Successful Business Plans

Lesson 3: Who Is Your Customer?

Potential lenders and investment groups must be clearly convinced that the market you have identified is feasible for the distribution of your products and services. The need to discuss consumer behavior or individual habits is not always clearly evident. However, you must remember that no matter what type of business you are in, the final decision to buy or not buy is made by an individual. The better you understand the decision-making process, the better you can sway that decision.

In this lesson we will discuss your market analysis and marketing/sales strategies. These sections of your business plan explain to your readers that you know the overall "lay of the land", who your customers are, and how you intend to most effectively reach them.

Market Analysis

Market Definition

This section describes what is known about your target market. Several key components of this analysis include:

• Industry Analysis: An industry analysis begins with collecting information on the size, growth, and structure of the industry as well as target market coverage, marketing objectives, marketing mix, and tactics. This information can be used to monitor changes and exploit weaknesses in the marketplace that can give your company a competitive edge.
• Market Segment: Within the industry, the market segment defines the market even further by product feature, lifestyle of target consumers, season, etc. Sources such as industry reports, census reports, and trade journal studies help you define your market. To become the market leader in your product or service, your company must capture the biggest portion of sales in its market segment. For example, within the computer industry, a market segment could be software, hardware, peripherals, networking, etc.
• Strengths and Weaknesses: In identifying the strengths and weaknesses of your competitor's product, you are evaluating the competitor's coverage of the market and its success in meeting customer demand. By exploiting this weakness, you can improve both your product and your position in the market and convey that you are/will be strong where your competitor is weak. Marketing positioning can include sources of advertising and promotion, public awareness and public acceptance.
• Unexploited Opportunities: Based on your marketing analysis, you may discover additional niches and opportunities to explore. Often a successful product can be leveraged through new distribution channels, licensing, packaging, customer relationships, etc. Identification of your top market opportunities will help you focus your marketing efforts.

Customer Profile

Identify your customers (including the decision maker) down to the most minute details. Include age, sex, family characteristics, geographic location, occupation, attitudinal patterns, education, economic factors (personal debt, income expectation, taxes, per capita income, etc.). If your target market is a business customer, identify what type of business, size (annual revenue), geographical areas of their offices, number of employees, business structure(sole proprietorship, corporation, etc.), years in business, etc.

Another consideration in profiling your customer is to understand who influences purchase decisions. These are the people who will INITIATE the inquiry of your product, INFLUENCE the decision to buy, DECIDE which product or service to buy, and PERMIT the purchase to be made (sometimes the decision maker and permitter are the same person, but the decision maker (like a CFO) will sign the paperwork after other managers have submitted their recommendations.)

Competition

It is important to know as much about your competitors' businesses as you do your own business. Here are some areas you should know regarding your competitions' product or service:

• Products: How does your competitor's product or service compete against your own, using the same criteria you used when evaluating your own product or service?
• Organization: What is your competitors' organization like? Can they make fast and accurate decisions? Will they respond quickly to changes you make? Are their management and staff competent? Are they leaders or followers in the market? How are they funded? Do you consider them to be a viable competitor in the future?
• Track Record: Customers will often choose a contractor or supplier because of their track record. How does your record compare to that of your competitors? An assessment of your stability compared to that of your competitors can be a real selling point to your customer, particularly if you are selling a product that will require future servicing (e.g., cars, computers, pet grooming, etc.).

Risk

Any discussion of the business environment must include the various kinds of risk. In researching risk, it is important to remember that it is impossible to anticipate all possible risks and alleviate them. The best you can do is identify as many as possible and anticipate solutions to handle them before they occur. The best strategy to alleviate risk is diversify: Use multiple suppliers, sell multiple products AND services, keep up with new technologies, purchase insurance for those risks you can insure against (fire, theft, illness, etc.). The two major risk categories are business and environmental risks.

Business Risks

• Cost Structure: The first and perhaps largest risk is the cost structure of the industry. This is directly related to the amount of fixed assets or capital required to operate your business, such as rent, insurance, supplies, and all other costs required to keep running the business, whether you are bringing in revenue or not.
• Competition and Industry Growth: Competition from the national brands or from present or new regionally-based companies poses a risk to your company. If the market for your product continues to grow, the major national companies will likely devote greater resources to this segment. Developing a niche in the market, competitive pricing, and customer service will minimize the risk.
• Profit Margin: Profit margin (the percentage of net profits to sales) versus the volume of sales is another type of risk. A good example of this risk would be to compare a grocery store to a jewelry store. The grocery store sells its entire inventory every other day, but the net profit margin is only 1-3%. The business makes its money through high sales volume. The jeweler holds a piece of jewelry on average 90 days before he sells it, but he only has to sell a few large items to equal the profit of the grocer.

Environmental Risks

• Economy: Adverse changes in prevailing economic conditions can have a negative impact on the company's projected business. Economic risks such as inflation, recession, and rising interest rates impact the bottom line. You cannot alter these risks, but you can decrease the effects they have on your company by understanding the impact of each. Perhaps the best strategy is diversification, offering numerous products and services to multiple market segments.
• Weather:For certain types of businesses such as farming, travel and tourism, sports, etc., the weather can be a substantial risk. The best way to avert these risks is good planning, good managment, and proper business insurance coverage.
• Legal and Government: Almost without warning, a local ordinance can invalidate your business license, restrict your business operations by zoning laws, or condemn your property in the public interest. As with the legal risk, your business may be dependent on government regulations or contracts that affect your product or service. Staying abreast of legal issues facing your industry through industry publications will warn you of any significant changes.

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