How to determine the size of your target market for your business plan-Part II

How to determine the size of your target market for your business plan-Part II

How do you determine the size of your target market if such information is not directly available? Many aspiring business start-ups face this question as they develop their business plans. This article will show you how to determine size of your target market in the absence of direct market information using deductive reasoning and/or calculations.

In my previous post, I discussed the importance of establishing the size of your target for your business plan. Knowing the size of the target market helps you to:

1) Determine your potential revenues from that specific market;

2) Formulate your marketing strategy for that segment; and

3) Enable the potential investor(s) to gauge the size and scalability of the proposed venture.

In that post, I discussed a simple case where information needed to calculate the size of the market is directly provided. With the number of customers given and the amount they spend to purchase a given product/service is known then it is a straightforward matter to calculate the size of your target market as shown below:

Formula_Size of Target Market

Unfortunately, in many practical cases the numbers of customers and/or the amount they spent on your product/service may not be directly available.

Question – How then will you calculate the size of your target market through market research?

Answer – by deductive reasoning and/or deductive calculations.

This is best explained by using an example. Consider the following case study:


Jane lives in a country in East Africa and has a talent for making handcrafted items (especially hand-knit items such as woolen sweaters and blankets). Jane discovers that there are online market places where she can sell her items and she settles on Etsy. Jane wants to prepare a business plan to raise some money to develop her business. Among other specifics she must employ market research to determine the size of her target market. Some specific details concerning her chosen venture include:

Jane’s Business Model: The business will involve creating high quality hand-knit woolen items for children less than 5 years old and selling them through an online shop at Etsy. These will be shipped through a reliable post office service to the customer after an order is made.

Jane’s Target customer: female, aged 25-44 yrs, lives in North America, married or single, has at least 1 child who is not more than 5yrs old; has easy access to internet; earns at least $25,000/year


 

But during her market research, Jane quickly realizes that Etsy does not provide specific data on how many women buy hand-knit items or how much they spend on the same.

So the question is: How will Jane determine the size of her target market from market research with such little information?

Now to calculate the size of the target market, two things must be established:

1) The number of women who visit Etsy to buy hand-knit items for their children; and

2) How much they spend to buy these particular items

 

1. Calculation of the number of customers

Jane does some detailed arket research from various sources and summarizes her findings in Table 1:

Criteria of calculations

From this, the number of people who fit the target criteria is established as follows:

No of customers in target market

Thus, there are 63,360 women who fit the desired target customer profile who visit Etsy each month and make actual purchases. But this is just the general number of women who visit the site to make purchases. Jane must somehow find a way of getting the proportion of these women that specifically purchase hand-knit items.

So Jane does some research in the US Census Bureau and finds that households in the United States spend about 10% of their income on clothing. On this basis, Jane makes an assumption that out of the total number of women who visit Etsy to purchase an item, 10% of these will buy clothing items. She further assumes that out of these 10%, 10% will buy hand-knit items (i.e. 10% of 10%). So the actual number of women who can be expected to buy hand-knit items will be:

Total actual no. of target customers

2. Calculation of the total amount spent by customers in the target market

After further research at Etsy (using relevant search criteria), Jane finds that the average unit price of hand-knit items (relevant to her chosen category) is $50.

Therefore,

Final size of target market

3. Establishing the desired market share

With the above figure, Jane can now go ahead and make a statement like “I intend to capture 20% of this market by the 5th year of operations”.

Additionally, she can prepare a graph using excel to show how she intends to build her market share over a 5 year period as follows: (Remember the saying: A picture speaks a thousand words)

Jane_Market Share

Some important notes on calculating the size of the target market

1) Formulate justifiable assumptions. While it is not easy to predict what will happen in future this is definitely not an excuse to make wild guesses or assumptions in your business plan. It is a big mistake to assume that the investor/s will accept with blind faith whatever figures or assumptions that you throw at them. The investor expects that:

-you have done some rigorous market research to establish the size of your target market for your business plan; and that

-any assumptions made are rational and supported by plausible arguments.

It goes without saying that references to your sources of your information should handy just in case you are asked for verification. For instance, the figures obtained in Table 1 are denoted by numbers in superscript (2 to 7). These refer to sources of information that have been used to obtain each figure and can be listed below the Table or somewhere in your Appendix.

2) Demonstrate that you have thought through the process. Your assumptions may not be 100% accurate and your calculation framework may have some minor flaws. But this is not the point – the point here is that the potential investor wants to see that you have thought through the process (as we have done) and taken time to think and work out the numbers – this is what is important. As long as this is evident, then you still stand a good chance of securing funds for your venture.

 

TOWS Matrix – How to write a TOWS Matrix

Introduction
• Every organisation, like a living organism, is surrounded by its environment through which it survives. The environment is the source of opportunities for any business. For instance, business enterprises rely on satisfied customers to survive through the provision of goods and/or services. However, the same environment is a source of threats for any organisation, for instance, through the entry of new competitors, adverse economic changes, changes in regulations, etc.
• As discussed in one of my previous posts, an organisation’s environment is made up of three layers, a) the macro-environment; b) industry; and c) competitors. Among other tools, the macro-environment can be analysed through the use of PESTEL analysis, which I have discussed in greater detail here.
• However, businesses are not distinguished by their environment, which presents both threats and opportunities, but more by their strategic capabilities. One of the most useful tools for analysing an organisation’s strategic capabilities is the SWOT analysis, which I have also discussed here. SWOT facilitates the development of strategic options which drives an organisation’s strategic path.

Application of The TOWS matrix – TOWS matrix of Domino’s Pizza
• TOWS matrix represents one of the tools that can be used in business strategy to analyse the suitability of strategic options. It is based on a SWOT analysis. If you are an entrepreneur, knowing how to make the TOWS matrix can enable you to develop a set of strategic options which will ensure that your business concentrates on those strategies that shall steer your business to success.
• For instance, looking at figure 1, the top-left quadrant of the TOWS matrix prompts one to think of options that use the strengths of the business to capitalise on the opportunities in the business environment while the bottom- right quadrant prompts the consideration of options that minimise wastes and avoids threats. Figure 1 shows the essential structure of the TOWS matrix.

TOWS matrix

Figure 1 : TOWS Matrix

• In order to understand how to make the TOWS matrix and apply it, I shall use a SWOT analysis of Domino’s Pizza from a 2011 case study in order to learn how to make the TOWS matrix.

Brief overview of Domino’s Pizza
Domino’s Pizza is an international company that specialises in the making and delivery of Pizza in the United States and in more than 65 other countries. A public company headquartered in Michigan, U.S.A, the company is the second largest pizza chain after Pizza Hut in the United States. As at January 2011, Domino’s had 4, 475 domestic franchise stores, 454 company-owned stores in the United States and 4,422 stores worldwide resulting in a total store count of 9, 351 and operates in more than 65 countries in the world.

An example of how to use the TOWS matrix
Step 1 – Prepare a SWOT analysis
Table 1 is a SWOT analysis of Domino’s Pizza following information gathered from the company’s annual report, website and other sources.

SWOT analysis of Domino's Pizza

Step 2 – Use the SWOT analysis to prepare the TOWS matrix
TOWS Matrix of Domino’s Pizza
From the SWOT analysis (Table 1), the TOWS matrix of Domino’s Pizza can now be written. The strategic options are the bulleted points in the pink-shaded quadrants (see Table 2).

TOWS Matrix for Domino's Pizza.JPG

TOW Matrix Template
A template of the TOWS matrix (like the one shown above) is available for download as a Word Document (.doc) here.

References
For an in-depth discussion of the TOWS matrix see the following:

Weihrich, H, 1982, ‘The TOWS matrix – a tool for situational analysis’, Long Range Planning, pp. 54–66.

Helms, M & Nixon, J 2010, ‘Exploring SWOT analysis – where are we now? A review
of academic research from the last decade’, Journal of Strategy and Management, vol. 3, no.3, pp. 215-251.