sign-up programs.
1. For members: Charter members (those who invest in the first six months) can renew their membership for the first there years at the same $39 yearly membership fee.
2. For producers: Free basic listings on the Oil-N-Gas Web site if they post the listing within the first three months of the program. Upgrade options are available for just the upgrade charge, with the basic listing still being free.
Domain Name Site Registration
To date the exclusive rights to over one hundred domain have been obtained by Oil-N-Gas, and the company is working to obtain as many additional names as possible. There are two goals in obtaining as many domain names as possible. First, it helps Oil-N-Gas come up early in any Internet search related to oil and gas investment (Search engines typically pull up in the first 10 items any domain names that match the search inquiry). The second goal is for registering names to prevent competitors from easily entering the market. Publicity
Fortunately there are a large number of magazines targeted at both investors and oil and gas producers. Oil-N-Gas will run an extensive publicity program with industry and investment oriented magazines to include both short product announcements, and features length stories. Oil-N-Gas will hire
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a company to prepare and send out press releases and to coordinate the follow-up to generate as much as publicity as possible. The targeted magazines are listed here.
Advertising
Oil-N-Gas has a $2.5 million advertising budget targeted at investors, and
a $250,000 budget targeted at oil and gas producers. The company plans to front end load these advertisements into the first four moths of 200X to generate immediate registrations. Periodical advertising will continue through the year to increase membership.
Oil-N-Gas will also hire a company specializing in the placement of
Web page advertising to promote its site to investors on other sites where accredited investors are likely to visit.
Direct Mail
Direct mail will be sent to key individuals at the 7,500 oil and gas
producing companies. Eighty percent of the budget of $400,000 will be budgeted for the first quarter. Oil-N-Gas will hire an outside direct-mail agency to prepare an elaborate mailing that will be much more than just a letter or postcard. Oil-N-Gas anticipates that each item mailed will cost $3, and the item will have enough emphasis to be sure it is opened and read by oil and gas producers. The cost for the mailing is high, but the company can justify it because over 50 percent of the recipients (oil and gas producers) will be soliciting investments in the year 200X.
No direct mail will be sent to investors as they already receive too
much mail and it is unlikely it would be opened and read. A more elaborate program, such as the one to oil and gas producers, isn’t cost effective for investors because the company can’t isolate investors who are most likely to invest in an oil and gas property. Trade Shows
Oil-N-Gas will attend several shows that are targeted at gas and oil
producer. These shows include: SPE (Society of Petroleum Engineers) Production
Operations, March 26-31, 200X. SPE Annual Exhibition, October 1-4, 200X.
Alliance/Partnership
Oil-N-Gas has already established an alliance with Amazon.com Internet bookstore. Customers from Oil-N-Gas can order books related to gas and oil investing from Oil-N-Gas, which will then have those products shipped
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by Amazon.com. Oil-N-Gas receives a 25% commission on each order shipped.
Implementation Plan
Implementation and expense plan can be prepared with detailed steps to monitor each step of the activities mentioned above.
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Appendix 3 Sample Marketing Plan of Product Company
Mosaic Buttons
The following market plan is an actual plan written by a woman-owned business. Names of some businesses and cities have been fictionalized at the owner’s request. MISSION STATEMENT Technically, the mission statement is in the opening of the entire Business Plan, of which the Marketing Plan is a part. It's included here for the reader’s information...
“Mosaic intends to supply Michigan with the most visually interesting buttons available today. They will delight their users and provide a springboard for creative activity. Mosaic believes artistic expression enhances life. It appreciates the skill of human hands and the sensitivity of human hearts. It regards buttons as small works of art in which we are able to see ourselves.” History & Description
Mosaic is a specialty retail store offering a collection of antique, contemporary and hand-crafted buttons from around the world. These buttons are distinguished from those available in the marketplace by the quality of materials, workmanship and design. A very simple need which Mosaic addresses is the need to have fun! Buttons are wonderfully expressive objects that add unexpected vitality to clothing. Apparel manufacturers are witnessing a competitive advantage to using fun and distinctive buttons. Mosaic makes such buttons available to home sewers and others involved in the needle arts. Providers of interior design services are also served by Mosaic in their efforts to create custom bedding, slip covers and window treatments.
With growth, Mosaic will also establish a working studio for the surface design of fabric. Workshops for the painting, dyeing and printing of fabric will be offered throughout the year. These will be conducted by the sole proprietor of Mosaic and by guest artists with particular expertise.
Mosaic opened for business on August 5, 1996, with an inventory
valued at $1,050. In the first eight months of operation another $1,290 of inventory was added. Sales totaled $1,376 for the same period with the average monthly total being $172. Sales have increased steadily over this eight month period.
Organizations and businesses served include:
• Machine Knitters Guild of Michigan
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• Michigan Embroiderers Guild • Sew for Profit of Michigan • The National Button Society • Home Fabrics • Smith-Wesson Designers • The Workroom
Funding for the company has come from the personal income of the
sole proprietor and from the income generated by sales. Additional funding is sought for the expansion of inventory and for advertising. PRODUCT OR SERVICE DESCRIPTION
Mosaic offers hand-crafted and manufactured apparel buttons in a range of materials and finishes. A high percentage of these buttons are made of natural materials such as horn, bone, wood, glass and clay. These buttons are hand-crafted by artisans throughout the world and are of original design. Manufactured metal and synthetic buttons are also offered, together with a collection of vintage and antique buttons.
All garments benefit from buttons that contribute to their character. Mosaic offers an opportunity to reinvent ready-made clothing and engages people in a creative process. Buttons are a form of ornament. They allow people to express their personal style in a novel manner.
"Makers" of garments who have invested a great deal of time and energy are unwilling to use buttons with nothing to offer but an attractive price. These people are looking for the perfect button for their creation. Mosaic helps people accomplish this and brings the entire process to a satisfying conclusion.
The charm of buttons is increasingly evidenced in the home, where they are used as a design element on pillows, bedding and window treatments.
Buttons are often purchased not for reasons of utility, but simply for their beauty. Collections of antique buttons represent a significant investment and historically risen in value.
LOCATION DESCRIPTION
Mosaic is located in the Tower Building, 706 Main NW, Suite 200, Altamount, Michigan. This building, a historic landmark from the town’s lumbering days, houses two design businesses and a dozen creative studios for book illustration, photography, painting and surface design, and furniture making. Its neighbor, the former Gay-Tonekey Building, at 710 Main NW, also supports numerous design studios. Most notable are the Artists’ Studio, a custom frame and gift gallery, and LaFontaine Gallery, a premier fine art gallery. These two buildings have supported the artistic community in the area for over a dozen years by offering architecturally interesting spaces and low rent. They are a signpost of creative thought and activity in the community and
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attract customers who are interested in artistic expression. This area is also about to receive renewed attention as renovations begin on the city’s former water purification plant, soon to become a nationally franchised restaurant.
Mosaic is currently located in a second floor suite in the Tower Building. With growth, it would like to relocate to the building’s south end. The benefits of this location are first floor access, room for expansion, higher visibility from large arched windows, more convenient parking, closer proximity to area retailers and reasonable cost. MARKET ANALYSIS The Industry
According to the American Home Sewing and Craft Association, the home sewing industry contributes $3.5 billion in retail sales to the national economy. In the five years from 1987-1992, first-time buyers of sewing machines increased from 30 percent to 50 percent. In the last five years (1991-1996), membership in the American Sewing Guild has doubled in size with a 55 percent increase in the number of local chapters. Thirty million people in this country are serious sewing hobbyists.
The availability of the serger may account for these increases. This machine seams, overcasts and trims all in one motion, cutting sewing time in half. Also, today’s sewing is technologically advanced, eliminating the need to thread needles and trim excess thread. Computer memories have also enhanced the creative potential of the sewing machine.
Sewing is one of several creative industries served by Mosaic. Home
oriented leisure activities enjoy increased levels of interest. Gallop Organization’s 1990 report on leisure trends indicated that sewing/knitting ranks fourth in activities pursued by the general public.
Throughout Michigan, there are guild chapters for sewing, weaving,
knitting (machine and hand), embroidery and quilting. Michigan also hosts a chapter of the National Button Society, an association of button collectors.
The Target Market
The home sewer’s profile, as reported by the American Home Sewing and Craft Association, looks like:
• 75 percent female • 25 to 54 years of age • college educated • household income of $35,000 and up • artistic, values originality • sewers of varying ability
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This profile is supported by direct observation of Mosaic’s customers. People who pursue the creative industries value objects made by hand
and purchase them for themselves, their friends and their families. They are deeply involved in home-based leisure activities such as reading, gardening and exploring the culinary arts.
Within the Altamount-Fairhills-Levine DMA, 23 percent of
households sew and 20 percent practice a form of needlework. This is slightly above the national average and compares favorably to the City of Indianapolis, which supports Buttons Galore, a similar enterprise with an annual trade of $500,000.
A larger percentage of people from the Altamount-Fairhills-Levine
DMA attends cultural events and patronizes fine art and antique galleries than from Indianapolis. The median income for this area is also slightly higher than that of Indianapolis.
Mosaic also serves design businesses that focus on residential interiors.
Buttons are used increasingly in the home as an element of interest and design.
The Competition
Direct competitors exist in three nearby cities. They are The Threadminder, a supplier of designer knitting and weaving yarns in Levine, Michigan; The Fabric Alley, a high-end fabric shop located in Cashill; and two button shops in Chicago—Twelve Buttons and Renewal Buttons. The strength of these competitors lies in the length of time they have been in business. Awareness of their product is well established.
The Threadminder offers a limited selection of unusual buttons purchased from the same suppliers as Mosaic for the same price. They offer one-stop shopping for the knitting and weaving community, but buttons are not their focus. Unless shoppers were looking for yarn, they would not know that buttons were available at the Threadminder. Mosaic will compete by focusing on buttons and by offering a broader and more exciting selection.
The Threadminder develops their market by offering classes in knitting
and weaving. Participants who love fiber and the textile arts will be open to exploring other avenues of expression. Mosaic will offer instruction in those areas.
Mosaic will also compete on the basis of location. It is centrally located with easy access from all parts of the city.
The Fabric Alley in Cashill, Michigan, appeals to serious sewers who are spending considerable sums on fine fabric. They offer a very broad selection of buttons in the same price range as Mosaic. Sewers can locate
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buttons and fabric in one location. However, access to the buttons is difficult. They are poorly displayed and shoppers must be very determined to locate buttons they find attractive. Once spotted, the clerk must retrieve the buttons from stock before the customer can fully assess them. This is both frustrating and time consuming.
Buttons are displayed prominently at Mosaic in a manner consistent with their quality and character. Again, Mosaic will compete by focusing on buttons. The company will also compete on the basis of location. Those whose needs are met by the local fabric stores and who may be unwilling or unable to travel across the state will depend on Mosaic for distinctive buttons.
Twelve Buttons and Renewal Buttons offer a product impressive in its range of quality, price and character. They are both centrally located in the metropolitan Chicago area. They are the model upon which Mosaic patterns itself.
Mosaic will entice fans away from the Chicago shops by diligently procuring buttons of high originality. Independent buttonsmiths will be showcased whenever possible. Mosaic will also maintain a large collection of vintage and antique buttons. Relationships with the local interior design trade are also vital to success.
Indirect competition comes from the local chain stores: Northeast Fabrics, Wisconsin Fabrics, Joan’s Fabrics and Fieger’s Fabrics. Mosaic offers buttons which cannot be found in these stores and which are priced generally higher. Mosaic will attract customers who may be willing to spend more on buttons than on fabric to achieve a higher level of style and expression.
PROMOTIONAL OBJECTIVES AND STRATEGIES
One of the greatest challenges facing Mosaic in its first year of operation is lack of community awareness. At this time, the customer base is 90 people. The company’s goal is to double this number over the months of June through October for an overall goal of 180 customers. Strategies for achieving this goal include:
• Establishing an auxiliary sales display at the local farmer’s market on Saturdays throughout the summer. This can be done at a cost of $210.
• Distributing business cards and reprints of the "Grandstand" article about Mosaic which appeared in Lifelike Magazine in January of 1997. Distribution points will be the farmer’s market, the Arts Alive Gallery Hop, the Underground Studio, and area dry cleaners.
• Mounting additional signage to the exterior of the Tower Building by June 1, 1997, at a cost of $75.
• Publishing a quarterly newsletter to existing customers and selected businesses. The newsletter will solicit referrals, advertise additions to inventory and notify readers of current sales promotions.
• Establishing quarterly sales promotions in May, August, November and February.
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The May sales promotion will be in honor of Mother’s Day. Customers will be treated to an afternoon tea; discounted gift certificates for mothers will be offered. During August, College will celebrate its anniversary. A fashion show/competition or other activity will be planned. November will focus on year-end festivities. February will highlight Valentine’s Day.
• Advertising in the newsletters of the Woodbrook Weavers, the Michigan Quilter’s Guild and the Greater Levine Embroiderers Guild. Costs range in the area of $10 per issue.
• Continuing to advertise in the Greater Levine Yellow Pages at a cost of $10.75 per month.
• Participating in the fundraising activities of public radio, such as the WYRU Auction, by making a donation in the form of a gift certificate. (Retail value of $30; actual cost $15)
• Supplying area interior designers with button samples mounted on fabric for them to use with their clients.
Another goal which Mosaic needs to address is that of building
inventory. Summer months will allow a greater portion of the company’s resources to be directed toward augmenting inventory.
• Mosaic will advertise in the area weeklies, such as Retreat, as wanting to buy old buttons.
• Mosaic will solicit handmade buttons by advertising in the "Opportunities" section of The Art Calendar as a consignor.
PRICING POLICY
Three categories of buttons are purchased by Mosaic for resale. They are hand-crafted buttons, manufactured buttons and vintage buttons. The standard industry mark-up is 100 percent. The average retail price of hand-crafted and vintage buttons is $4.25. Manufactured buttons range in price from $1.45 to $2.00, depending on what material is used. Buttons of natural materials are more expensive. In the eight months Mosaic has been in business, the best selling button has been a natural corozzo nut button that sells for $1.20. TERMS OF SALE
Mosaic currently accepts cash and personal checks in the amount of the purchase. With growth, the company will establish credit card acceptance.
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Appendix 4
Sample Marketing Plan of Service Company
Creative Cuisine-Personal Chef Service Introduction
Creative Cuisine, to be located in Somerville, Massachusetts, will provide personal chef services to busy working professionals in the West Suburban Boston area. This service will include personalized menu planning, grocery shopping and preparation of dinner entrees and side dishes on a regular basis. The service will be available as a monthly, bi-weekly or occasional service. Price will vary according to level of service selected. The meals will be prepared in the client’s home during a weekday while the client is at work. All meals will be packaged, labeled and refrigerated or frozen with complete instructions for final preparation. Creative Cuisine will use all its own utensils and will do complete clean up.
Creative Cuisine’s target market will be affluent working couples with children who want to enjoy healthy dinners at home with minimum preparation. The average clients will be homeowners age 35 to 55, with incomes over $100,000. Creative Cuisine’s marketing focus is to provide them with a convenient, unique and high-quality alternative to cooking, dining out, or take-out meals.
Creative Cuisine’s targeted high-end consumers continue to demand
more convenience and quality in their dinner meal. Nearly half of America’s dinner meals are currently prepared outside the home by full-service restaurants, grocery store prepared food sections, and take-out food retailers. Two of Creative Cuisine’s advantages over such competitors are: 1) its ability to completely customize meals to the client’s tastes, preferences and dietary requirements; and 2) its ability to deliver these meals directly to the client’s home refrigerator/freezer, thus saving clients valuable free time that would otherwise be spent shopping, driving, and cooking. The customized meals personally prepared by Creative Cuisine will be significantly higher in quality, taste and nutrition than the mass-produced food offered by its competitors.
What follows is a detailed analysis of the current market for a personal
chef service.
Current Market Size
Economists at the National Restaurant Association estimated total foodservice sales for 1996 at $313 billion, representing a 5 percent increase over 1995. That means consumers spent an average of $855 million per day on food away from home. According to the National Restaurant Association’s 1996 Foodservice Industry Forecast, fast food comprised the largest segment of this market, capturing 47.8 percent of the dollars spent. The report attributes this success to
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"fast food’s ability to meet consumers’ desire for value and convenience." It was further estimated that at least 64 percent of all fast food purchases were consumed off-premises.
According to Technomic, Inc., a food industry consulting firm in Chicago, almost half of consumer food dollars are spent on meals prepared away from home. In addition, food expenditures rise significantly as income increases according to the Bureau of Labor Statistics’ Consumer Expenditure Survey Data.
Industry Trends
This significant trend of consumers purchasing prepared meals is so pervasive that the foodservice industry has coined a new term to describe it: "home-meal replacement." Many businesses are shifting their focus to meet the growing demands of consumers:
• Most supermarkets now include a deli, bakery, and a prepared-foods section. Also, many offer fast-food service.
• Boston Market has continued to expand its product lines and market share.
• Famous chefs, such as Wolfgang Puck, are offering high-end prepared meals in upscale supermarkets.
• Fast-food chains such as KFC, Pizza Hut and Taco Bell have formed alliances to offer multiple product lines under one roof.
There are also several economic and cultural trends that have
contributed to this growing demand:
• Increasing number of women in the workforce • Increasing number of woman-owned businesses • Growing number of higher-income households • Americans working longer hours • Decreasing amount of leisure time • Premium placed on convenience • Trend toward purchasing personal services (i.e., personal-trainers,
house-cleaning services, home shopping services)
According to Foodservice Solutions, a Tacoma, Washington hospitality consulting firm: "Home-meal replacement is not a luxury today – it’s a necessity. People don’t want to take the time to cook; they have too many other things to do. Americans want high- quality prepackaged foods. It’s the American way – to make life easier." Entrepreneur Magazine’s February 1997 article selected "Personal Chef Services" as one of the top service businesses to start today: "Convenience-craving consumers are always looking for a way to do things better, faster and cheaper. Often, that means turning to a specialty-services
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entrepreneur who knows how to get the job done right. Those with culinary competence can likely find a hungry clientele among the ranks of America’s busy working families." Growth Potential of the Market
Based on the National Restaurant Association’s 1996 Foodservice Industry Forecast, the percentage of food dollars spent away from home has grown from 25 percent in 1955 to 50 percent in 1996.
More importantly, the proportion of the food budget spent on meals
away from home increases significantly as income increases. Households with incomes of $70,000 spent 81 percent more per capita ($1,278 per person) on food away from home than the average income-reporting household ($705 per person) according to the Consumer Expenditure Survey conducted by the Bureau of Labor Statistics.
Also contributing to the potential growth in the market is the rise in affluent households documented by the Current Population Survey from the Bureau of the Census. From 1990 to 1994 the number of households earning $50,000 to $74,999 increased by 16.4 percent; households earning $75,000 to $99,999 increased 36.1 percent; and households earning $100,000 or more increased by 61.1 percent in the same period.
A personal chef service is uniquely positioned to take advantage of the increasing demand for fast food, growing health concerns, and the rise in high-income households. Affluent working couples want "fast food," but they want it upscale, healthy, and convenient. The founders of Truly Unique Personal Chef Service in Newport Beach, California, report that their business has grown 10 to 15 percent every year since opening in 1992. Many of their clients said they were getting bored with going out to restaurants and wanted something different.
Affluent Households Gaining Ground
Change in Number of Households from 1990 to 1994 Household Income Increase (Decrease) in
Number of HouseholdsPercentChange
Less than $35,000 (1,638,000) -3.0% $35,000 to $49,999 (331,000) -2.0% $50,000 to $74,999 2,310,000 +16.4% $75,000 to $99,000 1,841,000 +36.1% $100,000 or more 2,496,000 +61.1% Total 4,479,000 +5.0% Source: Bureau of the Census Customer Profile
Creative Cuisine’s’ target customer will be families with two working, professional parents who are too busy to cook every night but are fed up with takeout and restaurant food. Their specific demographics are as follows:
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Household Income: Over $100,000 Age: 35 to 55 Education: College degree and/or advanced degree Marital Status: Married couples or high income single Job: Professional status (one or both partners) Children: Preferably ages 7 to 18 Homeowners: Preferably Location: Live in neighborhoods with high concentration of affluent families Customer Benefits
Here are just a few of the benefits to customers if they hire Creative Cuisine:
• 6 hours per week more free time (1 hour per day cooking/acquiring
meal plus 1 hour per week grocery shopping) • Very convenient • Meals customized to personal tastes • More variety • Health and nutrition benefits • Less stress • Client feels pampered • It makes life easier • Don’t have to cook • Less grocery shopping • Minimal kitchen clean-up • Peace of mind
The Competition
There are a handful of other personal chef services in the Boston metropolitan area; however, since this is still a new business concept, there remains a large untapped market.
Most competition for home-meal replacement exists from
neighborhood restaurants, upscale fast-food outlets (e.g., Boston Market) and supermarket prepared meals. Following is a competitive analysis of the various meal replacement alternatives: Creative Cuisine’s competitive advantage is its ability to deliver consistently high quality, personalized meals, custom menu planning, grocery shopping, and preparation of meals right in the client’s home for consumption at the client’s convenience.
This is an opportune time for beginning a personal chef service. According to Entrepreneur Magazine, some of the fastest growing trends in service businesses today include:
• Servicing smaller, upscale markets
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• Products and services for children and their parents
Demographic Summary West Suburban Boston Communities
Commu-nity
Ave. Househo
ld Income
1996 Househo
lds 1996 Pop.
Owner
Occupied
Married
Couple/
FamilyAve.Age
College
DegreeWeston $137,077 3,514 10,321 87% 90% 42 68% Wellesley $116,736 9,070 27,289 81% 88% 38 69% Lincoln $101,177 2,806 7,919 54% 89% 34 60% Winchester $100,946 7,698 20,735 79% 87% 40 55% Lexington $99,180 11,145 29,938 82% 86% 42 59% Newton $94,753 30,952 82,798 69% 84% 39 57% Belmont $84,873 10,080 24,871 60% 84% 42 55% Brookline $80,039 26,206 56,034 43% 76% 40 64% Arlington $65,610 19,705 44,200 57% 81% 42 42% Watertown $63,636 14,999 32,174 46% 77% 41 41% Cambridge $63,489 41,264 93,349 30% 63% 36 54%
Source: Equifax National Decision Systems, 1996, Courtesy of Community Newspaper Company
Creative Cuisine is better positioned to service small, upscale markets in a personal way than are the other competitors. Creative Cuisine’s personal chef services are specifically geared toward affluent couples with children. Busy working parents have more quality time to spend with their children when they aren’t rushing to get dinner on the table, and their children get a more nutritious dinner. Creative Cuisine also has the advantage of being a home-based business which requires lower overhead and start-up costs than a traditional foodservice business. Target Markets
Creative Cuisine has targeted the following communities in the West Suburban Boston area. All have high average household incomes and large populations of educated, married couples with families who own their own homes: Market Penetration
Research indicates the most effective advertising tool for a personal chef service is placing a small display ad in a weekly community newspaper with a paid subscription base of 5,000 to 40,000 readers. All of the above communities have a weekly community newspaper; although some offer free subscriptions and some have a paying subscriber base. In addition, the following marketing tools will be used:
• Offering $100 discount on initial service for first-time customers
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• Developing contact list for referrals through friends, family, co-workers and networking
• Fliers and business cards placed at strategic locations • Occasional advertising in other publications (e.g., Boston Symphony
program) • Press releases to community newspapers and radio stations
During the initial inquiry by the prospective client, an appointment will
be scheduled in the client’s home to discuss the service. At the first meeting, the Creative Cuisine chef will present sample menus and sample meal options. A questionnaire on food choices and preferences will be completed. After presenting the pricing structure, a plan will be chosen, a check will be collected, and a date will be set for the first service. An interim phone call will be made to present the personalized menu and obtain menu approval.
Problem Creative Cuisine Solution
• More stress • No time to cook • Too many decisions • Want to eat healthier • Hate to grocery shop • Tired of same old food • Impersonal world
• Less stress • Relax with family
instead • Fewer decisions • Eat healthier • We’ll grocery shop
for you • Lots of variety in food
choices • Personal attention
A student in Boston’s Center for Women & Enterprise’s 9-week business feasibility course—Fast Trac 1, wrote the above marketing plan. The author can be reached by email at [email protected]
A small gift will be left at the first service appointment with a thank
you card. A follow-up call a few days after service begins will inquire into the client’s satisfaction with the meals. If this is a trial customer, an additional call will be made one week later to see if there is interest in becoming a regular client; if so, a regular service date will be set. For all future service, a check made out to Creative Cuisine will be left at the client’s home on the service date. Creative Cuisine has the potential to create a very profitable business by capitalizing on several major trends of the 1990s. With the increasing numbers of affluent families comes their increasing demand. Creative Cuisine can help solve some of their problems while meeting these demands. In the competitive analysis below, following Legends are used: (*) Priority: Level of importance to target customer – affluent, busy professionals. * Satisfactory ** Somewhat satisfactory *** Satisfactory **** Mostly satisfactory ***** Very Satisfactory H High M Moderate NA Not applicable
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Competitive Analysis – For Creative Cuisine
Factors: Priority (*) Creative Cuisine Boston Market Bertucci’s Overall rating H ***** *** **** Customer Service H ***** ** ** Convenience H ***** *** *** Quality of meals H ***** *** **** Selection of meals H ***** *** *** Healthy options H ***** ** *** Low-fat options M ***** ** ** Vegetarian options M ***** ** ** Unique options M ***** ** *** Meal Price/Value M *** **** **** Product expertise M ***** *** **** Location M ***** *** **** Advertising/Marketing
NA $ $$$$ $$
Strengths NA Quality, Service, Convenience, Uniqueness
Value, Consistency, Market Penetration
Value, Consistency, Reputation
Weaknesses NA Price, Market, Penetration, New concept
Meat & Potatoes focus limit menu
You can’t eat pizza/Italian every night
References & Useful Text Books for Marketing Planning Adcock, D., Halborg, C. and Ross, C. (2001) Marketing: Principles and practice. 4th revised edition. London, FT/Prentice Hall. Bickerton, P. et al. (2000) Cybermarketing: How to use the Internet to market your goods and services. 2nd Revised Edition. Oxford, Butterworth-Heinemann. Blythe, J. (2001) Essentials of Marketing. 2nd edition. London, FT/Prentice Hall. Brassington, F. and Pettitt, S. (2002) Principles of marketing. 3rd edition. London, FT/Prentice Hall. Chaffey, D., et al. (2002) Internet marketing: Strategy, implementation and practice. 2nd revised edition. London, FT/Prentice Hall. Chapman, D. and Cowdell, T. (1998) New public sector marketing. 2nd edition. London, FT/Prentice Hall. Drummond, G. and Ensor, J. (2001) Strategic marketing; Planning and control. 2nd edition. Oxford, Butterworth-Heinemann. Hatton, A. (2000) Definitive guide to marketing planning. London, FT/Prentice Hall. Holtz, S. (2002) Public relations on the net. 2nd Revised Edition. New York, AMACOM. Johnson, Gerry and Scholes Kavin., (1999), Exploring Corporate Strategy, Prentice Hall, Europe, ISBN 0130807400. Kotler, P. (2003) Marketing Management. 10th edition. US, Prentice Hall. Kotler, P., Armstrong, G., Saunders, J. and Wong, V. (2001) Principles of marketing. 3rd European Edition. Harlow, FT/Prentice Hall. McDonald, M. (2002) Marketing plans: How to prepare them, how to use them. 5th Edition. Oxford, Butterworth-Heinemann. Michael Porter, 1980, Competitive Strategy: Techniques for analyzing Industries and Competitors, The Free Press. Myddleton, D.R. (2000) Managing business finances. London, FT/Prentice Hall. Palmer, A. (2000) Principles of marketing. Oxford, Oxford University Press. Palmer, A., Worthington, I. and Hartley, B. (2001) The business and marketing environment. Maidenhead, McGraw-Hill. Payne, A. et al. (1998) Relationship marketing for competitive advantage. Oxford, Butterworth-Heinemann.
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