Download posting 28122

MARKTING
BASIC DEFINITIONS
POSTING 28122
MARKET SHARE
A firm’s performance relative to its competitors can be measured by the proportion of the market that the
firm is able to capture. This proportion is referred to as the ‘market share’. The basic formula is as
follows:
Market Share = Firm’s Sales / Total Market Sales
Another definition is that market share is the ratio of sales of a brand to the total sales of the product-type
in a defined area. It can also be defined as the ratio of sales of a company’s entire product line to the total
sales of all related companies. Market share is usually presented as a percentage, although sometimes a
raw number of sales or units is provided. If the TOTAL raw number is provided, market share percentage
can be calculated by dividing the brand’s number by the total number and multiplying the result by 100.
While the firm’s own sales figures may be readily available, total market sales are more difficult to
determine. This information is available from trade associations and market research firms.
There are some general questions that should be asked in determining an organization’s market share.
Answering these questions will enable an organization to define their market systematically. Note that
the type of merchandise or service and the target market is kept in focus. The one determines the other to
a large extent. An organizations should be able to answer the following questions:
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Is the market made up of consumers (people who use the product or services for themselves) or
does it also include wholesalers and retailers.
What is the socio-economic profile of the customers.
o Age. Try to determine the approximate age range of the customer.
o Income. Will the business cater to the needs of low, middle or upper income people or
is your product for everyone.
o Gender. Although the product may be used by male or female, or both, which gender
will normally do the actually shopping for your product.
o Education/Culture. These aspects frequently affect the style, pricing, etc. of
merchandise that the customer prefer.
o Location. Geographical aspects of your market are important. They affect the ease with
which customers can reach the organization and the kinds of needs that arise from
where they live.
o Occupation. What proportion of your customers fall into different occupational
categories.
Market share data is sometimes hard to find. There are a number of market share reference books and
these are fairly straight forward, but one may also need to look into a statistical index as well.
(http://www.lib.duke/edu/reference/subjects/business/m_share.htm lists some of the reference books and
indexes available.
Market share is associated with profitability; therefore, an organization seeks to increase it market share
for a number of reasons:
1) economies of scale – higher volume can be instrumental in developing a costs advantage
2) sales growth – when the industry is not growing, the firm can still grow its sales by increasing
its market share
3) reputation – market leaders have clout that can be used to their advantage; and
4) increased bargaining power – gives an advantages in negotiations with suppliers
The market share of a product can be modeled as follows:
Share of Market = Share of Preference x Share of Voice x Share of Distribution.
The Share of Preference can be increased through product, pricing and promotional changes. The share
of voice is the firm’s proportion of total promotional expenditures in the market. Thus, share of voice can
be increased by increasing advertising. Share of distribution can be increased through more intensive
distribution.
An increase in market share, however, is not always desireable:
 If the firm is near its production capacity, an increase in market share might necessitate
investment in additional capacity. If this capacity is underutilized, higher costs will result.
 Overall profits may decline if market share is gained by increasing promotional expenditures or
by decreasing prices
 A price war might be provoked if competitors attempt to regain their share by lowering prices
 Antitrust issues may arise if a firm dominates its market
If a firm is able to identify certain customers that are unprofitable, it may drop these customers and lose
market share while improving profitability. That way it is advantageous to decrease market share.
MARKET SIZE
The term ‘market’ refers to the group of consumers or organizations that is interested in the product, has
the resources to purchase the product, and is permitted by law to acquire the products. The market
definition begins with the total population and progressively narrows:
http://www.netmba.com/marketing/market/definition
Some definitions are warranted: Potential market are those in the total population who have interest in
acquiring the product; available market is those in the potential market who have enough money to buy
the product; qualified available market are those in the available market who legally are permitted to buy
the product; target market is the segment of the qualified available market that the firm has decided to
serve and the penetrated market are those in the target market who have purchased the product.
Market size is not necessarily fixed. The size of the available market for a product can be increased by
decreasing the product’s price. The size of the qualified available market can be increased through
changes in legislation that may result in fewer restrictions on who can by the product. Defining the
market is the first step in analyzing it. This is done by market segmentation, which is the identification of
portions of the market that are different from one another. Segmentation allows the firm to better satisfy
the needs of its potential customers better than the competition.
Mass marketing refers to treatment of the market as a homogenous group and offering the same marketing
mix to all customers. The drawback is that customer needs and preferences differ and the same offering
is unlikely to be viewed as optimal by all customers. Target marketing on the other hand recognizes the
diversity of customers and does not try to please all of them with the same offering. Consumer markets
can be segmented on the following characteristics: 1) geographic – region, size of metropolitan area,
population density and climate, 2) demographic – age, gender, family size, occupation, etc., 3)
psychographic – interests, opinions, attitudes; and 4) behavioralistic – brand loyalty, reading to buy,
usage rate, etc.
Understanding market segmentation is central to making effective estimations of market size:
 Define the maximum possible population
 Define the sub-population
 Consider the analogous markets. For example, if you are selling vacuum cleaners, is there a
relationship with the market for the usage of electricity.
 Identify uncertainties.
Determining the size of the potential market is an important question to consider. There are several ways
to approach this issue. Regardless of the approach, the organization needs to determine the size of
‘primary demand’ or secondary demand’. Primary demand is the size of the market for a product
category. Secondary demand is the size of the market for a particular brand. Secondary demand is more
naturally associated with market share. Most companies will be interested in the demand for new
technologies or services, which is primary demand - or the size of the market for a product category.
The first thing to note about almost all methods for estimating market size is that they are based on
decomposing the larger "market size" problem into smaller problems, and building the results of these
smaller problems into the market size. The best way to see this approach is in the familiar method of
estimating market size as follows:
Market size = number of buyers in the market x
quantity purchased by an average buyer in the market per year x
price of an average unit
This is a common technique used by many companies, with the major differences being how they break
the problem down and how they build in back up. The art of breaking down a problem and building it up
is also at the heart of the "chain ratio method". This method is more focused on the size of the market in
terms of number of customers, rather the dollars. Think of this method as trying to determine the "number
of buyers in the market" in the simple equation above.
The chain ratio method can be used by either first breaking down the problem into smaller problems and
then building up, or estimating (really almost guessing) the size of the total market and then doing some
fine tuning.
MARKET STRENGTH/PRICE ELASTICTY OF DEMAND
The futures market can be used to gauge the trend of the market. There are two types of futures contracts,
financial and commodities. However, no matter which type of contract, the basic premise is the same.
The buyer of the contract agrees to deliver the product at the contract prices. The Standard and Poors 500
index contains many of the largest companies in the world.
The Advancers to Decliners technical analysis tool is considered to be the best indicator of market
movement as a whole. The formula is the ratio between advancing stocks and declining ones. If the
markets are up but there are more declining stocks than advancing ones it’s usually assign that the
markets are losing their ‘breadth’ or momentum. If the number of advancing issues are dominating the
declining issues, the market is then said to be healthy
When talking about the strength of a stock or overall market, another tool is the RSI (Relative Strength
Index and Arms) which is a comparison between the days a stock finishes up against the days finishing
down. Depending on the Investor, the RSI can be used to detect strength over a couple hours or several
months. The longer trends are more valuable to long-term investors, whereas the shorter term trends in
the RSI are popular with traders. ARMS is a market performance indicator that weights each stock by
volume traded for each issue. A ratio of 1 means the market is in balance, above 1 indicates that more
volume is moving in declining stocks, below 1 indicates that more volume is moving into advancing
stocks. Both can help detect the overall strength of the market.
The price elasticity of demand measures the responsiveness of quantity demanded to a change in price,
with all other factors held constant. The formula is :
The price of elasticity of demand, Ed is defined as the magnitude of: proportionate change in quantity
demanded / proportionate change in price.
Since the quantity demanded decreases when the price increases, this ratio is negative; hover, the absolute
value usually is taken and Ed is reported as a positive number. Because the calculation uses proportionate
changes, the result is a unitless number and does not depend on the units in which the price and quantity
are expressed.
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For E > 1 – the quantity demanded is relatively elastic, meaning that a price change will cause an
even large change in quantity demanded.
For E < 1 – the quantity demanded is relatively inelastic, meaning that a price changes will cause
less than a change of quantity demanded
E = 1 – the product is said to have unitary elasticity; small changes in price do not affect the total
revenue.
Factors affecting the price elasticity of demand include: 1) availability of substitutes – the more
substitutes the greater the elasticity; 2) degree of necessity or luxury – luxury products tend to have more
elasticity, 3) time period – elasticity tends to be greater over the long run because consumers have more
time to adjust their behavior. There are other factors such as the proportion of the purchaser’s budgeted
consumed by the item, permanent or temporary price changes and price points.
An important characteristic of demand is the relationship among market price, quantity demand and
consumer expenditure. The nature of demand is such that a reduction in market price will usually lead to
an increase in quantity demanded.
MARKET TYPE
The focus of any market is people. The table below shows some example of market segments or groups:
TYPE OF MARKET SEGMENT
Demographic
Psychographic
Use-based
Benefit
Geographic
SHARED GROUP CHARACTERISTICS
Measurable statistics such as age, income,
occupation, etc.
Lifestyle preferences, such as music lover, city or
urban dwellers, etc.
Frequency of usage such as recreational drinking,
traveling, etc.
Desire to obtain the same product benefits such as
luxury, thriftiness, etc.
Location such as home address, business address,
etc.
Marketing type make strategies for designing, pricing, distributing, promotion, positioning and moving
the product more effective and more cost-effective. For example, if research shows that a sturdy
recyclable package with blue lettering appeals to your target market and if you are focused on that target
market, you should choose that type of packaging. If however, you are product or profit oriented, the
package can be made out of plain Styrofoam because it protects the product or because it is cheap.
There are also different types of markets. The most common distinction is between consumer and
industrial markets. Consumer markets are the markets for products and services brought by individuals
for their own or family use. These goods can be categorized in several ways:
 Fast-moving consumer goods – high volume, low unit value, fast repurchase. For example, ready
meals, baked beans, newspapers
 Consumer durables – low volume but high unit value.
o White goods (fridge-freezers; cookers, vacuum cleaners)
o Brown goods (DVD players, personal computers)
 Soft goods – similar to consumer durables except that they wear out more quickly and have a
shorter replacement cycle (shoes, clothes)
 Services - hair dressing, dentists, etc.
Industrial markets involve the sale of goods between businesses. These goods are not aimed directly at
consumers. Industrial markets include selling finished goods, selling raw materials or components and
selling services to businesses. Industrial markets require a slightly different marketing strategy and mix.
In particular, a business may have to focus on a relatively small number of potential buyers.
In describing market behavior, the spectrum is based on three primary market characteristics: 1) the
number of firms in an industry, 2) the barriers to market entry or exit and 3) the type of good offered for
sale. These characteristics along with different market structures are summarized in the following table:
Characteristic
Number of Firms
Barriers to Entry
Type of Product
Perfect
Competition
Many
None
Homogeneous
Monopolistic
Competition
Many
Low
Heterogeneous
Oligopoly
Monopoly
Few
High
Homogeneous/
Heterogeneous
One
Absolute
One
At one end of the spectrum, we have a competitve ideal which represents a standard by which we evaluate
all other types of competitive behavior. At the other end, monopoly represents an absolute lack of
competition such that a single firm in the industry has a high degree of price-making ability.
PERFECT COMPETITION: With a large number of firms, a high degree of product similarity and
perfect market information available, each individual firm has absolutely no influence on market prices.
Prices are strictly established by the interaction of market supply and market demand.
IMPERFECT COMPETION: refers to those market structures that fall between perfect competition
and pure monopoly. Monopolistic competition is many firms selling products that are similar but not
identical. These are markets that have some features of competition and some features of monopoly. A
monopolistically competitive market is characterized by three attributes: many firms, differentiated
products and free entry. The equilibrium differs from perfect competition in that each firm has excess
capacity and each firm charges a price above marginal costs. An oligopoly also has three characteristics:
there are a few firms selling a similar product, there are barriers to entry and the firms are interdependent,
meaning the actions of one firm will affect the others in the industry. This is a market dominated by a
few large suppliers. Market concentration is very high meaning that a large percentage of the market is
taken up by the leading firm. These types of firms produce brand name products. There are four major
theories about oligopoly pricing:
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Oligopoly firms collaborate to charge the monopoly price and get monopoly profits
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Oligopoly firms compete on price so that price and profits will be the same as a competitive
industry
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Oligopoly price and profits will be between the monopoly and competitive ends of the scale
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Oligopoly prices and profits are "indeterminate" because of the difficulties in modelling
interdependent price and output decisions
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When one firm has a dominant position in the market the oligopoly may experience price
leadership. The firms with lower market shares may simply follow the pricing changes prompted
by the dominant firms. We see examples of this with the major mortgage lenders and petrol
retailers
MONOPOLY: natural monopoly is a situation where a single company tends to ecome the only supplier
of a product or service over time because the nature of that product or service makes a single supplier
more efficient than multiple, competing ones. It is inefficient to have several electrical distribution
systems covering the same area, or several pipelines going in the same direction. It is more efficient to
build and operate a single (larger diameter) pipeline. It occurs in a market where the average cost curve is
decreasing when it intersects with the demand curve. In standard supply and demand theory with a perfect
competition this creates an equilibrium price that is below the average cost to produce.
MARKET PENETRATION
Market penetration measures the extent to which market potential has been realized by companies
supplying a market. It is a growth strategy in which a company concentrates its efforts on its target
market in order to attract a higher percentage of users of its products.
Market penetration is one thing, but market penetration opportunity is a deeper concept. Determining
market penetration is fairly simple. You determine the total market potential, then divide that potential by
the amount of product that is already sold or purchased. For example, penetration of TVs in their
potential markets is very high, while penetration of household robots is very low. If there are 10,000
possible users and 1,000 of them already using a product or service, then that’s a 10% penetration. The
problem is that the total potential market for anything is a moving target, it changes with technology,
costs, socioeconomic trends and many other factors. How did we determine who is a potential user and
who isn’t. This is where marketing penetration opportunity comes up. This is pretty much the same as
asking about the business opportunity. Evaluating whether or not an opportunity exists, and how much of
an opportunity exist, is one of the core problems of entrepreneurship. Seeing the change before it
happens is vital. Look at a market and see how it might grow and why, and whether or not that growth
involves new market potential and new opportunities. For that, there is no formula. Study the benefits
offered to buyers, how they might change, and make good educated guesses about the future.
Success Measurements
Increasing sales and reducing sales expenses depends on many factors, but you still should be able to
gauge the impact of using a customer care technology solution. To measure progress and return on
investment in your customer care deployment, consider these metrics:
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Accelerated revenue growth
Increased market share
Increased sales per sales channel in units and dollars
Increased sales conversion rate per sales channel (the ratio of leads to customer sales)
Improved forecasting accuracy
Improved customer satisfaction
Fewer product returns
You can also track progress through specific metrics that measure customer or sales representative
performance. We suggest these three measurements:
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Reduced cost per customer order — You should see a decrease in total-costs-per-customer
when you use the Web to communicate efficiently and provide employees with the information
they need to process service requests.
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Profit per field salesperson — You should see a rise in profit per field salesperson because of
better-targeted offerings and timely customer information delivery.
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Reduced technical support response time and fewer product returns — Matching your
products to your customer needs better will help ensure they're satisfied with what they buy.
Customer care can directly or indirectly affect these metrics. Regardless of what metrics you use, these
measurements provide insight into what your company is doing right — and wrong — in terms of
customer relationships. Use customer care tools to investigate and adjust your practices and policies.
There are five barriers to generating predictable accelerated revenues:
Barrier # 1 – Lack of a Clearly Defined Market Definition
For most organizations, effective target market definition is still a struggle and decisions on geographical
market segments, vertical markets, buyers and influencers, remain unclear. If your market is not
correctly identified, the chance of corporate success is minimized from the start.
Barrier # 2 – Poorly Defined Lead Generation Execution
Generating leads is the first in a series of steps towards generating revenue for a company. A company
can’t succeed unless it is able to get the attention of a potential buyer. The leadership of all companies
have to ensure that the sales team is getting enough qualified leads before they can understand the
performance of their sales team. In mostcompanies the process is ill defined and normally does not have
a person or team directly accountable for lead generation results.
Barrier # 3 – Lack of Disciplined Product Marketing
Sales and marketing are supposed to fit together synergistically, but at most companies it’s a partnership
that goes strangely awry. Even in companies where a single manager has responsibility for both
functional areas. The sales and marketing teams often find themselves on different paths as opposed to
having aligned goals and performance metrics. When there is a lack of integration between sales and
marketing, it leads to confusion, redundancy of effort, a longer sales cycle, and lower revenues and
profits.
Barrier # 4 – Weak Sales and Marketing Leadership
Great sales leaders have three basic abilities. They must be able to create strategy and vision. They need
to execute using process as a tool, and they must be able to motivate those who work for (and with)
them. With daunting revenue goals likely facing companies in 2002, it’s time to take stock of your sales
leadership to see if they’re up to the task. Asking the right questions – and listening to the answers – will
either help you solve your confidence problem, or realize that it’s time to move in another direction.
Success in one industry doesn’t guarantee it in another – matching leadership profiles with specific
market requirements is a must moving forward.
Barrier # 5 – Lack of a Disciplined Sales Process
In most organizations there is a lack of appreciation for a structured sales process and why it needs to be
so tightly defined. There are a number of steps involved in any sales process – each one progressively
moving towards a closed sale and successful revenue generation. By defining these various processes
and the associated activities, a sales cycle can be segmented into a number of quantifiable and
measurable stages. These stages can then be analyzed for efficient and effective execution. Proper
implementation of a structured sales process gives a company the ability to diagnose the market place.
Without a well-defined process market analysis is antidotal and the ability of a company to react quickly
to market requirements is hampered.
References:
http://www.mitforumcambridge.org/fall02/5Barriers.pdf - Sirius Decisions - The 5 Barriers to
Predictable Accelerated Revenue
http://www.businesspartners.co.za/Bus_info/MarketShare.htm - Determine your Market Share
http://www.lib.duke.edu/reference/subjects/business/m_share.htm - Market Share Resources
http://www.quickmba.com/marketing/market-share - Market Share
http://www.mbda.gov/?section_id=5&bucket_id=161&content_id=2356 - Using Direct Sales
Promotion for Market Share
http://www.netmba.com/marketing/market/definition - Market Definition
http://www.betterproductdesign.net/tools/market/user_demand.htm - Market size estimation: enduser demand
http://www133.americanexpress.com/osbn/Tool/Bix_plan/market/sizetrend/index.asp - Market
Size Trends
http://www.marketingprofs.com/Tutorials/marketsize1.asp - How to Size a Market
http://www.investopedia.com/university/srength/strength1.asp - S&P 500 (and Nasdaq) Futures
http://www.quickmba.com/econ/micro/elas.ped.shtml - Price Elasticity of Demand
http://www.digitaleconomist.com/elasticity.html - Price Elasticity of Demand
http://www.onlinewbc.gov/docs/market/mk_target_mkt.html - Target Market
http://www.tutor2u.net/business/marketing/market_tupes.asp - Types of Market
http://www.digitaleconomist.com/mkt_4010.html - Markets and Price Competition
http://www.revisionguru.co.uk/economics/oligopoly.htm - Oligopoly
http://www.hoover.com/ - The Hoover Company
Http://www.onlinewbc.gov/docs/market/MKPLAN_object3.html - Marketing Plan Components:
Marketing Objectives and Strategies
http://www.wilsonweb.com/wmt5/plan-4p.htm The 4 Ps of Marketing as Part of your Internet Marketing
Plan
http://www.sba.gov/test/wbc/docs/market/product_features_and_benefits.html - Product features and
Benefits
http://www.sba.gov/test/wbc/docs/market/mk_4ps_pricing.html - Pricing - Understanding Costs and
Pricing for Profit
http://www.sba.gov/test/wbc/docs/market/mk_4ps_promo.html - Promotion Plan-Getting the Word Out
http://www.sba.gov/test/wbc/docs/market/mk_plan_distribution.html - Sales and Distribution
http://www.gaebler.com/The-4-Ps.htm - Marketing Plan - Advice for Entrepreneurs
http://www.aipmm.com/html/newsletter/archives/00051.php - AIPMM: Product Management Articles –
The 4Cs: The New 4Ps of Internet marketing
http://www.gaebler.com/Marketing-Plan.htm - How to Write a Marketing Plan – Advice for
Entrepreneurs
http://www.blanecanada.com/PDF/SharkproofArticle.PDF - A SharkProof Marketing Plan