An Introduction to Market Planning

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The statement "Knowledge is power" is especially true when making business decisions in a dynamic and highly competitive environment. "Knowing your numbers" requires that all business owners and …

The statement "Knowledge is power" is especially true when making business decisions in a dynamic and highly competitive environment. "Knowing your numbers" requires that all business owners and managers maintain accountability over their marketing goals and results. This presentation will teach non-financial people the right questions to ask to begin to understand and quantify their goals.

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  • 1. Knowledge Is PowerAn Introduction to MarketPlanningSixteenth century English philosopher Sir Francis Bacon is credited with first saying,"Knowledge is power." Actually, the closest phrase historians can find in his writings is, .""Human knowledge and human power meet in one; for where the cause is not knownthe effect cannot be produced."Whoever said it, the statement is never truer than when making business ddecisions in adynamic and highly competitive environment. "Knowing your numbers" requires thatevery businessperson possess a clear understanding of two things in order to develop amarketing plan and implement successful marketing campaigns.The two prerequisites are the specific goals you want to accomplish, and the financial quisitesconsequences of changes in customer behavior on sales, gross profit and net income.An old adage says the goal of marketing is to persuade consumers of three things:A. They need to buy your product or service;B. They need to buy your product or service from you; andC. They need to buy your product or service from you right now.In other words, the purpose of marketing is to influence consumer behavior in ways thataccomplish your business goals. What exactly do you want to accomplish? Do you want shto stimulate sales during a post holiday slump; clear out seasonal, overstocked or post-holidaydiscontinued merchandise; introduce a new product line; sell specific high marginproducts; or just get more people through your front door? Each of those objectives strequires its own set of tactics.Begin by making a list of your marketing and business goals. They should be consistentwith your value proposition and business philosophy. Include financial and non- financial nonmonetary objectives, along with realistic timeframes for each goal.Be specific. A goal of increasing sales is neither instructive nor measurable. A goal of structiveincreasing sales 5% per month for the next six months through a combination of a 4 4%increase in customer count and a $17 increase in average dollars per sale is both.
  • 2. If your timeframe extends over a few months or more, you also need to establishinterim benchmarks to measure short-term progress toward your long-term goals. Thatwill allow you to take timely corrective action or readjust your goals as needed.Compare promotion results against expectations and the cost of the promotion. Ifavailable, compare your numbers to industry norms and analyze significant variances.Accountability is a paramount business management concept. Unfortunately, it is oftena challenge, even for people with financial training. This is especially true if you runconcurrent promotions, as is frequently the case.Here is a sample of the type of accountability questions you should be able to answer,both before and after a promotion. Inherent in each question is the assumption that youhave an accounting system capable of capturing and reporting the supporting data.• What is your gross profit (sales price less the cost of goods sold) on every item in your inventory?• What are your turnover rates by major inventory category? Inventory turnover rate is the cost of sales divided by average inventory value. For example, if your annual cost of sales is $1.2 million and your average inventory (at cost) is $218 thousand, your turnover rate is 5.5. Generally, the higher the ratio, the more efficiently you are utilizing your capital. However, at some point a high turnover may indicate the potential loss of sales if items are out of stock too frequently.• What are your average sales by day of the week and month?• What is your average dollar sale per transaction?• What percentage of sales is from new customers versus repeat customers?• Who are your most profitable and least profitable customers; what characteristics distinguish one category from the other?• What percentage of sales (by meaningful categories) is returned?• What is your average customer retention? Customer retention means how long your customers continue to do business with you.• What is your average customer traffic (or number of sales transactions) by day and within meaningful time frames (morning versus afternoon, etc.)?• What is your closing ratio or the percentage of prospects that actually make a purchase? 2
  • 3. You have several alternatives to measuring traffic and closing rates. The simplest (andmost expensive) is to install electronic sensors on doors. This works well for most high-volume retail businesses, especially if customers enter and exit through one door, andemployees use another. If not, program sensors to start counting when the store opensor with the first recorded sale of the day.For lower volume establishments, you might consider keeping manual counts or simplytrack the number of bid requests or proposals. Alternatively, you can simply monitor thenumber of sales transactions and study changes over time.None of these methods is perfect. For example, electronic sensors count everyone twice(entering and leaving). They also include accompanying children, vendors and othersthat are not prospects. However, as long as you employ the counting methodologyconsistently, it will begin to disclose meaningful trends and allow you to monitorchanges in traffic because of your marketing efforts.You can undoubtedly add to the list of accountability questions. I encourage you totailor it to your specific business and circumstances.Knowing things like who responded to your promotion (repeat vs. new customers), whatthey did (bought only sale items or made additional purchases) and when they did it (forexample, traditionally slow mid-week traffic increased 14%) are important in youraccountability analysis and evaluation.If the benefits of a promotion fail to justify its cost, take a page out of Thomas Edisonsplaybook. When challenged about experimenting with over 10,000 different substancesbefore picking a carbon filament for his light bulb, he replied, "I have not failed. Ive justfound 10,000 ways that wont work." Learning that something does not work is valuableinformation. If a new marketing idea fails to generate the intended results after youhave given it sufficient time to succeed, simply cross it off your list and move on to thenext idea.If that sounds obvious, you may be in the minority. A study titled Small Business: Causesof Bankruptcy by Don B. Bradley III and Chris Cowdery of the University of CentralArkansas reported that of businesses in their study that filed for bankruptcy, 58%admitted to doing "little to no record keeping." I assume the actual number of failedbusinesses doing little to no record keeping probably exceeded the number willing toadmit it.Far too many small businesses fail to maintain adequate accounting and record keepingsystems. Avoid the trap of thinking your accounting system is merely an unavoidableburden to appease the Internal Revenue Service. Fully utilized, it is arguably your most 3
  • 4. important management tool. Software as basic, inexpensive and widely supported asQuickBooks or Sage Peachtree can address the needs of most small businesses.Without an adequate accounting system, a business cannot fully understand its revenuecycle. Nor can it know the actual cost of products and services, or measure results. Forthese unfortunate businesses, making informed marketing decisions is simply notpossible. They can only react blindly from a position of weakness rather than actconfidently from a position of knowledge.Two final examples illustrate the importance of knowing your numbers.Although there are valid business reasons to occasionally offer products or provideservices at a loss, you cannot continually sell something for $75 that cost you $100 andexpect to make up the difference on volume! Your gross profit margin sets a limit ofhow low you can routinely price a product or service in order to cover operatingexpenses and still make a profit. If your full price gross margin is 32%, a 25%promotional discount affords a small gross profit; a 50% discount does not.Knowing your numbers can be far more challenging for manufacturers and serviceproviders than for retailers, but is no less crucial.Now assume your average sale is $127 at an average gross profit margin of 23%.Further, assume the average customer makes 3.8 purchases per year. Your customerwill generate $483 in sales and $111 in gross profit annually. If customer retentionaverages 4 years, they are worth a gross profit or undiscounted value of $444.Both examples demonstrate limits that exist on all marketing efforts. High marginproducts and high repeat sales support high marketing budgets and discounts; lowmargins and low repeat sales do not.Ask yourself right now, "Do I really know where my business fits in that continuum?" Ifyou regularly exceed your limits, marketing actions that seem perfectly reasonablecould eventually lead you down an irreversible path to failure.I am a firm believer that in business, knowing all the answers is not nearly as importantas asking the right questions. I began this article with a quote from Sir Francis Bacon. Iend with another of his quotes."A prudent question is one-half of wisdom."Apply this philosophy in all your business endeavors. Ask lots of questions! © 2012 by Dale R. Schmeltzle 4
  • 5. About the author: Dale R. Schmeltzle, CPA is a founding partner of CFO America, professionalconsultants dedicated to helping business owners define, implement and monitor the strategicand tactical elements necessary to achieve long-term financial and operational success. CFOAmerica provides fractional or part-time executive management expertise not available on anin-house basis.Dale is a frequent speaker for numerous professional, civic and non-profit groups. He wroteHighly Visible Marketing, 115 Low-cost Ways to avoid Market Obscurity. He has also taughtcollege level accounting and financial courses to non-business audiences. For more information,please visit http://www.CFOAmerica.biz or follow us on Facebook athttp://www.facebook.com/CFOAmerica. Consulting CFOs and Executive Managers 5