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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
L561: Information Systems Design for Digital Entrepreneurship
Defining your market
I. Understanding the market
• 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
L561: Information Systems Design for Digital Entrepreneurship
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
Normally a single price is set for each good
The size of a market 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)
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
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)
L561: Information Systems Design for Digital Entrepreneurship
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 increases and decreases because of
social factors
Expectations: demand increases and decreases because
of our assumptions about our future income
Number of buyers: demand increases as more buyers
want the same good leading to price increases
L561: Information Systems Design for Digital Entrepreneurship
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 operates to find a balance between supply and
demand through pricing
Markets operate with greater and lesser degrees of
efficiency
L561: Information Systems Design for Digital Entrepreneurship
Supply and demand curves in a market
Supply
Assumes perfect competition with many
buyers and sellers
Price
P0 Q0
Supply: how much will be made at a
given price
As supply increases, price increases
and quantity decreases
P1
P2
P1 Q1
P0
Demand: how much will be bought at a
given price
As demand increases, prices and
supply increase
P2 Q2
Demand
Q1
Q0 Q2 Quantity
L561: Information Systems Design for Digital Entrepreneurship
• 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 should be more sensitive
to small changes in prices
Especially if there are competitors
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
Strategies for versioning in a digital market
Delay: free 20 minute delayed stock 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
Features: pay more for more features
Comprehensiveness: pay more for more stuff
Annoyance: pay more to get rid of intervention nag-ware
Technical support: pay more for answers
L561: Information Systems Design for Digital Entrepreneurship
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 marketplaces for
themselves
Neutral marketplaces are set up by third-party
intermediaries to match many buyers to many sellers
L561: Information Systems Design for Digital Entrepreneurship
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 that supports these types of goods and
services
L561: Information Systems Design for Digital Entrepreneurship
One view of the digital marketplace
Verity, J. (1999). Digital Marketplaces. White Paper. p6.
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
II. Understanding the competition
• What is a market analysis?
Your idea places your firm somewhere in the market
Where?
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
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
Marketing is an activity that takes place within a market
It involves the creation and exchange of value with
customers
It is 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
L561: Information Systems Design for Digital Entrepreneurship
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
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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
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
What do you want to know?
Industry maturity: where is it in the life cycle?
New: lots of opportunities, lots of competition, high
growth rate, few leaders, high prices, few products and
services, building brand awareness
Expanding: market grows rapidly, shakeout begins,
leaders emerge and firms are vulnerable, customer
loyalty hardens, new features, more variable pricing
Stable: plateau, slower growth rate, strong brand
loyalty, barriers to entry, price reductions, push to
differentiate
Declining: minimal growth rate, decreased competition,
leaders cannibalize each other, loyalty weakens, fewer
products
L561: Information Systems Design for Digital Entrepreneurship
What do you want to know?
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
L561: Information Systems Design for Digital Entrepreneurship
What do you want to know?
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
L561: Information Systems Design for Digital Entrepreneurship
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?
L561: Information Systems Design for Digital Entrepreneurship
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?
L561: Information Systems Design for Digital Entrepreneurship
• 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
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
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www.etg.com/images/Market_Analysis_to_Consulting.GIF
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
III. Differentiation of the marketplace
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
L561: Information Systems Design for Digital Entrepreneurship
Differentiating the marketplace
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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
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
Market segmentation characteristics
Demographic characteristics
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Age, gender, family size, generation,
income, occupation, education,
ethnicity, religion, social class
Psychographic characteristics
Activities, interests opinions, attitudes, values
http://graphics8.nytimes.com/images/2004/12/05/national/20041206_nat_STR
ATEGY.gif
Behavioral characteristics
Benefits sought, usage rates, brand loyalty, user
status, readiness
www.liebermanresearch.com/images/data_segment.jpg
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L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
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
L561: Information Systems Design for Digital Entrepreneurship
• 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
It is an indicator of the potential strength of the firm in
the marketplace
It is an important factor used to assess the viability of
the firm
These projections and their assumptions must be as
realistic as possible
L561: Information Systems Design for Digital Entrepreneurship
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 movement in the market
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)
L561: Information Systems Design for Digital Entrepreneurship
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: assumption is that the patterns of the part will
continue in the future
This is where the industry analysis comes into play
Are there disruptive factors on the horizon?
L561: Information Systems Design for Digital Entrepreneurship
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L561: Information Systems Design for Digital Entrepreneurship
Quantitative: estimating market potential and share
What is the sales potential of the market segment?
Target area (geographical or online)? Target customers?
Market build-up method
Identifying customers and estimating their potential to
purchase
How many people are there in the segment?
What do they spend on similar products?
Market factor method
Survey of Buying Power Index: income, retail sales,
population
.012% of Indiana retail sales are made in Bloomington
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are needed to see this picture.
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L561: Information Systems Design for Digital Entrepreneurship