In Ken’s last blog he presented a typical layout for a marketing plan. He also suggested that one should not confuse the development of a plan with the act of planning: everyone needs to do planning, not everyone needs a documented plan. In this blog Ken will talk about an often unspoken aspect of planning that is of critical importance: developing your “base case” estimate.
Since the purpose of planning is to improve on the current situation, the value of any plan’s outcome – and, as such, a key factor in deciding how much risk to take in making strategy “bets” – needs to be measured relative to what would have happened in the absence of the plan: that is, we look at financial outcomes associated with our plan relative to what the outcome would be if we did nothing more than continue doing things as currently done. This is shown in the top quarter of the chart provided.
The Information
We start with the MARKET SIZE. Market size reflects the maximum amount of a product or service that would be sold if you had 100% market share. This number can be broken down into three parts for ease of estimation:
The number of customers in your market
X The frequency with which they buy (e.g. once/week)
X The amount they buy each time
= Market Size
Data on the number of customers can most easily be obtained in cases where you define the market geographically. In these instances you can obtain numbers from Statistics Canada. Frequency of purchase and amount bought per purchase data will require you to make some assumptions based on your own observation. If you require greater precision you can commission or conduct a simple survey or even ask customers as they exit your store.
Data on MARKET SHARE is usually much more difficult to obtain at the local market level. There is almost never an available and affordable (for independent pharmacists) ongoing data service which measures at the local store level. However, there are a large number of ways you can assemble these data yourself, ranging from surveys to simply watching competitors’ storefronts, your own business and doing a physical headcount: all of these should be considered non-scientific but the numbers they provide will be reasonable approximations of what the “real numbers” would be.
Because you are using your current market share (i.e. before you make any changes), the PRODUCT of MARKET SHARE (in %) and MARKET SIZE is your estimate of your SALES VOLUME assuming you did nothing different from the past year. This is your so-called “base case”.
Learning From the Numbers
Once you have the base case, it is worthwhile to take a moment to reflect on the circumstances that generated that number. This “reflection” is really the kind of analysis that you would normally do under the guise of “The Business Review”. I discussed this in last weeks blog.
Conventionally, when we do a business review we start by describing things that happened in the overall environment – the economy, technology, social trends and the like. One of the goals of this review is to analyze these changes with an eye toward determining whether people will be spending more or less this year, compared to last. As they say “all ships rise (or fall) with the tide”
This is a time and data intensive process. It can also be frustrating since you may find that some trends or developments, however pronounced for most businesses overall, simply do not have any meaningful implication in your market. For example, we might hear all about mobility commerce but if your store was in a region where cell service was less reliable or data transmission speeds slower, your store’s sales would not be affected. To overcome these issues, we can adopt a more “bottom up” approach.
Start with the Market Size number. Is it bigger or smaller than last year? If it is different, think about why were there more/fewer people in the market? Were they buying more/less frequently? In larger/smaller amounts? If you answer “yes” to any of these then take your analysis a step deeper: what was going on – locally – that might explain that change in behavior?
Once you have completed this step you should review your list of things that influenced the market size one more time. But this time, as you review each factor, ask yourself whether that influence has a “natural” or “unnatural” source. Natural changes are things that are pretty close to 100% guaranteed to continue because they are influenced by natural forces like aging: for example, if our customers are senior citizens and we know 10,000 people in our market will be “new seniors” next year, we can pretty confident in plugging an additional 10,000 buyers into our formula for estimating market size. On the other hand, if we felt that the market grew because of a one time fad – an “unnatural” source – we would refine our estimate if we reduced our estimate accordingly.
We can use a similar process to estimate MARKET SHARE next year, assuming no change in activity compared to this year. However, we can be a little more systematic in how we do this. In Quality Defined and Improving Quality we covered the topic of “Profiling”. Profiling is a way of thinking about the answer to three questions: What criteria are used to select a supplier? How important are those factors (relative to each other)? How well do we compare, versus the competition, in our performance on those factors.
If our market share is shrinking/growing, we can use the tools covered in Quality Defined and Improving Quality to answer the key issues
- Which customers are we losing/winning?
- Why are we winning or losing them?
- From which competitors are our customers coming/going?
Now, just as we did with market size, we can ask ourselves how likely it is that the conditions bringing about our change in market share will continue, and adjust market share estimates accordingly.
Next week’s blog covers: Estimating the Plan’s Impact
