Individual Assignment

Chapter 6 Market Analysis

Introduction

The industry analysis section of a business plan is normally followed by the market analysis. Whereas the industry analysis focuses on the broad business domain that a firm will participate in (i.e., airline industry, fitness and recreational sports industry, women’s clothing industry), the market analysis breaks the industry into segments and zeroes in on the specific segment (or target market) that the firm will tackle. As mentioned in  Chapter 5 , most firms do not try to service their entire industry. Instead, they focus on servicing a specific market within the industry very well.

An important point to recognize at the outset of this chapter is that the market analysis section of a business plan is distinctly different from the marketing section. The market analysis section focuses on describing a firm’s target market, customers, and competitors; how it will compete in the marketplace; and potential sales and market share. In contrast, the marketing section, which is covered in  Chapter 7 , focuses on the classic marketing functions that support a firm’s product, including price, promotion, and distribution (product was covered earlier in the plan). Although some business plans commingle these two sections, it’s much more effective to keep them separate.

The market analysis is an extremely important section of a business plan for two reasons. First, like the industry analysis, the market analysis helps define the nature of the business and the remainder of the plan. For example, the market analysis normally includes a forecast of a firm’s sales, which directly impacts the size of its manufacturing operation, its marketing plan, the number of people it will need to hire, and the amount of money it will need. Similarly, the more a startup understands the needs of its target market, the more it can match its product attributes to those needs. For instance, in conducting market analysis, GreatCall ( www.jitterbug.com ), a company that offers a smartphone service designed specifically for older people, found through a survey of smartphone users that the most important feature for users age 55 and older is just the ability to make or receive voice calls. As a result, GreatCall’s phones are simple and easy to use and focus primarily on the ease of making and receiving calls. 1  In contrast, other smartphone manufacturers target the youth market. Consistent with the needs of their markets, they produce more stylish phones that offer advanced feature that are attractive to youths. For example, the Samsung Galaxy S4, which was a hot phone at the time this chapter was written (June 2013), offers a feature called Group Play. With Group Play, you can connect up to eight phones wirelessly to play games and share your favorite songs, photos, and documents. This functionality is exactly the type of feature that young people like, who are accustomed to interacting with small groups of friends at school and in their free time.

The second reason a market analysis is important, if done properly, is that it affirms that a company has a well-thought-out target market, understands its customers, and can generate sales in the face of competition. It also communicates the amount of potential that exists in a firm’s target market. This latter point is particularly important because the potential of a firm’s target market should be consistent with its overall goals and aspirations. If a firm wants to raise investment capital, for example, it must demonstrate that its target market has sufficient potential to enable it to rapidly increase sales and return to its investors an amount that is 5 to 20 times the original investment, which is what equity investors normally expect. In contrast, if the business plan is for more of a lifestyle firm, such as a high-end woman’s clothing boutique, and the goal is to qualify for an SBA guaranteed loan, then the target market will still need to demonstrate potential but at a level more commensurate with the type of financing desired.

Because of the stakes involved, a well-developed market analysis usually takes considerable time and effort to complete and is scrutinized carefully by discerning readers. The authors of a business plan must have a complete understanding of their target market, customers, and competitors; how they will compete in the marketplace; and their potential sales and market share. Gaining this degree of insight and knowledge generally requires entrepreneurs to conduct both primary and secondary research as they work through the individual sections of the market analysis.

Now let’s look at the first major section in a market analysis and why it’s important.

Market Segmentation and Target Market Selection

To succeed, a firm must answer the basic question: “Who are our customers, and how will we appeal to them?” To determine the customers, you first segment the industry that the firm will participate in and then identify the specific target market it will tackle.

In some cases, a firm will have two markets, and you should describe the characteristics of both markets. For example, if you plan to sell your products through a retail store, you have two markets—the retail stores and the end user of your product. You can use your judgment regarding how much weight to apply to each market analysis.

The market segmentation and target market selection portion of the Prime Adult Fitness market analysis is shown in  Figure 6-1 .

Market Segmentation

For the purpose of the Prime Adult Fitness business plan, the Gym, Health & Fitness Clubs in the U.S. industry is segmented by product type as follows:

Product/Service	Share of Industry Sales
Gyms and Fitness Clubs	65.0%
Other	10.0%
Dance Centers	7.0%
Swimming Pools	7.0%
Ice and Roller Rinks	6.0%
Tennis Centers	5.0%

Additional ways to segment the industry include by annual household income, by gender, and by sector (i.e., for-profit, not-for-profit, corporate).

Target Market Selection

Prime Adult Fitness will target the health and fitness club segment of the industry and people 50 years old and older. (Only people 50 years old or older will be granted membership.) The following factors led to the decision to select this market:

· Industry analysis. The industry analysis provides compelling evidence that older Americans are increasingly interested in fitness, have sufficient leisure time to engage in fitness activities, and have more disposable income than other age groups.

· Additional evidence. According to IBIS World’s August 2013 report, the central characteristic of the gym, health and fitness clubs industry has been the growth of older people who are joining health clubs. Of the 52.6 million people in the United States who belong to health clubs, about 20 percent are older than 55. That percentage represents a 320 percent increase since the early 1990s.

· Older people prefer to exercise with people their own age. Substantial anecdotal evidence suggests that older people, in particular, prefer to exercise with people their own age. In fact, according to a study published in the April 2007 issue of the Annals of Behavioral Medicine, many older people would rather exercise alone than in a mixed group that includes younger people. This statistic causes us to believe there is tremendous upside potential in terms of the number of older people who would join a fitness center if there was a center just for them.

· Current fitness centers are not meetings the needs of older people. As illustrated in the “Buyer Behavior” section shown below, all-purpose fitness centers are not able to offer the environment, programs, or mix of classes that are optimal for older people. As shown by Curves International and others, a potentially profitable business model in the fitness industry is to target a single demographic very well by offering a tailored environment and mixtures of classes and facilities.

· Insurance subsidies. An increasing number of health insurers are providing subsidies to Medicare-eligible individuals to join fitness centers.

Target Market Size

Prime Adult Fitness plans to open a single location in Oviedo, Florida. Oviedo is a suburb of Orlando. The following steps were taken to estimate the size of Prime Adult Fitness’s target market.

Step 1: Determine Prime Adult Fitness’s trade area:

We feel that Seminole County, Florida, the county that Oviedo is located in, represents a reasonable approximation of Prime Adult Fitness’s trade area. Most retail outlets obtain the majority of their business from a 5- to 10-mile radius of their location because people are not willing to drive farther if a similar service is available. Because Prime Adult Fitness will offer a unique service, it may draw from a larger area. The company’s initial location will not be more than 16 miles from any address in Seminole County.

Step 2: Determine the number of people 50 years old and older in Prime Adult Fitness’s trade area.

According to a report commissioned by Seminole County, 2  in 2014 there will be 61,643 people 55 years and older living in Seminole County. No breakdown is provided for the number of people 50 years old or older. We do know that there will be 67,341 people who are 45 to 54 years of age. If 40 percent of those people are between 50 and 54, that amounts to an additional 26,936 people. Combining the two numbers, we estimate there are 88,579 people 50 years old and older living in Seminole County.

Step 3: Determine the percentage of the people 50 years old and older in Seminole County who already belong to a fitness club.

According to the International Health, Racquet & Sportsclub Association (IHRSA), 16 percent of the American population currently belongs to a fitness club. According to  Chron.com , 25 percent of that percentage is 55 years old and older. This number syncs with IBIS World’s report that the 50+ age demographic is well represented in fitness centers. As a result, we can reasonable assume that 16 percent of Seminole County’s 88,579 people 50 years or older, or 14,172 people, belong to a fitness center. To substantiate this number in its local market, Prime Adult Fitness distributed its concept statement and buying intentions survey to a random sample of 196 residents of Seminole County 50 years old or older. A total of 17.8 percent of the respondents indicated that they belong to a fitness center.

Step 4: Determine the total size (in dollars) of Prime Adult Fitness’s target market for 2008.

Fitness clubs have three revenue drivers.

Revenue Driver No. 1: Monthly membership dues.

The average cost of belonging to a fitness center, of all varieties, in Seminole County is $60 per month. $60 per month ✕ 14,172 people (the estimated number of people in Seminole County who are 50 years old or older and belong to a fitness center) ✕ 12 months per year = $10,203,840.

Revenue Driver No. 2: One-time enrollment fees.

The average one-time enrollment fee for joining a fitness center in Seminole County is $75 (all types of centers). Fitness centers, on average, turn over approximately 33 percent of their membership per year. As a result, if 33 percent of the total members are new, that would result in additional income of 4,676 new members per year (14,172 members ✕ .33) paying the $75 fee, for a total additional income of $350,700.

Revenue Driver No. 3: Additional sources of income.

Fitness clubs have additional sources of income, which vary by center. Examples include massage services (which usually cost extra), tanning salons, coffee and smoothie bars, health maintenance and nutrition classes, and childcare. According to industry norms, the average fitness center’s nondues revenue equals 20 percent of its sales. Based on conversations with owners and managers of Seminole County fitness centers, we’ve backed this number down to 15 percent. Thus, 15 percent on top of the income from revenue drivers No. 1 and No. 2, which totals $10,554,540, is $1,583,181.

Summary:

$ 10,203,840	Membership dues
$ 350,700	One-time membership fees
$ 1,583,181	Other income
$ 12,137,721	Total size of fitness club market for Prime Adult Fitness’s trade area

Step 5: Determine the total size (in dollars) of Prime Adult Fitness’s target market for 2014, 2015, and 2016.

According to our industry analysis, the Gym, Health and Fitness Clubs industry is expected to grow at a rate of 2.0 to 2.5 percent in the coming years. There is evidence that the fitness center portion of the industry will grow at a faster rate than the industry as a whole (as shown in  Figure 6-1 , the industry also includes segments such as dance centers and ice and roller rinks). A conservative 2.5 percent annual growth rate in people 50 years old and older who will belong to a fitness center in Seminole County, Florida, is used below.

2014: $12,137,721

2015: $12,441,164 *

2016: $12,752,193

2017: $13,070,997

*  Prime Adult Fitness plans to open on January 1, 2015.

Figure 6-1 Market Segmentation and Target Market Selection (Prime Adult Fitness Business Plan)

Market Segmentation

In many instances, a firm will already have shown how its industry is segmented in the industry analysis portion of the business plan. If this circumstance applies to your plan, simply recapping that analysis in this section may be appropriate. If you’re starting from scratch, you should explain that market segmentation is the process of dividing a market into distinct subsets (or segments) that behave in the same way or have similar needs. 3  An important decision you’ll need to make is to how to segment your market. Markets can be segmented in many ways, such as by geography (city, state, country), demographic variables (age, gender, family size, income), psychographic variables (personality, lifestyle, values), behavioral variables (benefits sought, product usage rate, brand loyalty), and product type (varies by product). Sometimes a firm segments its market on more than one dimension to drill down to a specific market segment that the firm thinks it is uniquely capable of serving. For example, in its market analysis, GreatCall, the cell phone service provider for older people, probably segmented the cell phone market by age and by benefits sought. Samsung used this same segmentation strategy by targeting younger users and featuring a more sophisticated set of options.

To test whether you have segmented your market successfully, the requirements for successful market segmentation are as follows:

· Homogeneity of needs and wants appears within the segment.

· Heterogeneity of needs and wants exists between the segments.

· Differences within the segment should be small compared to differences across segments.

· The segment should be distinct enough so that its members can be easily identified.

· It should be possible to determine the size of the segment.

· The segment should be large enough to be profitable.

If you are satisfied that you have segmented your market in a way that meets the criteria shown in the preceding list and makes sense, given your business concept, you can stop here. As shown in  Figure 6-1 , Prime Adult Fitness segmented its market by product type and by age of buyer.

If you’re unfamiliar with how to segment your market, both IBISWorld and Mintel provide suggestions for segmenting the industries that they follow. Another good choice is to consult industry trade journals and trade associations. You may also want to talk to some of the major participants in your industry, such as suppliers, distributors, and customers. One of the richest sources used to understand the segmentation of the fitness club industry, for the purpose of completing the Prime Adult Fitness business plan, was information obtained from the International Health, Racquet & Sportsclub Association ( http://www.ihrsa.org ), an industry trade association mentioned in  Chapter 5  that represents more than 10,000 fitness clubs and recreational facilities in 70 countries. 4  Information from these types of sources should be sought out and used.

An exciting aspect of the entrepreneurial process is that it often results in the identification of new segments of an industry that weren’t previously considered. For example, Curves International ( www.curves.com ), the fitness center for women, created a new segment in the fitness industry by segmenting the market by gender. Following the lead of Curves, firms are now segmenting the fitness industry in other innovative ways. An example is Baby Boot Camp ( www.babybootcamp.com ), a chain of fitness centers that has segmented its market by benefits sought. Each of Baby Boot Camp’s 154 franchises focuses on helping new moms enhance prepregnancy fitness levels and meet the physical challenges of parenting by emphasizing strength training in a supportive environment. 5

Selecting a Target Market

As alluded to previously, after a firm segments its market, it selects a segment within the market to target. If a firm does not have a preconceived notion about the market it plans to target, it will usually select the segment that represents the best prospects for entry. Even in these instances, the segment that represents the best prospects for entry (in terms of sales growth and profitability) might not be chosen because it isn’t consistent with founders’ passions and/or core competencies. In these cases, the founders normally select the target market that represents the best fit for them both professionally and personally.

The biggest mistake that people make when selecting a target market is to define their target market too broadly or to try to target more than one segment simultaneously. Startups are usually best served by segmenting their industry carefully and zeroing in on a specific market segment. An exception may be a firm that targets two or more extremely small but related segments. It’s simply too difficult and expensive, in the vast majority of cases, to adopt a more aggressive strategy, at least initially. This sentiment is affirmed by Joel Kurtzman, the founder and chairman of Kurtzman Group, a small business-consulting firm, and author of the book Startups That Work. Commenting on this issue, Mr. Kurtzman wrote:

A lucid and articulate business plan will identify specific market segments and individual customers, and offer a blueprint for attacking the marketplace. Our research shows that startups often go after too many market segments simultaneously, trying to be all things to all people and fail to satisfy anyone. 6

For a new firm, focusing intently on a single market rather than several markets (or a larger market) makes sense because it allows a firm to become an expert in a specialized area, rather than trying to spread itself too thin, as alluded to by Mr. Kurtzman.

Before settling on a specific target market, a firm should assess the size of the market and study the trends that are affecting that market to make sure it is large enough and healthy enough to meet the firm’s objectives. This subject is covered in the next section of the chapter.

Target Market Size and Trends

Estimating the size of a target market can be a tricky proposition. In many cases, you need to literally invent a methodology for making your estimate. The first rule of thumb is to not make frivolous predictions. Although there may be occasions when you have to make an educated guess or estimate, the key is to explain the path that led you to your conclusions. If the reader of your plan discerns that you are simply guessing, with no clear rationale for your guess, the credibility of your plan will be compromised.

If you are producing a product that is an enhanced version of something that is already available, such as a new type of toy or home health care service, the numbers will be fairly easy to get. IBISWorld, Bizminer, Mintel, and similar resources track the sizes of industries and segments within industry on a broad basis. You can also consult industry trade journals and trade associations as mentioned previously. Sometimes the size of a market segment isn’t stated exactly in an industry report, but the number is easy to compute if you read through the report. For example, if you were thinking about developed a new line of camping equipment and wanted to know the size of the market for camping equipment in the United States that number is relatively easy to determine. IBISWorld reports that the Athletic and Sporting Goods Manufacturing in the U.S. industry (NAICS 33992), which camping equipment is part of, reported sales of $8.9 billion in 2012. The sales of camping equipment accounted for 9.5 percent of industry sales. 7  Thus, the market for camping equipment is roughly $845.5 million per year in the United States.

Estimating the size of a target market for a market that doesn’t exist, or a market that is specific to a particular location or geographic area, is harder. You will probably need to do some marketing research. For example, to determine the size of its target market, Prime Adult Fitness, which will open a single location in Oviedo, Florida (a suburb of Orlando), used the approach carefully articulated in its business plan. Readers will normally judge a projection like this based on (1) the reasonableness of the assumptions made, (2) the degree to which the numbers are anchored in facts and sound analysis rather than guesses or speculation, and (3) the extent to which it appears that a good faith effort was made to make as accurate of a projection as possible, given normal time and budget constraints. All readers know that a projection is just that, a projection, and some latitude is normally provided. But there is no fooling a savvy reader if a projection is just a set of guesses that looks hastily prepared. Following that approach seriously undermines the credibility of a business plan.

A projection, like the one shown in  Figure 6-1 , must also be melded with common sense to arrive at a final judgment. For example, the numbers in Prime Adult Fitness’s projection of its target market size are likely to be conservative because they estimate the dollar value of the existing fitness center market for people 50 years and older in its trade area. Prime Adult Fitness may be able to bring new people into the industry as the result of the unique nature of its offering (i.e., exclusively for 50+ aged adults), similar to how Curves brought new people into the fitness center industry by opening the first fitness centers exclusively for women. In the final section of the market analysis, which describes how a startup forecasts its initial sales, we’ll show how much of its available target market, along with new people brought into the market, Prime Adult Fitness believes it can garner during the startup years.

A similar process is used to estimate the size of a new target market for a company that plans to produce a product and sell it nationwide. Again, the key is to follow a sensible process based on the best available data and conduct primary research if necessary. If you get stuck and can’t find the information you need, the best recourse is to talk to a reference librarian to see if there are information sources that you are overlooking, and then talk to people in the industry you are interested in. The best place to start in regard to industry participants is to talk to the editors of industry-specific trade journals and the directors of industry trade associations. Industry participants, such as suppliers and distributors, are other good sources of information. Don’t hesitate to reach out to people. Most people are flattered to be asked for their insights and opinions.

Along with reporting the approximate size of a firm’s target market, this section of the market analysis should also comment on industry trends that have the potential to affect the target market positively or negatively, if the information has not already been sufficiently reported. The authors of Prime Adult Fitness’s business plan, for example, did not include a section in its market analysis on target market trends because the information was already adequately covered. The same process for discerning trends discussed in  Chapter 5 , which covered industry analysis, can be applied here. An example of the type of trend that should be reported is a trend that is currently taking place in the online social networking industry. The industry is spreading beyond Facebook, Twitter, and other dominant players. An example is CafeMom ( www.cafemom.com ), a social networking site for mothers and mothers to be. Another example is Dogster ( www.dogster.com ), a social networking site for dog owners. Sites like CafeMom and Dogster can translate into successful businesses because they appeal to a specific clientele. Attracting a specific clientele to a signal site is attractive to advertisers who are trying to reach that clientele. A company that advertises on Dogster, for example, knows that a high percentage of the site’s visitors are dog owners and that they purchase a steady supply of dog-related products.

The next section of the market analysis deals with buyer behavior within a company’s target market. This section of the Prime Adult Fitness market analysis is shown in  Figure 6-2 .

The following are factors that affect the fitness club purchase decision for people in Prime Adult Fitness’s target market:

· Motivation. Motivation remains the key to recruiting new members and keeping them engaged. According to a survey commissioned by Mintel, 67 percent of nonfitness club members said they would join a fitness club if they knew the activities would keep them motivated.

· Income level. People with incomes of $75,000 or more are most likely to join a fitness center, a statistic that works in favor of Prime Adult Fitness. A total of 44.2 percent of households in Seminole County, Florida, have incomes levels of $75,000 or more, which is well above the national average.

· Lifestyle. It is estimated that the more mature market will maintain a more active lifestyle (than mature people in the past) and will continue to focus on physical appearance, maintaining proper weight, and general well-being. These trends suggest strong opportunities for fitness centers that will help mature people meet these objectives.

· Environment. Older people prefer to exercise in an environment that is tailored for their specific needs and stage in life, as noted in the target market section. To illustrate how deep these emotions run, the following is a sample of quotations taken from our survey of 196 people in Seminole County, Florida (all 50 years old and older), who were asked to comment on how they feel about fitness centers in general:

· “I enjoy my fitness center, but it caters primarily to people who are young and thin. To be honest with you, I’ve reached a point in my life where I want to be working out with people my own age.” (Retired Homemaker, age 69)

· “I’ve tried several aerobics and exercise classes over the years, but the pace was always too quick. I enjoy water aerobics, but the classes don’t meet at a convenient time for me. I think that because the people who run the place (the fitness center) are all in their 20s and 30s, they don’t think too much about us older folks.” (Insurance Agent, age 61)

· “My husband died when he was only 68. He was overweight and never exercised. That scares me. I’m 71 now, and I want to live long enough to see my grandchildren grow up. I should join a fitness center and start exercising, but the choices confuse me. I wish someone would take me by the hand and show me what to do.” (Retired School Administrator, age 71)

· Programs and facilities. Older people prefer a different mixture of programs and different types of fitness machines than the population in general. As a result, older people who belong to all-purpose fitness centers are frustrated with exercise machines and programs that often don’t suit their specific needs. To illustrate this point, the following is a comparison of the 10 most popular program offered by all-purpose fitness centers opposed to the 10 programs preferred by the 196 Seminole County residents 50 years old and older in our survey. The survey illustrates the potential benefit of tailoring a fitness center specifically to 50+ individuals.

Top 10 Programs Offered by All-Purpose Fitness Clubs (in order of popularity)	Top 10 Programs Preferred by a Sample of 196 People 50 Years Old and Older in Prime Adult Fitness’s Trade Area
1. Free weights	1. Low-impact aerobics
2. Treadmills	2. Treadmills
3. Resistance machines	3. Yoga
4. Elliptical trainers	4. Fitness evaluation *
5. Stretching	5. Stretching
6. Abdominal machines	6. Nutrition and lifestyle classes *
7. Stationary cycling	7. Indoor walking track *
8. Low-impact aerobics	8. Elliptical machines
9. Yoga	9. Strength training *
10. Stair-climbing machines	10. Water aerobics *
*  Not in list of top 10 programs offered by all-purpose fitness centers. Source for Top 10 Programs Offered at Fitness Clubs: International Health, Racquet & Sportsclub Association’s (IHRSA) 2012 Trends Report

· Location of exercise. People who are 55 years old and older are more inclined to exercise indoors than any other age group. This statistic is particularly important when considering a Florida audience, which may be more inclined to exercise indoors as a result of the heat and humidity.

· Health concerns. According to a 2011 report by the Centers for Disease Control and Prevention, about 80 percent of older adults have one chronic health condition, and 50 percent have at least two. 8  Infectious diseases (such as the flu) and injuries also take a disproportionate toll on older adults. As a result, access to physical therapy and exercise regimes that address these problems is important to this age group.

· Social interaction. Older people often crave positive social interaction with their peer group. As a result, fitness centers that provide opportunities for social interaction and provide open spaces with tables and refreshments where people can gather and socialize have an advantage.

Figure 6-2 Buyer Behavior (Prime Adult Fitness Business Plan)

Buyer Behavior

It’s important to include a section in the market analysis that deals directly with the behavior of the consumers in a firm’s target market. As mentioned earlier, the more a startup knows about the consumers in its target market, the more it can gear products or services to accommodate their needs.

The brief discussion of buyer behavior in the Prime Adult Fitness market analysis, articulated as bullet points, is reflective of this. The company understands that the key to attracting people to its center is to provide an “environment” that motivates them to participate. As a result, in the marketing ( Chapter 7 ) and operations ( Chapter 9 ) sections of the plan, you’ll see the specific steps that Prime Adult Fitness plans to take to tailor its center specifically for the needs of its clientele and make the center an uplifting and socially satisfying place to exercise. The Prime Adult Fitness plan highlights national statistics that show that people with annual incomes of $75,000 or more are the most likely to join a fitness center, a statistic that works in favor of Prime Adult Fitness. A total of 44.2 percent of households in Seminole County, Florida, the location of the first center, have income levels of $75,000 or more, which is well above the national average.

There is additional information that Prime Adult Fitness knows about the consumers it will be servicing, which is reflective of the type of information you should include in this section of your market analysis. Prime Adult Fitness knows the types of classes and programs its potential members want because it conducted a survey of a random sample of people 50 years and older in its trade area. As shown in  Figure 6-2 , the mixture of classes and programs desired by the target market differs from what is offered by generic fitness centers. The company also knows that older people today are more concerned about their physical appearance, maintaining proper weight, and their general well-being than older people in the past. A particularly important insight is that 80 percent of older adults have one chronic health condition, and 50 percent have at least two. This statistic prompted the founders of Prime Adult Fitness to include a physical therapy center within the fitness center. The company also knows that older people often crave positive social interaction. Again, in the marketing plan section and operations section of the business plan, you’ll see how Prime Adult Fitness translates this insight into activities and business practices within the facility.

In this section of Prime Adult Fitness’s business plan, the focus on the core needs of Prime Adult Fitness’s target market, rather than the fitness industry in general, is particularly well done. A lot of information is available that explains why people, in general, join fitness centers and the types of activities they prefer. Some of this information applies equally to all age groups and should be included in Prime Adult Fitness’s business plan. Prime Adult Fitness, however, is targeting the 50+ age group, not the population in general. So what’s needed, mainly, is an understanding of what people 50 years and older want in a fitness center. Although this information is tougher to find, its inclusion is essential, even if you have to collect it yourself.

Many other issues pertaining to buyer behavior may be important to cover in this section, depending on the nature of your business. For example, in many business-to-business startups, it’s important to discern specifically who the “decision makers” are in the businesses you’ll be trying to sell to. Similarly, the length of the customer’s buying process is often an important concern. Many startups find it hard to sell products to public schools, for example, because purchase decisions are often made by committees (which draws out the decision-making process), and the funding often has to go through several levels of teacher’s committees and administrators to get approved. It’s also important to know whether your product is a high-, medium-, or low-involvement purchase. A high-involvement purchase is one for which the buyer is prepared to spend a considerable amount of time and effort searching. In contrast, a low-involvement purchase is one that a buyer makes with minimum thought because it does not have much impact on his or her life. Prime Adult Fitness’s product is clearly a high-involvement purchase—people normally want to know a lot about a fitness center before they commit to a $50 to $100 per month membership. As a result, it would be prudent for Prime Adult Fitness to have staff members available to provide facility tours, to answer questions, to introduce prospects to current members, to host open houses, and so forth. This is also the reason that many fitness centers offer free trial memberships because it’s hard to get some prospects to commit unless they are able to actually spend time becoming familiar with the facility.

Competitor Analysis

A competitor analysis is a detailed analysis of a firm’s competition. It helps a firm understand the positions of its major competitors and the opportunities that are available to gain a competitive advantage in one or more areas. The competitor analysis also communicates to the readers of your business plan that you have a complete understanding of your firm’s competitive environment. One thing you should never say is that you don’t have any competitors. Even though a company like Prime Adult Fitness may be the only fitness center in its area that caters strictly to older people, its potential clientele can still spend their money in a million other ways.

The first item included in a competitor analysis is an identification of a firm’s direct, indirect, and future competitors. This item is followed by the presentation of the firm’s competitive analysis grid, which is a tool for organizing the information a firm collects about its major competitors.

Prime Adult Fitness’s Competitor Analysis is shown in  Figure 6-3 .

Direct Competitors

There are 44 fitness centers in Seminole county, Florida. They are broken down as follows:

· 7 all-purpose large centers, including two YMCAs, two Gold’s Gyms, two LA Fitness Centers, and one Gold’s Gym

· 37 smaller, more tightly focused centers, including four Planet Fitness and three Snap Fitness centers

There are no fitness centers in Seminole county that focus strictly on the 50+ demographic. The benefits of this demographic, however, are apparent to all centers, which are starting to offer more programs with older people in mind. In addition, many centers are attempting to become more “senior” friendly in a variety of ways. For example, LA Fitness, which has traditionally catered to a younger clientele, is now showing older people in its ads. Most YMCA’s also participate in Silver Sneakers, the fitness program offered through health insurers to Medicare recipients. Still, for the most part, the larger fitness chains cater primarily to a young demographic. Many of the tightly focused centers, such as Planet Fitness and Snap Fitness, are not equipped to offer specialized services to an older clientele. Prime Adult Fitness is poised to establish a competitive advantage in Seminole county by focusing strictly on the 50+ demographic.

Indirect Competitors

Indirect competitors include companies that sell home fitness equipment. Seminole county is serviced by a number of sporting goods stores that sell treadmills, exercise bikes, rowing machines, and other home exercise equipment. Nationwide, according to IBISWorld, the Sporting Good Store industry has grown by an average of 2.4 percent over the past three years, about the same as the Gym, Health & Fitness Clubs industry. There are also a number of Web sites that sell exercise equipment, including eBay. According to Prime Adult Fitness’s survey of 196 potential customers in Seminole county, 19 percent of the respondents indicated that they own home exercise equipment valued at $200 or more. An increase in the growth rate of the home exercise equipment market poses a threat to all fitness centers, Prime Adult Fitness included.

Future Competitors

The fitness industry should continue to grow, as indicated in the industry analysis earlier in this business plan. Seminole county will reflect this growth. Several nascent 50+ fitness chains exist, including Nifty After 50 and Club 50. Both of these companies are selling franchises and could move into the Seminole county market. Other startups may also follow suit. Prime Adult Fitness hopes to establish a strong brand and clientele before these competitors move into the market.

Summary

The grid shows that Prime Adult Fitness will compete on par with its closest competitors on geographic location and breadth and quality of equipment. It plans to achieve advantages in term of the quality of its staff, the fitness programs offered, social interaction, and tailored services. Its primary disadvantage is price. Prime Adult Fitness Services feels that establishing an absolute advantage in terms of tailored services is more than worth the trade-off.

Figure 6-3 Competitor Analysis (Prime Adult Fitness Business Plan)

Identification of Direct, Indirect, and Future Competitors

The first step in a competitor analysis is determining who the competition is. Depending on the nature of the business, this may be a more difficult task than you might think. For example, take a company such as Blue Nile ( www.bluenile.com ), the online jewelry store. Primarily, the company sells jewelry, but Blue Nile is not only in the jewelry business. Because jewelry is often given for gifts, the company is also in the gift business. If the company sees itself as in the gift business rather than just the jewelry business, it has a broader set of competitors—and opportunities—to consider.

You should list your direct competitors, indirect competitors, and future competitors; if you believe that your business will attract imitators, then future competitors are inevitable. A brief description of each type of competitor follows:

· Direct competitors. These are businesses that offer a product that is very similar to yours. These competitors are the most important because they are going after the same customers that you are.

· Indirect competitors. These competitors offer close substitutes to the product you will be offering. These firms’ products are important in that they target the same basic need that will be met by your product. For example, when people told Roberto Goizueta, the late CEO of Coca-Cola, that Coke’s market share was at a maximum, he countered by saying that Coke accounted for less than 2 percent of the 64 ounces of fluid that the average person drinks each day. “The enemy is coffee, milk, tea [and] water,” he once said. 9

· Future competitors. These are companies that are not yet direct or indirect competitors but could move into one of these roles at any time.

Normally it’s impossible to identify all of your direct and indirect competitors, let alone your future competitors. As a result, you should list a handful of competitors or classes of competitors in each category. You should provide a short assessment of the scope and intensity of your competition. You’ll have the opportunity to talk about your competitive advantage after you present your competitive advantage grid.

The next section focuses on your competitive analysis grid, which is a comparison of your firm to your major competitors. To complete a meaningful competitive analysis grid, you must first understand the strategies and behaviors of your competitors. This requires you to engage in competitive intelligence, which is the process of gathering information about your competitors. Suggestions for how to approach this task are provided in the Business Plan Insights box.

Competitive Analysis Grid

A competitive analysis grid is a tool for organizing and presenting the information you collect about your competitors. It can help you to see how you stack up against your competitors in key areas and illustrate your primary sources of competitive advantage. To be a viable company, a new venture must have at least one clear competitive advantage over its major competitors.

The Prime Adult Fitness competitive analysis grid is shown in  Figure 6-3 . The way to complete the grid is to show the key success factors for firms in your target market on the vertical axis of the grid and then show your firm along with your four or five major direct competitors on the horizontal axis. In each box, you rate yourself relative to your competitors on each of the key success factors. The purpose of this exercise is to see how you stack up against your major competitors on key success factors and to illustrate the areas in which you have an advantage (and have a disadvantage). For example, Prime Adult Fitness sees itself as superior to its competitors in terms of “tailoring its activities to its target market.” The process of completing a competitive analysis grid also helps a firm fine-tune its offering. For example, if your business plan is for a retail store, and one of the key success factors in your industry is “hours of operation,” in most cases, you would want to make sure you’re equal to or have an advantage over your competitors in this area. Completing the competitive analysis grid may reveal that you’re at a disadvantage in this area, which will help you make adjustments if appropriate.

Business Plan Insights Sources of Competitive Intelligence

To complete a meaningful competitive analysis grid, a startup must first understand the strategies and behaviors of its competitors. The information that is gathered by a firm to learn about its competitors is referred to as competitive intelligence. Obtaining sound competitive intelligence is not always an easy task. If a competitor is a publicly traded firm, a description of the firm’s business and its financial information is available through annual reports filed with the Securities and Exchange Commission (SEC). These reports are public records and are available at the SEC’s Web site ( http://www.sec.gov ).

More often than not, however, a new firm will compete primarily against other private companies. In these instances, the task is more difficult. Private companies are not required to divulge information to the public. As a result, when preparing your business plan, you have to find ways to ethically obtain information about your competitors. Here are some suggestions for doing that:

· Attend conferences and trade shows. Most industries have conferences and trade shows at which firms talk about the latest trends in the industry and display their products.

· Read industry-related trade publications, magazines, and Web sites, along with general business magazines, such as Inc. and Business Week.

· Read industry reports via online resources such as IBISWorld, Mintel, and Standard and Poor’s. For example, for each of the industries that it covers, IBISWorld has a section in its report titled Major Competitors.

· Purchase competitor’ products to understand their features, benefits, and shortcomings: The process of purchasing the product will also provide data about how the competitor treats its customers.

· Talk to customers about what motivated them to buy your product as opposed to your competitors’ products. Customers can provide a wealth of information about the advantages and disadvantages of competing products.

· Study competitors’ Web sites. Many companies put a lot of information on their Web sites, including their company’s history, profiles of their management teams, product information, and the latest news about the company.

Similar to all sections of the business plan, you should draw conclusions and help your reader interpret the information you are presenting. For example, as depicted in  Figure 6-3 , Prime Adult Fitness uses its competitive analysis grid to illustrate its sources of competitive advantage.

The next section focuses on how to estimate the annual sales and market share for a new firm. Prime Adult Fitness’s estimates are shown in  Figure 6-4 .

Estimate of Annual Sales

The following steps were taken to estimate the size of Prime Adult Fitness’s annual sales.

Step 1: Determine the number of members Prime Adult Fitness will have.

Prime Adult Fitness’s target is 2,100 membership units within 12 months of opening its doors. A “unit” is a single member or a couple paying for a couple’s membership.

Step 2: Based on 2,100 membership units, what will Prime Adult Fitness’s annual sales be?

Prime Adult Fitness estimates it will take 12 months to reach 2,100 membership units. It is projecting 2,100 membership units at the end of 2014 (first year of operation), 2,226 in 2015, 2,360 in 2016, and 2,502 in 2017. It will generate income in the following three ways:

Membership Fees: The membership fees will be $70 per month for a single membership and $92.50 per month for a couple’s membership. Based on discussions with industry experts, the founders estimate that 70 percent of its memberships will be single members and 30 percent will be couples.

For its first year, Prime Adult Fitness projects will obtain its 2,100 membership units in the following order (January, February, and March are the biggest months for fitness club’s “new” memberships):

2014 Membership Unit Enrollment Projection

Projected membership income:

2014: $1,251,275 (based on enrollment timing and projections)

2015: $2,050,146

2016: $2,173,560

2017: $2,304,342

One-Time Enrollment Fees: Prime Adult Fitness’s one-time enrollment fee will be $150 for both singles and couples. An attrition rate of 25 percent per year is anticipated. These numbers translate into the following projected enrollment fee income.

2014: $315,000 (2,100 membership units ✕ $150/unit)

2015: $110,100 (734 new membership units ✕ $150/unit)

2016: $116,700 (778 new membership units ✕ $150/unit)

2017: $123,750 (825 new membership units ✕ $150/unit)

Additional Sources of Income: Prime Adult Fitness will collect license fee income from massage therapists, physical therapists, and mental health professionals who will provide services in its facilities on a fee basis. It will also operate a coffee and smoothie bar. Prime Adult Fitness anticipates that its additional income will be 12.5 percent of its membership fees.

2014: $124,123 *

2015: $256,268

2016: $271,695

2017: $288,042

Total Projected Sales from All Sources:

2014: $1,690,398

2015: $2,416,514

2016: $2,561,955

2017: $2,716,134

Estimate of Annual Market Share

Prime Adult Fitness, through focus groups and a study conducted by our Customer Advisory Board, believes that 50 percent of our membership will come from people who already belong to other fitness centers and 50 percent will be new members (to the fitness center industry). If 50 percent of revenues come from the existing market, Prime Adult Fitness will need to capture a 14.81 percent share of the 50+ market for people in Seminole County, Florida, who currently belong to a fitness center. We feel this number is achievable.

Figure 6-4 Estimate of Annual Sales and Market Share (Prime Adult Fitness Business Plan)

*  This number is not 12.5 percent of 2014 membership income due to the timing of when people join the center.

Estimate of Annual Sales and Market Share

The final section of the market analysis focuses on computing an estimate of your firm’s initial annual sales and market share. In many business plans, this analysis is provided in the financial plan section, which is usually near the end of the business plan. As mentioned earlier in the chapter, the advantage of providing the estimate here is that it helps set up the remainder of the plan. For a company like Prime Adult Fitness, it must have a good handle on the type of membership and revenues to expect before the firm can plan its facility, project the number of employees it will need, plan its marketing budget, and so on.

There are four basic ways for a new firm to estimate its initial sales. All of the methods produce estimates—there is no way to precisely predict the sales of a new business. More than one method should be used if possible. The most important thing is to come up with an estimate that is based on sound assumptions and seems both realistic and attainable.

The first way to estimate the sales for a new business is to contact the premier trade associations in your industry and ask if they track the sales numbers for businesses that are similar to the business you plan to start. If the trade association doesn’t track actual sales numbers for comparable businesses, ask if there are other rules of thumb or metrics that help new companies estimate sales. For example, many industries collect statistics such as “average sales per square foot” or “average sales per employee” for the firms in their industry. These numbers may be helpful to you in estimating your initial sales. To find the trade associations in your industry, conduct a general Google or Bing search or check the resource listed in the Internet Resources Table in  Appendix 2.2  at the end of  Chapter 2 .

The second way to estimate a new firm’s sales is to find a comparable firm, or a company that’s selling a comparable product. Many financial experts feel that this is the most effective approach. For example, if you are planning to open a woman’s clothing boutique, try to find a boutique that is similar to the one you are planning, and simply call the owner and ask for a chance to talk to him or her about the business. You should try to find a store out of your trade area so the owner doesn’t see you as a potential competitor. As indicated in  Chapter 3 , even if the owner is only willing to talk in general terms (i.e., our annual sales are between $300,000 and $400,000 per year), that information is better than nothing. Of course, you’ll need to use common sense to adjust the numbers based on whether your store will be smaller or larger than the comparable store, will be in a better location or a poorer location, and so on. You should report your assumptions so it’s clear to the reader of your plan exactly how you arrived at your sales estimate. If you’re planning to sell a product, such as a new type of smartphone accessory, the same approach applies. Try to find a company that won’t be a direct competitor that is selling a similar product, and try to arrange a telephone appointment or engage in an e-mail exchange. In all instances, simply tell the person you’re talking to that you’re working on a business plan for your startup and you’re trying to arrive at a sales estimate. Ask for help regarding what types of sales to expect for the first one to three years of your business based on their experiences. Many first-time entrepreneurs are surprised at how helpful businesspeople are in freely divulging this type of information.

The third way to try to estimate sales is to conduct Internet searches to try to find magazine and newspaper articles that focus on firms in your industry. On occasion, the articles will talk about the sales experiences of a similar early stage firm. If you know of a firm that’s comparable to your firm, target that firm first in your search. To find articles, you should use general search engines such as Google and Bing and more powerful search directories such as LexisNexis Academic and ProQuest. The latter two directories are fee based but are normally free if accessed through a university library. Publicly traded companies report their sales number, and the numbers are available via Hoovers ( www.hoovers.com ) and through many other sources. These companies, however, are rarely good comparables because they are much larger than startups and are often multidivision firms.

The fourth way to estimate a startup’s sales is to use a multiplication method to try to arrive at a reasonable number. Startups that plan to sell a product on a national basis normally use a top–down approach to arrive at this number. This typically involves trying to estimate the total number of users of the product, estimate the average price customers pay, and estimate how much of the market their business will garner. Startups that plan to sell locally, such as a restaurant or clothing boutique, normally use a more bottom–up approach. This approach involves trying to determine how many customers to expect and the average amount each customer will spend. The numbers are usually computed on a weekly, monthly, and yearly basis.

Sometimes the multiplication method gets fairly complicated, and you have to consider several industries and conduct primary research to get a good estimate. For example, if you had started Songkick, the online company that alerts people when their favorite bands are in their area, how would you have used the multiplication method to estimate your initial sales? One way to approach this task would be to gather data on the total number of people who attend concerts every year. The next step would be to locate data on the percentage of concert goers who buy their tickets online (once Songkick alerts someone that their favorite band is in their area, it offers tickets for the upcoming concert). Working with these numbers, you could then estimate the number of people who are concert goers who buy their tickets online. You would then have to conduct primary research to make an estimate of the percentage of the people in this group who might become Songkick members and buy their tickets via Songkick. The primary research activities might involve distributing your concept statement and buying intentions survey to a sample of your potential customers, talking to industry experts, and so forth. Don’t be timid. Many successful startups talk face-to-face to over 100 potential customers, for example, before they get a good handle on their prospects. For a company like Songkick, there would also be a ramp-up period. For example, if Songkick determined that 20 percent of the people they talked to (who go to concerts and buy tickets online) are likely to become Songkick members, that doesn’t mean that 20 percent of all people who go to concerts and buy tickets online will instantly become Songkick members. It will take time for Songkick to market its service and make people aware of its offerings. As a result, Songkick might estimate that 20 percent of its potential clientele will sign up in Year 1, another 20 percent in Year 2, and so forth.

To estimate its initial sales using the multiplication approach, Prime Adult Fitness used a variation of the bottom–up method as shown in its business plan in  Figure 6-4 .

The ideal scenario for startups is to use all four methods of estimating initial sales and then compare the estimates. The key is to arrive at your estimates by following a clear rationale and to present numbers that appear to be both realistic and obtainable.

Chapter Summary

1. The marketing analysis section of a business plan is distinctly different from the marketing section. The market analysis section focuses on describing a firm’s target market, customers, and competitors; how it will compete in the marketplace; and potential sales and market share. In contrast, the marketing section focuses on the classic marketing functions, including product, price, promotion, and distribution.

2. The market analysis is an extremely important section of a business plan for two reasons. First, it helps define the nature of the business and the remainder of the plan. Second, it affirms that a company has a well-thought-out target market, understands its customers, and can generate sales in the face of competition.

3. Market segmentation is the process of dividing a market into distinct subsets (or segments) that behave in the same way or have similar needs. An exciting element of the entrepreneurial process is that it often results in the identification of new segments of an industry that weren’t previously considered.

4. After a firm segments its market, it selects a segment within the market to target. The biggest mistake that people make when selecting a target market is to define their market too broadly or to try to target more than one segment simultaneously. Startups are usually best served by zeroing in on a specific target market.

5. Estimating the size of a target market can be a tricky proposition. The first rule of thumb is to not make frivolous predictions. The key is to explain the path that leads you to your conclusions. If you are producing a product that is an enhanced version of something that is already available, the numbers will be fairly easy to get. Estimating the size of a target market for a market that doesn’t exist is harder.

6. It’s important to include a section in the market analysis that deals directly with the behavior of the consumers in a firm’s target market. The more a startup knows about the consumers in its target market, the more it can gear products or services to accommodate their needs.

7. A competitor analysis is a detailed analysis of a firm’s competition. It helps a firm understand the positions of its major competitors and the opportunities that are available to gain a competitive advantage in one or more areas.

8. A firm’s competitors include direct competitors, indirect competitors, and future competitors.

9. A competitive analysis grid is a tool for organizing and presenting the information you collect about your competitors.

10. There are four basic ways for a firm to estimate its initial sales: contacting trade associations, finding comparable firms, finding sales estimates for comparable firms in magazine and newspaper articles, and using the multiplication method.

Review Questions

1. Explain the purpose of the market analysis section of a business plan.

2. Describe the difference between the market analysis section and the marketing plan section of a business plan.

3. Explain the process of market segmentation and why it’s important for a firm to select a specific target market.

4. Describe the requirements for successfully segmenting a market.

5. What is the biggest mistake that people make when selecting a target market?

6. Why is estimating the size of a target market referred to as a “tricky” proposition?

7. Describe why it’s important to include a section on “buyer behavior” in a business plan.

8. Explain the purpose of a competitor analysis.

9. Explain why it’s important to collect competitive intelligence, and describe some of the techniques that are used to collect it.

10. Briefly describe the four separate ways of estimating the annual sales and market share of a new business.

Application Questions

1. Recreate Prime Adult Fitness’s estimate of the size of its target market, and substitute the county that your college of university is located in for Seminole County, Florida. How do your numbers compare with the numbers reported in Prime Adult Fitness’s estimate?

2. Prepare a competitive analysis grid for Runkeeper ( www.runkeeper.com ), a company that makes an iPhone app that tracks workouts. Summarize what you learn about Runkeeper’s competitive landscape and its points of differentiation through this exercise.

3. Put yourself in the place of an investor listening to Prime Adult Fitness present the market analysis portion of its business plan. Think of three penetrating questions that you would ask about the market analysis.

4. Imagine you’re writing the business plan for a smoothie shop that you plan to launch near the campus of the college or university you attend. Make an estimate of your Year 1 sales using the bottom–up approach to the multiplication method.

5. Fitstar (www.fitstar) is a company that produces an app that turns an iPad into a personal trainer. When Fitstar first started (with a single app that offered personal training sessions via an iPad), how would you have estimated Fitstar’s initial sales? Select one or more of the four ways of estimating a new firm’s sales outlined in the textbook, and explain how you would have utilized each method.

Endnotes

1. Great Call Homepage, available at  www.greatcall.com  (accessed October 12, 2013).

2. Seminole County Florida, Demographic Detail Summary Report, available at  http://www.seminolecountyfl.gov/ecodev/pdf/Demographic_Detail_Report.pdf , prepared February 2, 2010 (accessed October 6, 2013).

3. “Market Segmentation” (Wikipedia), available at http://en.wikipedia.org/wiki/Market_setmentation (accessed October 6, 2013).

4. International Health, Racquet and Sportsclub Association Homepage, ihras.org (accessed June 14, 2013).

5. Baby Boot Camp Homepage, available at  www.babybootcamp.com  (accessed October 4, 2013).

6. J. Kurtzman, Startups That Work (New York: Portfolio, 2005), 156.

7. D. Schmidt, “IBISWorld Industry Report 33992a Athletic & Sporting Goods Manufacturing in the US,” IBISWorld, May, 2013.

8. “Helping People To Live Long and Productive Lives and Enjoy a Good Quality of Life,” available at http://www.cde.gov/chronicdisease/resources/publications/aag/aging.htm (accessed October 10, 2013).

9. P. Kotler, Marketing Insights From A to Z (Hokoken, NJ: Wiley, 2003), 23.