Market Research Sales2018-09-15T07:28:33+00:00

Market Research Guide
Investigating The Market
For A New Product


  1. Market Research
  2. The Target Market Segment
  3. The Competition & Market Trends
  4. Sales Channels & Required Margins
  5. Determining Product Price
  6. Sales Volume & Market Share
  7. Hurdles & Barriers To Market Entry
  8. Financial Planning & Analysis

6.  Sales Volume And
Market Share


A necessary step in the planning and evaluation stages for your product development venture is to estimate sales volume for the product. Your estimated sales volume is relevant not only to the design of your product, but also to the cash flow projections you will need to make in your business plan that will justify an investment in the development of your product.


The sales volume of the product can impact its design. A high volume product may require a greater investment in tooling so that parts can be manufactured less expensively in large volumes. A low volume product may be designed to reduce the need for an investment in tooling, but parts may be more expensive. Tooling is the equipment used to produce the parts of product (e.g. a mold).


The amount of cash a business selling the product will generate is dependent not only the price of a single product, but the total number of products sold. If a business can’t sell enough products to generate sufficient cash to cover all of its expenses (such as the cost of purchasing the goods sold, sales and advertising, employee wages, etc. . . ) and still generate a profit, then the business won’t succeed. So in preparing projected financial statements (a required part of any business plan), a business will need to have an estimate of future sales. This can be a very difficult task, especially for a new business with a new product, and is always an inexact prediction.


The first step in estimating sales is to determine the maximum potential sales volume for the target market, or the total size of the market for the product. In other words, what is the maximum number of potential purchases per year for the contemplated product? The maximum number of potential purchases will consist of first time sales of the product, and any repeat sales of the product. The maximum amount of first time purchases should correlate with the number of potential customers who have not yet purchased the product. The maximum amount of repeat sales will depend upon the nature and lifetime of the product. For example, there is a difference between how many times a customer may purchase new soft drink in a year, compared with purchasing a new car. The sum of maximum first time purchases and repeat purchases during a year, would be the maximum potential sales volume for the market in a year.


Market share measures the performance of a business against its competitors in the market. The greater the market share of a business the more successful it is in capturing sales from the competition. Market share is typically expressed as the percentage of the total number of sales in a market that a business makes. So if a business makes one half of all sales in the target market, then it will have a 50% market share. Businesses generally strive to increase their market shares, and will usually fight to keep what they already have.


Once there is an estimate of the maximum potential sales volume for the target market, limiting factors need to be taken into account and applied in order to arrive at an estimate of the projected sales for the business, or what the projected "market share" will be. The limiting factors are real world constraints that a business will face when trying to sell its product. What exactly they are depends upon the particular product, business, and market circumstances. However they may be grouped into three general categories:


Customer Awareness

Customers need to know about your product in order to buy it. How many of them become aware of the product in a given period will depend upon such things as your marketing and advertising budget, and placement in potential venues where the product may be purchased. So if you have no advertising or marketing, chances are very few if any potential customers will even know about your product. Even if you spend a great deal on advertising or marketing, your advertisements and promotions are still unlikley to to be seen by 100% of the potential customers. Accordingly, the awareness of customers to the existence of a new product will almost certainly not be 100%, and can often be much less if there is only limited advertising and promotion, as may be the case with a new business having a very limited budget.


Product Availability

Product availability to customers at points of sale will also have an impact on sales volume. For example, if your target market is mostly purchasing products like yours through retail stores, it is unlikely (at least in the beginning) that you will have the product available in every single retail store that potential customers go to. The number of locations that offer your product for sale, the convenience of these locations, and the prominence of your product at the point of sale are all factors that will limit sales volumes.


The Competition

The competition is unlikely to simply stop selling its products, or just sit by and watch your business gain market share. Rather they will take actions to try and convince potential customers to buy their product over yours. This needs to be taken into account when estimating sales volume, by considering things such as the size of your competitor’s advertising and marketing budgets compared with your advertising and marketing resources. Likewise the competition may take actions on things such as pricing, or introduce its own new product, in response to your product. The competition may also have strong brand loyalty that you may have to overcome with customers who are unfamiliar with your business or product. In most cases it is unlikely that your new product will simply drive the competition out of the market entirely.


EXAMPLE


Assume that your research shows that the total potential annual sales for your target market is 100,000 products a year (this research can come from studying data available through industry reports or literature about sales). If due to a limited advertising and marketing budget in your first year it is only possible to inform 30% of the target market in the first year about the new product, then your share of potential sales for the first year will be down to 30,000 products (100,000 x 30%). However, being new to the market you expect only limited initial distirbution of your product in the first year, such that your product will only be available to 50% of those whom are aware of it. This further reduces first years sales down to 15,000 products (30,000 x 50%). Lastly, due to heavy advertising expenditures by the competition, brand loyalty, and an expectation that your competitors may drop their prices, you only expect 25% of customers who know about the product, and have it available to them to purchase, in the first year to choose it over the competition. So you estimate that sales for your product in the first year will be 3,750 products (to give you a 3.75% market share).


Because projecting sales is an inexact exercise, especially if you are a new business with no history of sales, it is often considered prudent for a new business to prepare a range of sales estimates: A best case scenario, a worst case scenario, and something in between that is considered likely taking into account your predictions for what is most likely.


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Market Research Guide
Investigating The Market
For A New Product


  1. Market Research
  2. The Target Market Segment
  3. The Competition & Market Trends
  4. Sales Channels & Required Margins
  5. Determining Product Price
  6. Sales Volume & Market Share
  7. Hurdles & Barriers To Market Entry
  8. Financial Planning & Analysis

6.  Sales Volume And
Market Share


A necessary step in the planning and evaluation stages for your product development venture is to estimate sales volume for the product. Your estimated sales volume is relevant not only to the design of your product, but also to the cash flow projections you will need to make in your business plan that will justify an investment in the development of your product.


The sales volume of the product can impact its design. A high volume product may require a greater investment in tooling so that parts can be manufactured less expensively in large volumes. A low volume product may be designed to reduce the need for an investment in tooling, but parts may be more expensive. Tooling is the equipment used to produce the parts of product (e.g. a mold).


The amount of cash a business selling the product will generate is dependent not only the price of a single product, but the total number of products sold. If a business can’t sell enough products to generate sufficient cash to cover all of its expenses (such as the cost of purchasing the goods sold, sales and advertising, employee wages, etc. . . ) and still generate a profit, then the business won’t succeed. So in preparing projected financial statements (a required part of any business plan), a business will need to have an estimate of future sales. This can be a very difficult task, especially for a new business with a new product, and is always an inexact prediction.


The first step in estimating sales is to determine the maximum potential sales volume for the target market, or the total size of the market for the product. In other words, what is the maximum number of potential purchases per year for the contemplated product? The maximum number of potential purchases will consist of first time sales of the product, and any repeat sales of the product. The maximum amount of first time purchases should correlate with the number of potential customers who have not yet purchased the product. The maximum amount of repeat sales will depend upon the nature and lifetime of the product. For example, there is a difference between how many times a customer may purchase new soft drink in a year, compared with purchasing a new car. The sum of maximum first time purchases and repeat purchases during a year, would be the maximum potential sales volume for the market in a year.


Market share measures the performance of a business against its competitors in the market. The greater the market share of a business the more successful it is in capturing sales from the competition. Market share is typically expressed as the percentage of the total number of sales in a market that a business makes. So if a business makes one half of all sales in the target market, then it will have a 50% market share. Businesses generally strive to increase their market shares, and will usually fight to keep what they already have.


Once there is an estimate of the maximum potential sales volume for the target market, limiting factors need to be taken into account and applied in order to arrive at an estimate of the projected sales for the business, or what the projected "market share" will be. The limiting factors are real world constraints that a business will face when trying to sell its product. What exactly they are depends upon the particular product, business, and market circumstances. However they may be grouped into three general categories:


Customer Awareness

Customers need to know about your product in order to buy it. How many of them become aware of the product in a given period will depend upon such things as your marketing and advertising budget, and placement in potential venues where the product may be purchased. So if you have no advertising or marketing, chances are very few if any potential customers will even know about your product. Even if you spend a great deal on advertising or marketing, your advertisements and promotions are still unlikley to to be seen by 100% of the potential customers. Accordingly, the awareness of customers to the existence of a new product will almost certainly not be 100%, and can often be much less if there is only limited advertising and promotion, as may be the case with a new business having a very limited budget.


Product Availability

Product availability to customers at points of sale will also have an impact on sales volume. For example, if your target market is mostly purchasing products like yours through retail stores, it is unlikely (at least in the beginning) that you will have the product available in every single retail store that potential customers go to. The number of locations that offer your product for sale, the convenience of these locations, and the prominence of your product at the point of sale are all factors that will limit sales volumes.


The Competition

The competition is unlikely to simply stop selling its products, or just sit by and watch your business gain market share. Rather they will take actions to try and convince potential customers to buy their product over yours. This needs to be taken into account when estimating sales volume, by considering things such as the size of your competitor’s advertising and marketing budgets compared with your advertising and marketing resources. Likewise the competition may take actions on things such as pricing, or introduce its own new product, in response to your product. The competition may also have strong brand loyalty that you may have to overcome with customers who are unfamiliar with your business or product. In most cases it is unlikely that your new product will simply drive the competition out of the market entirely.


EXAMPLE


Assume that your research shows that the total potential annual sales for your target market is 100,000 products a year (this research can come from studying data available through industry reports or literature about sales). If due to a limited advertising and marketing budget in your first year it is only possible to inform 30% of the target market in the first year about the new product, then your share of potential sales for the first year will be down to 30,000 products (100,000 x 30%). However, being new to the market you expect only limited initial distirbution of your product in the first year, such that your product will only be available to 50% of those whom are aware of it. This further reduces first years sales down to 15,000 products (30,000 x 50%). Lastly, due to heavy advertising expenditures by the competition, brand loyalty, and an expectation that your competitors may drop their prices, you only expect 25% of customers who know about the product, and have it available to them to purchase, in the first year to choose it over the competition. So you estimate that sales for your product in the first year will be 3,750 products (to give you a 3.75% market share).


Because projecting sales is an inexact exercise, especially if you are a new business with no history of sales, it is often considered prudent for a new business to prepare a range of sales estimates: A best case scenario, a worst case scenario, and something in between that is considered likely taking into account your predictions for what is most likely.


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