with an example using the Baby car seat market
Planning is a critical function in any business. Banks need a business plan outlining your plan for profitability before lending capital. So do venture capitalists when they seed new start ups. Business planning is not just a one-off process; it needs to be done annually.
The business plan derives from a market plan, an understanding of the market you are in and your position in that market. The profitability and the feasibility of your business largely depend on the following things:
Market Planning is the process of sizing up your market and calculating your share versus your competitors. A Marketing Plan is the tool used to increase your share of the market through marketing activities such as advertising, branding, and promotions.
A key component of Market Planning is market share forecasting. In the manufacturer to retailer to consumer model, what matters most is the shelf take-away or sales at retail. Marketing Strategies aim to maximize shelf consumption (and usage) and thus increase your share of that consumption.
The first step is calculating the total market potential for your products. The second step is to estimate your retail sales and derive your share of the total market. The third step is to forecast your base case market share as well as target market share given your advertising budget and your marketing plan. Let us use the case of a infant car seat manufacturer to illustrate this process.
If you are a baby seat manufacturer, you need to understand the total market potential of infant car seats in both units and dollars. In this case, the entire population of infants is your market. If two million babies are expected in a year, the market for infant seats is 2m units. However, some of the households may be two car households and decide to buy two seats. If 50% of the households buy two seats, then the market is really 3m units.
Now what is the market potential for infant car seats in dollars? It depends on the price segments of car seats. There may be different types of car seats with different features commanding varying prices. Let us assume that there are two kinds of seats one being a simple no-frills car seat and the other a fancier seat with additional features like a cup holder, sun shade, diaper holder, etc. Different consumer segments may demand these car seats at different price ranges.
We can apply several market analysis techniques to understand price points and calculate the average price of these two market segments. Let us say our studies show the average prices to be $40 for the basic seat and $50 for the fancy seat.
The total market potential in dollars is the sum of the basic seat
segment and the fancy seat segment. Suppose the basic seat segment
is 2m units. At a price of $40, this potential is $80m. The fancy
seat has 1m units at a price of $50 and a market potential of $50m.
The total dollar market potential is then $130m.
In simple terms, your market share equals total retail take-away of your products divided by the total market potential. This is just a calculation of your share of the total retail sales.
Your total retail sales depend on which segment you participate in and who the other players are in that segment. Retaining and growing your share depends on a number of marketing factors including product differentiation, advertising, brand value, etc. The size and the marketing budget of your competitors also are key determinants of your market share.
In the infant car seat manufacturer example, let us say, you compete in the basic seat segment of the market. If you own 50% of the basic seat market, which is 2m units, then your total annual retail sales is 1m units compared to a total market of 3m units. Your share of the infant car seat market is then 33.3%.
We can calculate the dollar share using the following steps:
Although your unit share is 33.3%, the dollar share is 31% because you play in the low-price segment of the market.
The Marketing Plan is an outline of your strategy to increase your market share. It may cover a number of marketing and brand building techniques as well as the budget dollars allocated to each activity. Generally, the following tools are used to retain/gain market share:
Market share forecasts are important in order to understand the return on investment of advertising dollars and the budget needed to retain versus grow market share. But truly, market share forecasts tell us the long-term demand for our products. They are early warnings of what and how much to produce and distribute to be successful in the marketplace.
In practice, large CPG companies use share forecasts to guide their
demand planning and supply chain operations. This gives them a competitive
advantage in running a lean operation, controlling inventories,
and maximizing customer service.
Adapted from the Article Know your market and learn your potential from Baby shop Magazine written by Mark Chockalingam, Ph. D.
For a detailed discussion on POS data and coverage factors, please click here
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