our business market, like everything else, will change with time. As your business matures and your market share steadily increases, you will probably begin to encounter the growth limits of your original target market. Another method of market expansion involves developing new products that you will introduce to the same or new markets.
In the business world, change may be inevitable, but growth is not. Business growth always depends on the strategies and the actions that you take to make it happen. Planning and implementing a growth strategy to develop new markets and expand your business before your current market flattens will not only help your business survive through tough times, it could also give you considerable edge on the competition.
The degree to which you implement a market growth strategy depends on your own business goals and objectives. You may plan to grow your business slowly so that you can maintain a small but manageable market share. Or, you may develop an aggressive growth strategy that causes you to establish a more flexible organizational structure that can adapt to new markets and rapid growth
A systematic approach is the best way to find a new market. Without it, you can waste a lot of precious resources — something a small business does not have an excess of.
Define Your New Target Market(s) or the customer group that you feel will most likely want to buy your products or services.
This group is defined by your customer profile. Customer Profile is a detailed profile of your typical customer. For individual consumers, it includes information such as age, income, gender, marital status, profession and buying habits. For businesses, it includes the types of business, number of years in business, number of employees, annual revenues and products or services sold.
After you have defined your target customers and described how you can meet their needs, then you need to define the approximate geographic boundaries of your new target market. Select an area where you feel the target customer population is large enough to support your market expansion efforts.
The first thing you will need to do as you begin your market expansion effort is to determine the demographics and the geographic location of the new target market. Demographics are the characteristics of a population such as size, growth, age, income, gender, marital status and buying habits. This information helps you decide whether this target market is large enough for your products or services in the target area
Determine which of the following categories characterizes your expansion efforts:
- Same Target Group, New Geographic Area
- New Target Group, Same Geographic Area
- New Target Group, New Geographic Area
If you plan to sell to the same target group, then you should already have a detailed profile of the customers in that group. If you are targeting a new group, you will need to develop a basic profile of the new customers. The more you know about your target customers, the easier it is to develop a marketing strategy that will reach them.
Step 2: Do Your Market Research
Once you have developed a customer profile and identified the extent of your new target market, then you can do some basic market research to determine the following information: Interest in your product or service
- Do customers currently use your product/service?
- Do customers have a need for your product/service?
- What would customers be willing to pay?
- What other products/services would they be interested in?
Current population trends of your targeted customers
- Expanding, shrinking or stable?
How to get your product/service to your customers
- What do your customers prefer?
- What are your competitors doing?
- What is the most economical?
- Can you establish a competitive advantage?
The number and strength of competitors in the target area.
- Who are they?
- Where are they located?
- What products or services do they offer?
- What is their image?
- What is their pricing structure?
- What is their performance history?
- What is their current share of the market?
- What are their strengths and weaknesses?
Where to get the Information Your local college and public libraries are excellent resources for national and regional demographic and business-directory information. Here are some helpful resources that you may want to consult:
- County and City Data Book (U.S. Census Bureau, triennial). Provides information on population, education, employment, income, housing and retail sales.
- American Marketplace: Demographics and Spending Patterns. (New Strategist Publications). Listings of characteristics of U.S. Consumers.
- Sourcebook of County Demographics and Sourcebook of Zip Code Demographics. (ESRI, annual). These volumes identify dozens of local potential-customer characteristics.
- Demographics USA, City and County editions, (Trade Dimensions International, annual). These volumes are similar in concept but have little overlap with the Sourcebooks from ESRI.
- Lifestyle Market Analyst (SRDS, annual). Statistics on regional consumer interests.
- U.S. Industry and Trade Outlook, (U.S. Department of Commerce, annual) forecasts growth rates and reports on production in the past year for 200 industries.
- Current Industrial Reports (U.S. Census Bureau). CIRs provide information on production, shipping, inventories, consumption, and the number of manufacturing firms for over 5000 products.
- Economic Censuses. (U.S. Census Bureau, every fifth year). TheEconomic Censuses report sales figures and trends. The Census Bureau publishes the Annual Survey of Manufactures in the years between Economic Censuses.
- County Business Patterns (U.S. Census Bureau). Local industry statistics. The printed version includes listings for each industry having more than 50 employees in an area, and the CENDATA computerized version has listings of every North American Industry
- Classification System (NAICS) category with at least one employee.
- Encyclopedia of Associations (Gale Research, annual). Lists U.S. trade and professional associations, many of which produce publications with industry and market statistics.
Your library is likely to have other resources that can be used to profile the local competitors and potential business customers. Ask the librarian about state and city manufacturer and service directories, the various directories produced by Dun & Bradstreet, Ward’s Business Directory of U.S. Private and Public Companies (Gale Research, annual), and theThomas Register (Thomas Publishing, annual).
• For local information, contact the chamber of commerce. The staff should be able to provide you with information on regional growth trends and competitors.
• Local newspapers will provide you with information on competitors, the local economy, growth areas, business stability, etc.
• Read the yellow pages for the targeted area to help you determine how many competitors are in the area.
• Take a sales representative or wholesaler to lunch. These people make it their business to know what’s going on in their industry and community.
• Observe your competition in person. Pretend you’re a customer and shop in their store or analyze their products or services to determine what is good or bad about their operation.
• Contact your prospective customers directly. Through personal or telephone interviews, surveys, or focus groups you’ll be able to gather valuable information on your target market. Now list the sources you are going to use to get the market research information that you need.
Key Questions to Answer
Your research should help you decide whether or not it will be profitable for you to enter into the new target market. Refer to your customer profile as you do your analysis to help you stay focused on your customers and their needs. If you need help in conducting a market analysis, refer to the Business BuilderHow to Prepare a Market Analysis.Generally, theresults of your analysis should help you to answer these basic questions:
What are the market trends?
Try to determine if your new target market is growing, stable or declining. You may be able to compete successfully for a good market share now, but if the market trend shows declining demand for your products or services, then the future may not be promising. It is better to enter into a market that shows healthy growth trends.
Can I compete successfully in this new market?
Decide whether the market is large enough to make it worth your while. Analyze all your trend data carefully before you answer this very important question. Next, take a look at the competitive information that you’ve gathered. Is the market already saturated with competitors or is there room for one more? What is the relative strength of your competition? Do you already compete with them in other markets?Also, supplement this information with your own experience and knowledge.
If you are successful in your current markets, then you probably already know a great deal about what it takes to sell your product. You should be able to identify some unique features and benefits of your products or services and the way you promote them. Remember, features are the special characteristics of your product or service, but it is the benefits that sell a customer on your product or service. The customer wants benefits; they satisfy his needs. For instance, you may sell an air-conditioner that is efficient, is computer-controlled, has few moving parts, and is economical. The customer, however, buys it because it saves money on his electric bill, is easy to use, is quiet, and affordable — all benefits to him. Think about your prospective competitors. How are they likely to react if you enter the market? Are your product or service benefits strong enough to compete against theirs?
What will my market share be?
Try to estimate the market share you hope to gain and the amount of time it will take you to gain it. Most business owners overestimate their expected market share so start conservatively. You may want to conduct some limited-scale test marketing in the area you are targeting. For instance, if you’re planning to expand your home inspection services into another region, then try out your marketing plan in a smaller new area. Promote your service. Test the waters. Find out what the response will be and base your estimate on that trial.What is your market share projection?
Can I make a decent profit? Consider pricing and profitability.
Can you sell your products at a competitive price and still make a profit in this new market? It doesn’t always follow that an increase in revenues results in an increase in profitability, especially if your costs are higher. But how can your costs be higher for this new market? Simple! Your promotional costs will be greater. Your distribution costs could be higher. Your labor costs may increase, etc. Before making any concrete decisions on entering this market, you’ll want to have a clear understanding of your sales and associated costs. Estimate the numbers for the following abbreviated profit and loss statement (also known as an income statement) to get started on your analysis.
Creating a Profit and Loss Statement
Like a cash flow statement, a profit and loss statement provides you with detailed information regarding both revenues and expenses for your business. Also known in accounting terms as an income statement, even a basic profit and loss statement can provide you with a convenient window through which you can view your company’s revenue and expenses. In addition, profit and loss statements can also be a useful tool for creating a budget or calculating your working capital.
It’s up to you how frequently you wish to run a profit and loss statement. Some companies choose to run one monthly, while others prefer quarterly profit and loss statements. Whatever your preference, the best way to create a profit and loss statement is by using accounting software, which will take care of the entire process for you.
Step 1: Calculate revenue
The first step in creating a profit and loss statement is to calculate all the revenue your business has received. You can obtain current account balances from your general ledger such as cash and current accounts receivable balances.
If you’re creating a monthly profit and loss statement, you’ll include all of the revenue received in that time frame, whether your business has collected that revenue or not. If you’ve chosen to run a quarterly statement, just add up the revenue received in that three-month time frame.
When calculating revenue, be sure to include all revenue received, whether it’s from selling products and services or from selling your old printer to the business next door.
Step 2: Calculate cost of goods sold
Your cost of goods sold is an important part of any profit and loss statement. If you’re selling wallets, you’ll have to include the cost of purchasing the wallets from the manufacturer. If you’re making the wallets, you’ll have to include the materials and supplies needed to make them. If you’re selling services, you need to include the cost of your time or your employee’s time that provided the service.
Step 3: Subtract cost of goods sold from revenue to determine gross profit
Once you have calculated your revenue and your cost of goods sold, you’ll just need to subtract the cost of goods sold to arrive at your gross profit number. Gross profit is the profit your business has earned from selling your products and/or services.
Step 4: Calculate operating expenses
The next thing you need to do is calculate all of your operating expenses. Operating expenses include rent, travel, payroll, equipment, utilities, and postage.
Step 5: Subtract operating expenses from gross profit to obtain operating profit
Once your operating expenses have been calculated, you’ll want to subtract that total to obtain your total operating profit. This will give you your total operating profit or loss.
Gross Profit – Operating Expenses = Operating Profit/Loss
Step 6: Add additional income to your operating profit
If you have any additional income not included in your revenue totals above, such as interest income or dividends from investments, you’ll want to include them here. Once added to your operating profit, the total is earnings before interest, taxes, depreciation, and amortization, otherwise known as EBITDA.
Step 7: Calculate interest, taxes, depreciation and amortization
The next step is to calculate any interest payments, taxes due, as well as depreciation and amortization expenses.
Step 8: Subtract interest, taxes, depreciation, and amortization expenses from EBITDA to obtain net profit
Your final step is subtracting interest, taxes, depreciation, and amortization expenses to arrive at your net income, or net profit.
Net Profit/Loss = EBIDTA – (Interest + Taxes + Depreciation)
A profit and loss statement lets you know exactly how your business is doing. Often used to determine both strengths and weaknesses in businesses, a profit and loss statement can also tell you the following:We’re all in business to make a profit, so it’s no surprise that one of the most important markers for your business is your gross profit. Your gross profit is calculated by subtracting the cost of goods sold from revenue earned. This number can tell you how well your products are performing or whether your services are profitable. If your gross profit is low, look to increasing sales.
References and Resources also include: