Business Feasibility - Market
It is important that you know, in your own mind, precisely what business you are going to engage in. You may say "That's obvious!" but in taking the time to collect your thoughts and write your idea down, you may discover problems you had not anticipated and advantages you had not considered. While there are hundreds of types of businesses, most can be classified into one of four main categories: service, retail, wholesale, or manufacturing.
Service businesses are currently the most frequently established operations. They are similar to retail businesses, though location is often less important and advertising is often more important than in retail. Service operations usually sell a specialty or skill, so credibility is very important. Start-up costs are often low, and many service businesses can be operated from the owner's home.
Retail stores are a common type of business start-up. Their main advantage is that they can be owned and operated by one person with minimal assistance. Compared to manufacturing operations, they are relatively easy to start, both financially and operationally. However, they have a high failure rate due to undercapitalization, poor site location, and poor market analysis.
Wholesale operations serve as the link between the manufacturer of goods and the retail merchant, industrial customer or end user. They take title to the products they sell and, thus, often have a larger dollar investment in inventory. Location is important even though they often serve a large geographic market.
Manufacturing start-up costs are higher and the set-up times are longer than with the other three business types. Cash may become a problem as the time span between purchase of raw materials and payment for finished goods can be weeks and often months during which many fixed expenses must still be paid. Also, manufacturing operations require more people, both for production and management, than all but the largest of the other three types.
Most government and industry information for all lines of business is collected and reported by NAICS code (North American Industry Classification System) which has replaced the Standard Industrial Classification (SIC) code. This code is a six-digit number assigned by the U. S. government. Identify your NAICS code using the search tool on the OSHA website (www.osha.gov).
Write out your responses to the following questions.
- What type of business am I planning to start? (service; retail; wholesale; manufacturing; etc.)
- The NAICS code for my business is:
- What will my business's image be? (quality and price of my products or services; the location and appearance of my facilities; level of employee assistance to customers; types of customers I will sell to)
- What specific products/services will I offer?
- Are these products/services already available in the marketplace? If so, how and where? If not, why not?
- Will my products/services be different from what is already available? In what way? (e.g., convenience, quality, service, price)
- How will I deliver my product or service to the marketplace?
- What type of labor skills will I need to run my business? How will I be able to find them in my area?
- What kinds of equipment or raw materials will I need to run my business or produce my product? How available are these?
- Can my equipment be used to manufacture other products or produce other services?
- Are there other services or products I could offer to increase my lines of business?
Describe Your Customer
Without customers, you will not have a business. Yet it is amazing how many companies know next to nothing about the people or businesses who purchase their products or services. You have to know who your potential customers are before you can determine how to sell to them.
When it comes to your potential customers, you need to know two things: what they are like and how many of them exist in your target area. You must determine the characteristics that your customers have in common. For consumers, these include things like age, occupation, marital status, income, number of children, etc. For business customers, some characteristics to consider are dollar sales volume, type of business, markets served, authority to make the buying decision, and location. Trade journals for specific industries may include subscriber characteristics in their "media kits."
Unless you can find a competitor or industry association that has already gathered this information, you will have to do it yourself. While there are a number of ways to go about characterizing potential customers, they are too involved to cover in this workbook. There are excellent websites available that help you do your own market research, including:
- www.factfinder.census.gov - gives you demographic data by city, county, zip code, etc;
- www.bizstats.com - excellent industry information, including retail sales per foot for each industry, safest/riskiest types of businesses, and average amount owners keep per sales dollar for every industry;
- www.firstresearch.com - for a small fee, you receive a complete industry profile (helpful for "Marketing" section of Business Plan)
- www.sbdcnet.utsa.edu/SBIC/industry - another great website for free industry information.
Once you have determined what your customer "looks like," you need to approximate how many of him or her there are in your target area. Census data is an excellent source for this kind of information. Use the "factfinder" website above. Use a map to identify geographic markets. Based on your knowledge of who your primary customer groups are, mark their location(s) on your map. You can use this visual aid later in evaluating possible locations for your business.
Answer the following questions about your customers.
- Describe my customers in detail. (What will be their age? sex? income level? education? occupation? marital status? location? etc. If customers will be other businesses, what types? sizes? location? etc.)
- Why will customers buy my products/services? (Possibilities include need, luxury, impulse, replacement, improvement, status, pleasure, quality, price, guarantee, durability.)
- When will my customers buy my products/services? (Particular times of the year, month, week, day.)
- How often will customers buy my products/services? In what quantity?
- Where are my potential customers located?
- How many potential customers are in my market area?
- If customers have to come to my store location, how far will they be willing to travel to get to my business?
- Is the population growing or declining in my market area?
Describe Your Competition
Competitors - people in the same line of business are key sources of information. Starting a business successfully can depend to a great degree upon how well you understand your competition, their products, their marketing methods, and their competitive advantages and disadvantages.
If you are starting a storefront operation (one where customers will be coming into your business location), visit your competitors' businesses as a customer. Observe their operations: the number of customers and salespeople, the courtesy and knowledge of staff, the types and prices of goods and services available, etc. Make more than one visit, varying the time and day that you go.
If your competitors do not have storefront operations that you can visit, call them. Ask about services or products sold, how quickly they can respond to your needs, and what technical expertise they have that will reassure you of their ability.
Do not overlook the possibility of interviewing people to learn about the competition. Talk to people or businesses that fit your customer profile. Ask about their current sources for the goods and services you plan to offer. Ask them to identify what they like and dislike about their sources of supply.
For a manufacturer, competition is usually by products rather than geography, so it is more difficult to get information from competitors. One source of manufacturer information (such as product, business size, plant location, etc.) is state manufacturers' directories. The most widely recognized one is the "Thomas Register", available at public and college libraries, and at www.thomasregister.com.
If you find it impossible to get a competitor to talk to you, then try to find an independent sales representative who works in the industry; he or she is likely to be very knowledgeable about the companies in the industry. Another source of information is an industry distributor such as a retail store, catalog company, or wholesaler that carries a competitor's product. Suppliers to your industry often deal with many of the producers in it, so do not overlook them either.
Using the map on which you previously marked the location of customer groups, identify the location(s) of competitors. This aid may highlight customer groups that competitors are not serving.
Write out your responses to the following questions concerning your competition.
- Who will my major competitors be and where are they located?
- What are the major strengths of each competitor?
- What are the major weaknesses?
- Do any of my major competitors plan to expand? At what location?
- Are there any new competitors about to start operating in my market area? Where?
- Have any competitors gone out of business in the past two years?
- If yes, why did they go out of business?
- Will growing demand permit a new business to enter the market or will I be attempting to take business away from my competitors?
Describe Your Sales And Distribution Process
Sales are how businesses make money and grow. Selling involves three things:
1. A good product.
2. Someone who will pay money for it.
3. A way to get the product to the customer.
For many small businesses, it is the third element, known as distribution, that causes sales problems. An understanding of the advantages, disadvantages, and costs of different channels of distribution will help you avoid making mistakes that could cost you your business.
For the purposes of this section, we divide the information into sales processes for those starting a service or retail business and distribution for those going into manufacturing. This is because retailers are a part of the distribution channel, always dealing directly with the end user. Manufacturers, on the other hand, rarely sell to end users, but instead to a variety of intermediaries, of which retail stores are one. To avoid confusion, we will use the word "storefront" to indicate those going into a retail business and "manufacturer" when referring to distribution for a manufacturer.
Since most retail operations sell directly to the end user, marketing for a retail operation is 90% location. Though advertising can increase traffic to your store considerably, your facility must be accessible in terms of finding it and getting into it.
Answer the following questions about sales and distribution as it relates to your planned retail business.
- Can I initially operate the business out of my home?
- What time of day will customers shop my business?
- What sales-per-square-foot ratio is typical for my type of business?
- What other kinds of businesses will complement mine and help increase my business's traffic flow?
- How can I best communicate with my customers? What types of promotional and marketing techniques will I use to reach them?
- How much space will my business need?
- How much parking space will I need?
- Will my business require special lighting, heating or cooling, or other special services? If yes, what?
- Is the location I'm considering served by public transportation?
- Is access to and from the street convenient and safe?
- Is exterior lighting adequate to attract evening shoppers and make them feel safe?
- Are there any zoning restrictions that will limit my operations at this location? If so, what are they?
- Will I be able to expand at this location if my business is successful and I need more room? Do I need to own my location or should I lease? Why?
- If I lease, will I have the option to renew my lease?
- What happened to the business that last occupied the location I am considering? Why did they vacate? If the business failed, why?
There are many channels of distribution. While they will vary from industry to industry in their effectiveness, the following are the main ones with which you should be familiar.
Direct to End User
End user distribution includes selling through a retail operation owned by you, by phone, at fairs or trade shows, door-to-door, a website, or directly out of the production facility. Marketing to and closing sales with individual end users can be expensive for manufacturers. For that reason, many choose to use one or more of the following methods.
There are three types of sales representatives: 1) in-house representatives, who sell only your product line (usually by telephone) and are full-time, compensated employees; 2) outside salespersons, who sell only your product line, but do so by face-to-face contact with prospects; and 3) independent representatives (or manufacturer's reps), who carry other product lines besides yours, are considered independent contractors, and are paid strictly on a commission basis.
These include individually owned stores, regional chains like Dollar Stores, merchandisers like J.C. Penney, upscale department stores such as Dillard's, and discounters like Wal-Mart.
Catalog, Direct Mail, and Mail Order
This category includes catalogs (a collection of items sent to specific individuals), mail order (advertising placed in newspapers and magazines that offers products directly to the reader) and direct mail (sales material sent to thousands of potential customers at one time to either make a sale or generate a sales lead).
Distributors and Wholesalers
Distributors and wholesalers include businesses that do little more than warehouse your product as well as those that will buy, store, resell, and deliver it. They usually serve markets that feature a large number of independent stores, seasonal demand, and a fair amount of price competition. Distributors and Wholesalers are useful when your geographic market is very large, when reaching the customer would be difficult to do on your own, or when you do not have the time/money to build your own distribution system.
Write down your responses to the following questions concerning your manufacturing operation.
- Is the product I will make intended for the consumer or industrial market?
- Is my facility in an area that is accessible to my customers?
- Do I have any sales experience? Describe that experience. Do I have the time to both manage operations and sell the product/service?
- Could my product be sold by an independent sales representative? What will the wholesale price of the product/service be after adding the cost of commissions?
- Does selling the product /process require technical education or support? Can I provide such assistance in-house? How?
- Can I produce in the high volume a Wal-Mart requires, or will my output be better suited to smaller, individually-owned retail stores?
- Can my product/service be sold with a picture? Will customers understand enough about the product to purchase it through the mail? What will I have to add to a photograph to sell my product?
- Can the product be sent through the mail? How much will this cost?
- If I am going to use direct mail, where will I get my mailing lists?
- Can my product be produced inexpensively enough so that a distributor could add 30% and still sell it competitively? What is the price range of competing products?
These sources will provide answers to your research needs:
1. George Breen & A. B. Blankenship. Do-It-Yourself Marketing Research. New York, NY: McGraw-Hill, Incorporated, 1992.
Use this workbook to evaluate the marketing problems you want solved, plan your research study, find existing marketing information to learn about competitors, and develop the best questionnaire.
2. Margaret Ambry. Consumer Power: How Americans Spend Their Money. Chicago, IL: Probus Publishing Company, Inc., 1992.
This handbook details exactly how much money Americans spend on hundreds of products and services. Its detail will help you with market share, packaging & promotion, product line, media buying, new product development, and site location.
3. Census of Population & Housing. Washington DC: U. S. Department of Commerce, 2002.
Use this information to locate your customers once you have identified their key characteristics. Geographically arranged by city block, census tract, MSA, city, county and state. Census information is available online at www.census.gov.
4. County Business Patterns. Washington, DC: U. S. Department of Commerce, 2001.
This Census Bureau publication gives statistics (by state and county level) on numbers of establishments by detailed industry, their quarterly and annual payroll, number of employees, and number of establishments by employment-size class.
5. Directory of Manufacturer's Sales Agencies. Laguna Hills, CA: Manufacturers' Agents National Association, 2000.
This directory is a good source for finding the best sales agencies for your product line. It is indexed alphabetically and by product line.
6. American Wholesalers and Distributors Directory. Detroit, MI: Gale Research, Incorporated, 1998.
A comprehensive guide offering industry details on more than 18,000 wholesalers and distributors in the U.S. Manufactured goods are usually not delivered straight to the consumer. Instead, wholesalers & distributors buy these products from the manufacturer, then sort, assemble, and store them for resale. This directory can be used to establish important connections between manufacturers and consumers.
7. Market Share Reporter. Detroit, MI: Gale Research, Incorporated.
An annual compilation of reported market share data on companies, products, and services.
8. Adrienne Toth; Suzette Bessette; Leanne Jisonna; Deborah Kid, & Elizabeth McLaughlin. Directory of Mass Merchandisers. Stamford, CT: Hunter Media, 1999.
This directory lays the groundwork for you to evaluate distribution opportunities and reach buyers. It includes information on demographics, market area maps, major corporations, top 100 mass merchandisers, convention dates, and specific companies.
9. Harold Novick. Selling Through Independent Reps. New York, NY: AMACOM, 1994.
Presents a unique systems approach to sales channel design and management.
10. National Directory of Catalogs. New York, NY: Oxbridge Communications.
Covers more than 7,000 U.S. and Canadian catalogs of all types & sizes. Gives contact information, a description of products carried, personnel contact names, list rental data, and production information.
Last Updated: July 2005