What makes a useful market grouping?

The fact that you can identify a group of people with similar tastes in your target market does not necessarily mean that you have unlocked a source of sales. To be useful, a market grouping needs to have certain characteristics. First, the segment needs to be big enough to give you the living you require. You must also be able to differentiate it from other groups, so that its size can be measured. Another necessary characteristic is that the segment must be easy to reach. If not, you will experience problems getting your message across or supplying the product because of location. Finally, the group must have common features that actually lead to similar buying decisions.

A step-by-step analysis to identifying market groupings

1. Is your target market a consumer market? Or is it an industrial or professional market? If it is consumer, go to 2; if it is industrial or professional, go to 9.
2. Look at family and personal factors. Would age, sex, family size or marital status form the basis of different groups?
3. Is your product the sort that relies on supplying a local area? Location may be an important feature of a group.
4. Look at social class. Could this be important for your product?
5. Can you distinguish groups of potential customers on the basis of how much or how little they use or buy your product? Could your product be tailored to appeal to heavy or light users?
6. Are there psychological or social factors at work? Could the product appeal to those wishing to ‘better themselves’? Is lifestyle important? Would prospective customers be likely to ‘follow the crowd’ or want to be seen as stylish? Could there be snob or prestige appeal? Would the product appeal to consumers concerned about the environment and climate change?
7. Price could be a feature that distinguishes one group from another. Is there an element of value for money in a target group’s make-up? Some people go for the cheapest, no matter what. Most customers would say that they want good value for the money they spend.
8. How do the potential customers buy? Local shop, large supermarket or store? Mail order? The Web? Can you create a niche out of distribution methods? Now go to 14.
9. What type of industry will you be selling into? You could specialise in one industry or profession (called vertical marketing).
10. How big are the companies or businesses you are likely to sell to? Would you be interested in government contracts (see box that follows)? Size can mean different procedures in buying and frequency of purchasing. Can you create a distinguishing product benefit from the need to satisfy large, medium or small businesses?
11. Will one group of potential customers require quicker or more frequent deliveries than others?
12. Price could well create different market segments in industrial or professional users.
13. Will one group of customers be looking for a higher level of after-sales care or maintenance? Could this be your distinguishing product feature?
14. Consider what other categories might apply to your market. Each market will have its own specialised characteristics apart from the general ones listed above.
15. Now look to see if there is a group with more than one of the characteristics listed above. This could define your target group.

What do you know about your likely customers?

To help you to understand your potential customers, and to help you sell to them, you need to know a range of information about them. If it is a business you are selling to, you need to have information on the organisation and buying policies. Investigate the other suppliers to your customers and acquire and analyse information on the products bought by them.

Databases are the key. Set up a database for information about your potential customers and gather and collate as much as you can within the legal limits allowed (p. 192). Interrogating databases will help you to target potential customers more effectively.

Market size

The first step is knowing the market size. This could be either its monetary value or the number of units sold. Beyond this you need an estimate of the market potential, which is unlikely to be the same figure as market size because it is unlikely that everyone in the market will buy your, or an equivalent, product. Obviously, if you have the figure for the overall market but have decided to concentrate your business resources on a particular market segment, your next step is to assess the size of that particular segment. Even then, this may not give you your estimated market potential (the amount of sales you stand some chance of being able to make over a period of years).

Market structure

This is the process by which a product is sold to the end-consumer. Market structures constantly evolve, and the world economy has undergone a rapid restructuring with the development of the Internet and mobile devices as tools to sell products on a global basis direct to end-consumers. Over the past 20 years, distribution has moved away from face-to-face selling to selling by direct mail, telephone, Internet, mobile phones and, most recently, tablets such as the iPad. A key stage in selling used to be the role of intermediaries, businesses were placed somewhere between the end-consumer and the end-producer. Intermediaries include agents, distributors and brokers. But the restructuring of the global economy has squeezed this sector as a distribution channel. Nowadays intermediaries need to offer more than just a range of products: service is crucial.

The routes for direct selling include direct mail, telephone, e-mail, Internet, through your own web site, face-to-face, in person and retail outlets.

But not all markets can be reached by direct selling and, although a web site is fairly cheap to set up and easy for customers to use, do not underestimate the work involved in generating traffic to your site and then monitoring and fulfilling orders you receive this way. Small businesses may find that selling through others, or a chain of others, is still a lower-cost alternative. These can include distributors, agents, brokers, through an Internet portal or someone else’s web site.

If you sell through others, you have to pay them a royalty or commission or sell to them at a lower price than you would sell to the end-consumer.

Market share

Unless you are supplying a completely new product or service, you are going to share the market with other businesses. To be in a dominant position (that is, the supplier of 25 per cent or more of the market) would be very rare for a small business.

To be able to forecast your sales you are going to need some idea of what share of the market your competitors have. You also need information about your competitors’ businesses and products to enable you to position and price your own offering. Knowing the market shares gives you a measure of how successful the other businesses have been.

Monopolies are unusual, but there may be a duopoly (two businesses supplying 25 per cent or more of the market each) or an oligopoly (three, four or five businesses dominating it). However, many small businesses are likely to face a fragmented supply position, where there are lots of suppliers and one business is unlikely to achieve more than 5 per cent of the market. This is particularly true if it is a new industry or market.

Measuring market share is one thing, achieving it another. But there are some ways of influencing the share you can seize. On the whole, it is helpful to build a reputation for good, consistent quality. For this to be translated into market share, a second influence is maintaining a reasonable level of marketing activity: PR, advertising, search engine optimisation (SEO) if you have a web site, and sales activity. A third influence is if your product is recognised as being ahead of the competition in performance, design or whatever.

Look at your competitors in a detailed fashion. The data it would be helpful to have include:

• what are the competing products and how much do they sell?
• how well have they done in the last few years?
• how is the company organised?
• how is its selling carried out?
• if it produces goods, how is it done and what are the facilities?
• who are the main customers?
• what is the pricing policy and what sort of delivery is offered?

Market trends

Market size, market structure and market shares do not remain the same. What happens today may be totally irrelevant to what is happening in one, two or three years’ time. The usual method of deciding what is going to happen in the future is to look at what has happened in the past and project it forwards. This approach is fraught with dangers. At the very least, you need to adjust the figures for changes that may occur or are forecast to occur.

On a general level, anticipated changes in the economy can affect the buying patterns of individual markets. There may be changes forecast in tax or other laws that will influence purchasing decisions. New information may emerge on the effect of certain items (for example, health hazards).

On a more specific level, there may be changes caused by government or local authority policy. And so on. You need to look closely at your market to guess what changes will occur that might affect the market trends. In any conversations with people already operating in the market, remember to ask what likely changes they think are on the cards. You may be better able to take advantage of them as a new entrant with no constraints from existing products, methods of operating or overheads.

Investment needed in sales

You need to make realistic forecasts of how much you will sell, when you will be able to do it and what you need to spend on selling and promotion to achieve it. Inevitably, if you are starting your own business, you are optimistic, but do not let optimism blind you to the uncertainty of making sales.

If you are in any doubt, a rule of thumb is to double the length of time you expect it will take you to achieve a certain level of sales. In this way, you will organise sufficient funds to keep the business going until you reach break-even. The danger of this rule of thumb is that your business may not seem sufficiently attractive to lenders and investors. Keep a balance.

It might be possible to obtain a more reliable estimate of sales by carrying out tests (p. 25) on a limited basis, though this is tricky for a small business.

Web research

With a computer and a broadband connection, you have an enormous treasury of information at your fingertips on the Internet. The World Wide Web lets you tap into computers around the world to gather a diverse range of data and ideas. However, there is so much information out there that it is easy to get bogged down. You need to use a good ‘search engine’ to help you find your way around. A search engine is a piece of software within the Internet that searches for items on the Web by keyword or key phrase. Different search engines are better suited to different tasks, for example:

• Google is rapid and comprehensive. Hone down the very large number of entries you’ll probably get by using precise, multiple keywords. While Google is dominant, Yahoo! and Bing offer a similar service.
• webcrawler.com aims to improve coverage by combining the best results from several search engines, including Google, Yahoo! and Ask.
• www.yell.com is the Internet version of Yellow Pages and lets you search by business type and location.

For a detailed guide to most of the search engines available, including those with a business specialism, see www.thesearchenginelist.com

Depending on your area of business, you may find useful information on government web sites, such as HM Revenue & Customs* or the Department for Environment, Food and Rural Affairs*. You can find links to all government departments from the Number10* web site. Increasingly government statistical data are being centrally produced by the Office for National Statistics* and many previously unpublished government data sets are now available through a new web site, www.data.gov.uk Government information for citizens, consumers and businesses is now being channelled through the www.gov.uk* web site, which has replaced DirectGov and Business Link.

Desk research

The main sources of information are:

• directories.
• central and local government information.
• information from within your own business, if already up and running – keep good sales records and encourage your employees to be on the look-out for market information.
• trade associations.
• the trade press and special features in the quality papers.
• competitors’ literature.
• published statistics and reports.
• former colleagues.

Your starting point for a lot of information can be your local public reference library. You will need to organise your research in a systematic way, because the danger is that you may end up with too much information, a lot of it irrelevant, and with no way of being able to gain quick and easy access to the data that matter.

If you plan to sell locally, your local authority might be a source of useful reports and survey statistics. You could also try your local chamber of trade or commerce, although these vary greatly in size and resources.

There are also the trade sources of information. Find out which are the trade magazines and, if they are not free, take out subscriptions. Organise cuttings’ files. Contact the relevant trade association and obtain information about its members. Check out their web sites. Use trade exhibitions as an opportunity to pick up literature about your competitors and talk to potential customers about the market, the suppliers, the products and the gaps.

Interviews

The term ‘interview’ can cover anything from a chat at an exhibition to a brief telephone call, to a long face-to-face discussion in private. The main point is that you can pick up a lot of information simply by talking.

Whether you have started your business or not, good sources of information are customers, potential or actual. If you have access to a list, properly gathered and complying with the Data Protection Act (p. 193), you could carry out a telephone survey, limiting each interview to ten minutes, say. It would help you to analyse the information if you had prepared a questionnaire sheet. On the whole, you will find that most customers are usually ready to cooperate, as it may mean you develop a product more suited to their needs. Carry on with telephone interviews until you begin to feel that you are learning nothing new, because the same points are being repeated.

If you want detailed information, you will find that the telephone is not the best method of acquiring it. Instead, try to carry out a number of in-depth interviews.

If you are researching a consumer market, you should try to talk to the distributors and retailers as well as to the end-users. Most people are flattered to be asked their ‘professional’ opinion. Talking to the final consumers can be a bit of a problem because you may not know who these are. Perhaps a retailer will allow you to spend a day in the shop talking to customers? Asking people in the street outside the store is another possibility.

If your product is likely to be exhibited at trade fairs for the consumer, spend some time there asking about the market and product. Use a brief questionnaire to ensure that you ask the same questions so that the information can be analysed.

Interviewing competitors may sound an odd idea, but there is no harm in it and it can help you to understand what are common problems. If you come across any ex-employees of competitors, it is always worth a discussion, although you have to bear in mind that their view may not be entirely objective if they did not part with the business on good terms. And the information may be out of date.

Before you start your business, you could carry out some discreet research into how competitors organise their businesses by pretending to be a prospective customer. In this way you can gain some idea of the literature, prices, the way telephone queries are dealt with, selling methods or even how your potential competitors quote. It may seem unfair, but it is an unrivalled source of information and you may rest assured that once you are in business others will do it to you.

Tests

It would be a great help to you if you could test-market your product, especially if you will be setting up production facilities or ordering very large quantities. If you can try out a few before you make the substantial investment needed, you would be able to refine the product, satisfy yourself that the demand does exist and define the likely sales cycle (the length of time from first contact to purchase). To test this, buyers of the trial product need to be followed up and interviewed.

If you are selling by telephone or direct mail, you can test your product and your offer before launching into selling in volume. A pilot mailshot to, say, 5,000 potential customers can give you a huge amount of information about the likely response and sales.

If you are growing or producing local foods or drinks, you might be able to test on a small scale by selling at farmers’ markets or in farm shops. For information on selling direct through these routes, contact the National Farmers’ Retail & Markets Association (FARMA)*.

Other chapters to read

12 The right name (p. 133); 13 Getting the message across (p. 144); 14 Getting new customers (p. 167); 15 Building customer relationships (p. 189); 16 How to set a price (p. 197).