By this stage you should have a sense of what your sales will be in the absence of any change from your current practices, please see Ken’s last post Planning and Profit projections – The Base Case if you’d like to review. However, the reason for planning was not to stay the same but to improve. Here we look at ways we can estimate how much improvement is possible and whether the cost of that improvement is justifiable.
How much improvement?
To estimate the gains you will make through your plan, it is important to think about the series of steps or stages of your relationship with a buyer that leads them to become a loyal customer. Specifically,
- AWARENESS: They must be aware of what you are offering
- TRIAL: Once aware, the offer must be of sufficient interest that they try you one time
- ADOPTION: After trying you they must be so satisfied that they buy from you again (and again)
In fact, we can think of the overall market as comprised of people at various “stages” in their relationship with us. As shown in the chart:
the result is four distinct kinds of consumers. These are:
- UNAWARES: Unaware of what we offer
- REJECTERS: Aware of what we offer but don’t find it appealing
- TRIERS: Aware of what we offer and find it appealing enough that they give us trial but were not satisfied
- ADOPTERS: Aware of what we offer and find it appealing enough that they give us trial and are satisfied enough that they become loyal
The reason we break out the market in this way is that our choice of tactics will change depending on which of the four groups we are targeting. Awareness is usually tackled by advertising, public relations or social networking activity. Trial is usually gained by giving samples or demonstrations or by offering one time promotions that remove risk or increase customer value. Adoption is usually gained by making improvements to the product or service provided, so that customer expectations are met. In addition, we can estimate how much revenue and profits will result from a change in the number of people at each stage.
For example, we can see from the chart above that of the 1,000 people in this market:
- 600 are aware of what we offer; 400 are not
- Of the 600 who are aware, 300 (50%) liked what offered enough to give us trial; 300 did not. This means that for every 100 customers who become aware of our offering, 50 (50%) will give us trial
- Of the 300 who tried our product/services, 75 (25%) became loyal customers while 225 (75%) did not. This means that for every 100 people who try our product, 25 (25%) will become loyal users
- Our total sales equals the product of 75 loyal users times the amount they bought and the price they paid
- Our total profit (contribution) is the product of our sales times the gross margin on those sales
Armed with these data, we can consider the financial wisdom of undertaking a specific program. For example, we might try to increase the number of AWARE people by 200 through, say, an ad campaign costing $10,000. According to the data shown in the chart
- Adding 200 more AWARE customers will generate 100 more TRAILS
- The 100 new TRAILS would generate 25 new ADOPTERS
- If the total profit contribution on 25 new ADOPTERS is greater than $10,000, this is a self-financing promotion. If it is less than $10,000 it lacks financial justification.
Finding The Data
The data for this analysis – the numbers on Awareness, Trial and Adoption – are not available from published, secondary sources. These data can either be “guess-timated” based on observation or can be obtained via formal or informal surveys of customers using three simple questions:
- (AWARENESS) Name all of the local pharmacies you know about
- (TRIAL) Name all the pharmacies you have bought from over the last ___months
- (ADOPTION) Name the pharmacy you most regularly us
In the absence of survey data some people will question whether or not the use of guess-timates negates the value of the exercise. Absolutely not! One way or the other, you will need to make the kinds of decisions outlined above and so, in the absence of the kind of analysis outlined, you are implicitly making assumptions anyways: it is always better to make those assumptions explicit so that you can at least ask yourself “does that look right”?
