Understanding the market

Beyond providing an overview of the market’s composition and organization, executives must demonstrate an understanding of key market dynamics. Shifts in markets or customer behavior can leave you vulnerable. These, too, can be considered in terms of several key questions:

What motivates buying decisions? Individuals invariably purchase benefits rather than specific products or services. They buy convenience, status, and savings of time or money. They may buy a luxury car to impress friends or a computer to avoid adding personnel. Executives must be aware of the factors that determine how buying decisions are made and describe this decision-making process for the company’s product or service in the business plan.

How is the market segmented? Market segmentation is very important and frequently overlooked. You cannot assume that because a product’s price varies over a wide range, its customers are distributed evenly over that range. For example, if the price of a basic product varies among competing manufacturers from $50 to $100 per unit, you cannot assume that if you sell your product for $75, you will get one-half of the customers. Upon a closer look, you may discover that the higher-priced product ($90 - $100) accounts for only 10 percent of all sales and that the basic model with lesser capabilities and fewer enhancements ($50 - $60) accounts for the bulk of the sales. In this case, your $75 version may have very few customers. Your understanding of this principle and your description of your product’s place in its market are essential to getting financial backing.

How will your product or service be positioned in the market? Positioning begins with the crucial issue of pricing. Your price should be set according to how much the market will pay for your product or service, not how much it will cost you to manufacture, deliver or sell it. If you determine the maximum selling price of your product and then find you cannot make and distribute it at a profit, you will have to modify the product concept (e.g., Is your product so “cutting edge” that it is unclear how to price?). You will need to find a way either to sell your product for more money or to manufacture it at a lower cost. Other positioning considerations include:

•  Technology Leadership Is your company perceived as a technological leader or follower?

•  Management Style Is your company aggressive and not averse to risk, or do you plan togrow carefully and slowly?

•  Service Philosophy Have you acquired a reputation for stable and reliable service ordo you expand your business only as quickly as your service organization can support it?

•  Product Quality company try to make an adequate product that can capture a large market share by selling at Do you aim for the high-priced, high-quality end of the market, or does your a low price?

What is your defensive strategy? If your product or service threatens any of your competitors, you must consider how they might fight back and what your reaction will be. If your product represents a significant advance in technology or application, your competitors may seek to divert or at least delay your efforts until they can catch up. Many people expect large, entrenched companies to react slowly to changes in the marketplace. When their primary market is seriously threatened, however, such companies can act swiftly and commit substantial financial resources to a competitive effort.