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,

1. AWARENESS: They must be aware of what you are offering
2. TRIAL: Once aware, the offer must be of sufficient interest that they try you one time
3. 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:

1. UNAWARES: Unaware of what we offer
2. REJECTERS: Aware of what we offer but don’t find it appealing
3. TRIERS: Aware of what we offer and find it appealing enough that they give us trial but were not satisfied
4. 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:

1. (AWARENESS) Name all of the local pharmacies you know about
2. (TRIAL) Name all the pharmacies you have bought from over the last ___months
3. (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”?

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

1. Which customers are we losing/winning?
2. Why are we winning or losing them?
3. 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