S643: Digital Entrepreneurship Spring 12 Defining your market I. Understanding the market What is a...

S643: Digital Entrepreneurship Spring ‘12

Defining your market

I. Understanding the market

• What is a market?

• How does a digital market differ?

II. Understanding the competition

• What is a market analysis?

• Competitive analysis

III. Differentiation of the marketplace

• Segmentation and marketing

• Making sales projections



What is a market?

Every society faces a fundamental economic problem

Deciding what to produce, for whom, with limited resources

Two economic systems have provided different answers

Command economies

Directed by a centralized government

Market economies

Based on private enterprise



A market is a mechanism for exchanging goods and services for money among agents

Exchanges take place at specific ratios, called prices

There are exchange rates for many pairs of goods and a single price is set for each good

Market size depends on the set of trades that take place at the same price for reasons of taste or technology

This occurs because of competition

Either buyers consider the two objects to be the same (tastes) or sellers can make them at the same cost (technology)



Markets involve relationships among

The stuff: Demand and supply

What buyers want and what sellers can offer

The people: Buyers and sellers

Buyers set demand and sellers provide supply

The mechanism: Competition and exchange

Multiple buyers compete for limited supply

Multiple sellers compete to provide the supply

Goods and services are exchanged, typically for money



Types of markets

Competitive: no one buyer or seller can influence price

Monopoly: one seller, many buyers

Oligopoly: few sellers, many buyers

What determines demand?

Price: demand falls as price increases

Income: demand increases as income increases (for a normal good)

Demand decreases as income increases (for an inferior good)



Determinants of demand

Availability and price of related goods: decrease in demand for one good as price falls for

another (a substitutable good)

Demand for a good decreases as price of a related good increases (a complementary good)

Taste: demand changes because of social factors

Expectations: demand changes because of our assumptions about our future income

Number of buyers: demand increases as more buyers want the same good leading to price increases



Determinants of supply

Technical efficiency: How much does it cost to produce the good or service

Marginal utility: after the first one is produced, how much does the next one cost?

Economic efficiency: what is the mix of inputs to produce the good or service at the least cost?

How much of a good or service is a firm willing to supply at different price levels?

A market should find a balance between supply and demand through pricing (with greater and lesser degrees of efficiency)



Supply and demand curves in a market

Assumes perfect competition with many buyers and sellers

P0 Q0

Supply: how much will be made at a given price

As supply increases, price increases and quantity decreases

P1 Q1

Demand: how much will be bought at a given price

As demand increases, prices and supply increase

P2 Q2

Pri

ce

Quantity

Demand

Supply

P0

P2

P1

Q0 Q2Q1



How does a digital market differ?

They are supposed to approach a frictionless state

Reduced information asymmetries from lower search costs

Low market entry costs and low margins

Leads to strong price competition

All should lead to lower prices

Efficient market processes

Price elasticity: consumers are more sensitive to small changes in prices, especially if there are competitors



More market processes

Menu costs: retailers should adjust prices more frequently

What is involved in changing prices

Prices change when the benefit of change is greater than the cost of change

Should be easier to change in digital market

Price dispersion: less spread between high and low prices for a good

Depends on consumer’s ability to search for good information about the good



More market processes

Versioning

Information goods have high fixed or first copy costs and low marginal costs

Sell a line of incremental variations on the initial product

Appeal to different segments with differential pricing

A solution to the problem of pricing to cover fixed costs



Strategies for versioning in a digital market

Delay: free 20 minute delayed info; pay for real time

Interface: pay more for more features

Ease of use: pay more for fewer frustrations

Image resolution: give away low quality images

Speed: pay more for high speed

Comprehensiveness: pay more for more stuff

Annoyance: pay to get rid of intervention nag-ware

Technical support: pay more for answers



Types of digital marketplaces

Marketplaces controlled by sellers are set up by a single vendor seeking many buyers

Goal: create or retain value and market power in any transaction

Buyer-controlled marketplaces are set up by or for one or more buyers to shift power and value to the buyer

Many involve intermediaries who act as aggregators

Some strong buyers set up their own marketplaces

Neutral marketplaces are set up by third-party intermediaries to match many buyers to

many sellers



A digital economy

Involves goods or services whose development, production, sale, or provision is dependent on digital technologies

Highly digital goods and services produced, offered for sale, purchased and delivered through the net

Mixed digital goods and services offered for sale and purchased on the net and delivered offline

IT intensive services or goods production that cannot be delivered without a IT infrastructure

The IT industry supports these goods and services



The digital marketplace

Verity, J. (1999). Digital Marketplaces. White Paper. p6.



What is a market analysis?

Your idea places your firm somewhere in the market

A marketing analysis is the first step in determining if there is a need or audience for your idea

Goal: to determine the attractiveness of a market and to understand the opportunities and threats

It will help you

Prepare to enter a new market

Launch a new product/service

Start a new business



Understanding your industry helps you become aware of factors that help you succeed or that will make you fail

The industry: all organizations offering a similar product or service

Supply and distribution systems supporting these organizations

Trend in the industry: where is the market headed?

What are the opportunities for your organization?

What you do

Assessment of the target population, competition and needs for marketing that product or service



Marketing is an activity that takes place within a market

The creation and exchange of value with customers

A means by which one organization can differentiate itself from another

Like innovation, it is an entrepreneurial activity

Requires understanding of customers, partners, and competitors

Figuring out how to effectively meet customer needs

A critical component of an organization’s strategy

Selecting a target market and positioning the product or service



Carrying out a market analysis

Defining the problem: what market are you trying to reach?

Analysis of the situation: what do you know about this market?

Obtaining data that is specific to the problem: sources?

Analysis and interpretation of the data

Fostering ideas and problem solving: what are the best ways to market the product?

Designing a plan: which ways will you enact?www.va-interactive.com/inbusiness/editorial/sales/ibt/market_analysis.html



What do you want to know?

Past and future growth of your economic sector

Service, manufacturing, retail, or distribution?

By looking at the business press or government stats, what can you tell about trends in your sector?

Size and growth of your industry

What is your industry? How big is it?

Growth rate of your industry compared to gross domestic product

Hopefully your industry’s rate is higher



Try to fill in as much as you can

Factor -2 years Last year This year Next year 5 years

Total revenue

Total units sold

Total employed

Industry growth rate

GDP growth rate

Comparison

Sources: government statistics, trade associations, financial data from public filings and annual reports, market research, business press



You want to know about industry maturity: where is it in the life cycle?

New: lots of opportunities and competition, high growth rate, few leaders, high prices, few products and

services, building brand awareness

Expanding: rapid growth, a shakeout, leaders emerge, firms are vulnerable, customer loyalty begins, new features, variable pricing

Stable: plateau, slower growth, strong brand loyalty, barriers to entry, price reductions, push to differentiate

Declining: minimal growth, decreased competition, leaders cannibalize each other, loyalty weakens




Industry maturity: what are the risks and opportunities associated with these factors?

Growth rate

Competition

Market leaders/standards

Marketing goals

Market share strategy

Product range

Customer loyalty




Other factors

Sensitivity to economic cycles

Business expansion/contraction

High/low unemployment

High/low interest rates

High/low inflation

Strong/weak dollar

Seasonality

Technological change



Reduced to 10 questions

1. What defined market am I trying to reach?

2. What specific companies are servicing this market?

Are they successful?

What is their market share?

3. Is the market saturated or wide open? If so, why?

4. What is the size of the market?

Is it a growing market?

Is the industry stable, volatile, growing or trendy?



Reduced to 10 questions

5. How can I reach this market?

How do my competitors reach the market?

6. What are the business models of my competitors?

7. What do customers expect from this type of product or service?

8. What core competencies must the product or service have?

9. What are customers willing to pay for this type of product or service?

10. What is my competitive advantage?



Competitive analysis

Describe direct competitors in terms of

Target markets served (current customers)

Market share

Product attributes

Pricing

Promotion

Distribution including the distributor network

Services offered



Discuss competitor’s strengths and weaknesses

May need to consider much more than just marketing issues

Financial standing

Target market perception

R & D capabilities

Discuss competitive trends

May need to include discussion of future competitive threats

Combine into a SWOT analysis



www.etg.com/images/Market_Analysis_to_Consulting.GIF



The digital consumer

The primary relationships are not between sender and receiver (as in traditional marketing)

The consumer’s relationship is with the CME with which he or she interacts

Information or content is not merely transmitted from a sender to a receiver

Mediated environments are created by participants and then experienced

Marketers must reconstruct marketing models for the interactive, many–to–many medium underlying the web



www.morebusiness.com/templates_worksheets/bplans/4-1.gif



The transition to market differentiation

We are entering a new phase where the focus is on transactions and buying/selling

Problem: how can markets be created and maintained?

A key element in creating a market is product differentiation

This means appealing to desirable market segments to maintain visibility and create defensible market positions

Survival in ecommerce means finding, maintaining, and dominating a niche



As the marketplace becomes congested, firms have to choose their niches

Most won’t be able to be “all things to all people”

The goal is to create a perception that there is extra value in doing business with a particular firm

Differentiation is the process of defining a market niche

Focusing on the identification of tangible-intangible customer needs

Creating a superior bundle of products and services which meet these needs

Communicating with the target market about this stuff



Differentiation depends on charging a competitive price and making a reasonable profit for this bundle

Kalakota and Whinston’s (1995) Law of Differentiation:

“As the blurring of distinctions among firms increases in electronic markets, survival requires identifying your unique role in the marketplace in terms of value to the customer”

One problem is that there is currently no commonly accepted procedure for doing this on the web



Differentiation involves:

Segmentation Setting prices

Product bundling Packaging and delivery

Service quality Ad/marketing strategies

Customer service Rewarding customer loyalty

The goals are to create:

Perceived extra value in the eyes of customers

Establish the distinctiveness and institutional image required for survival



Market segmentation is needed for product positioning

It divides the market into distinct customer groups

This involves demographic research:

Age, sex, income, occupation, purchasing habits, attitudes, race, family size, or religion….

A goal is to find the relationship between profits or volume and relevant demographic characteristics

Another goal is to determine differences among customers

This is used to create and fine-tune products, services and marketing strategies



Market segmentation characteristics

Identifiable: the attributes of a segment must be able to be measured

Accessible: must be able to communicate with and market and distribute to the segment

Substantial: should be large enough to justify expenditures

Unique needs: must respond to marketing mix

Durable: stable over time

Members should be relatively homogeneous and easily distinguishable from other segments



Market segmentation characteristics

Demographic characteristics

Age, gender, family size, generation, income, occupation, education, ethnicity, religion, social class

Psychographic characteristics

Activities, interests opinions, attitudes, valuesgraphics8.nytimes.com/images/2004/12/05/national/20041206_nat_STRATEGY.gif

Behavioral characteristics

Benefits sought, usage rates, brand loyalty, user status, readiness



www.realestateconsulting.com/images/Psychographic.gif



Marketing moves from satisfying customer needs to a cooperative goal of developing the market with the customer

The non-digital market has excluded the consumer

“In the new business environment, cooperation may prove more rewarding than competition, and

information – sharing more fruitful than information control.” National Academy of Sciences (U.S. Congress 1994)

The problem is how to develop reliable techniques to establish and maintain this type of cooperation



The web consumer

The web can transform the our identity, resulting in the relative anonymity of users in digital environments

Consumers may experience the perception of being present in a mediated environment (telepresence)

Within the web environment, consumers can engage in two main types of behavior

Experiential (e.g. Netsurfing, browsing)

Goal–directed (e.g. Product comparison, online shopping)

These behaviors compete for consumers’ attention



Making sales projections

A sales forecast is an estimate based on assumptions about the environment, market, and expected sales activity

These come from the industry and market analyses

Also the product pricing strategy, competitive analysis and marketing plan

An indicator of the strength of the firm in the market

An important factor used to assess the viability

These projections and their assumptions must be as realistic as possible



The sales projections also provide evidence to support the request for loans and/or VC funding

Asset needs and period-by-period cash flow needs

Creating a forecast

Based on assumptions of future market movement

Sales volume for a specific market

Sales volumes of competitor firms

Stage of product, industry life cycle

Can be quantitative (based on tools)

Can be qualitative (based on an experienced forecaster)



Quantitative: extrapolating from past sales

Time series analysis: months, quarters and years

Trend: showing linear movement over time (5%/yr)

Cyclical pattern: regular increases and decreases over time (typically 3-5 years)

Seasonal pattern: consistent increase and decrease within a year

Important: assumes that the patterns of the past will continue in the future

Are there disruptive factors on the horizon?



www.pmprb-cepmb.gc.ca/images/cmimages/figure315HDP-4112003-4916.jpg



Quantitative: estimating market potential and share

What is the sales potential of the market segment? Target area (geographical, online)? Target customers?

Market build-up method

Identifying customers and estimating potential to purchase

How many people are there in the segment and what do they spend on similar products?

Market factor method

Survey of Buying Power Index: income, retail sales, population



www.nhsgb.org/images/mkt_data04.jpg

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