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S643: Digital Entrepreneurship Spring ‘12
Defining your market
I. Understanding the market
• What is a market?
• How does a digital market differ?
II. Understanding the competition
• What is a market analysis?
• Competitive analysis
III. Differentiation of the marketplace
• Segmentation and marketing
• Making sales projections
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
What is a market?
Every society faces a fundamental economic problem
Deciding what to produce, for whom, with limited resources
Two economic systems have provided different answers
Command economies
Directed by a centralized government
Market economies
Based on private enterprise
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
A market is a mechanism for exchanging goods and services for money among agents
Exchanges take place at specific ratios, called prices
There are exchange rates for many pairs of goods and a single price is set for each good
Market size depends on the set of trades that take place at the same price for reasons of taste or technology
This occurs because of competition
Either buyers consider the two objects to be the same (tastes) or sellers can make them at the same cost (technology)
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
Markets involve relationships among
The stuff: Demand and supply
What buyers want and what sellers can offer
The people: Buyers and sellers
Buyers set demand and sellers provide supply
The mechanism: Competition and exchange
Multiple buyers compete for limited supply
Multiple sellers compete to provide the supply
Goods and services are exchanged, typically for money
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
Types of markets
Competitive: no one buyer or seller can influence price
Monopoly: one seller, many buyers
Oligopoly: few sellers, many buyers
What determines demand?
Price: demand falls as price increases
Income: demand increases as income increases (for a normal good)
Demand decreases as income increases (for an inferior good)
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
Determinants of demand
Availability and price of related goods: decrease in demand for one good as price falls for
another (a substitutable good)
Demand for a good decreases as price of a related good increases (a complementary good)
Taste: demand changes because of social factors
Expectations: demand changes because of our assumptions about our future income
Number of buyers: demand increases as more buyers want the same good leading to price increases
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
Determinants of supply
Technical efficiency: How much does it cost to produce the good or service
Marginal utility: after the first one is produced, how much does the next one cost?
Economic efficiency: what is the mix of inputs to produce the good or service at the least cost?
How much of a good or service is a firm willing to supply at different price levels?
A market should find a balance between supply and demand through pricing (with greater and lesser degrees of efficiency)
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
Supply and demand curves in a market
Assumes perfect competition with many buyers and sellers
P0 Q0
Supply: how much will be made at a given price
As supply increases, price increases and quantity decreases
P1 Q1
Demand: how much will be bought at a given price
As demand increases, prices and supply increase
P2 Q2
Pri
ce
Quantity
Demand
Supply
P0
P2
P1
Q0 Q2Q1
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
How does a digital market differ?
They are supposed to approach a frictionless state
Reduced information asymmetries from lower search costs
Low market entry costs and low margins
Leads to strong price competition
All should lead to lower prices
Efficient market processes
Price elasticity: consumers are more sensitive to small changes in prices, especially if there are competitors
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
More market processes
Menu costs: retailers should adjust prices more frequently
What is involved in changing prices
Prices change when the benefit of change is greater than the cost of change
Should be easier to change in digital market
Price dispersion: less spread between high and low prices for a good
Depends on consumer’s ability to search for good information about the good
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
More market processes
Versioning
Information goods have high fixed or first copy costs and low marginal costs
Sell a line of incremental variations on the initial product
Appeal to different segments with differential pricing
A solution to the problem of pricing to cover fixed costs
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
Strategies for versioning in a digital market
Delay: free 20 minute delayed info; pay for real time
Interface: pay more for more features
Ease of use: pay more for fewer frustrations
Image resolution: give away low quality images
Speed: pay more for high speed
Comprehensiveness: pay more for more stuff
Annoyance: pay to get rid of intervention nag-ware
Technical support: pay more for answers
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
Types of digital marketplaces
Marketplaces controlled by sellers are set up by a single vendor seeking many buyers
Goal: create or retain value and market power in any transaction
Buyer-controlled marketplaces are set up by or for one or more buyers to shift power and value to the buyer
Many involve intermediaries who act as aggregators
Some strong buyers set up their own marketplaces
Neutral marketplaces are set up by third-party intermediaries to match many buyers to
many sellers
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
A digital economy
Involves goods or services whose development, production, sale, or provision is dependent on digital technologies
Highly digital goods and services produced, offered for sale, purchased and delivered through the net
Mixed digital goods and services offered for sale and purchased on the net and delivered offline
IT intensive services or goods production that cannot be delivered without a IT infrastructure
The IT industry supports these goods and services
S643: Digital Entrepreneurship Spring ‘12
I. Understanding the market
The digital marketplace
Verity, J. (1999). Digital Marketplaces. White Paper. p6.
S643: Digital Entrepreneurship Spring ‘12
Defining your market
I. Understanding the market
• What is a market?
• How does a digital market differ?
II. Understanding the competition
• What is a market analysis?
• Competitive analysis
III. Differentiation of the marketplace
• Segmentation and marketing
• Making sales projections
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
What is a market analysis?
Your idea places your firm somewhere in the market
A marketing analysis is the first step in determining if there is a need or audience for your idea
Goal: to determine the attractiveness of a market and to understand the opportunities and threats
It will help you
Prepare to enter a new market
Launch a new product/service
Start a new business
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
Understanding your industry helps you become aware of factors that help you succeed or that will make you fail
The industry: all organizations offering a similar product or service
Supply and distribution systems supporting these organizations
Trend in the industry: where is the market headed?
What are the opportunities for your organization?
What you do
Assessment of the target population, competition and needs for marketing that product or service
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
Marketing is an activity that takes place within a market
The creation and exchange of value with customers
A means by which one organization can differentiate itself from another
Like innovation, it is an entrepreneurial activity
Requires understanding of customers, partners, and competitors
Figuring out how to effectively meet customer needs
A critical component of an organization’s strategy
Selecting a target market and positioning the product or service
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
Carrying out a market analysis
Defining the problem: what market are you trying to reach?
Analysis of the situation: what do you know about this market?
Obtaining data that is specific to the problem: sources?
Analysis and interpretation of the data
Fostering ideas and problem solving: what are the best ways to market the product?
Designing a plan: which ways will you enact?www.va-interactive.com/inbusiness/editorial/sales/ibt/market_analysis.html
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
What do you want to know?
Past and future growth of your economic sector
Service, manufacturing, retail, or distribution?
By looking at the business press or government stats, what can you tell about trends in your sector?
Size and growth of your industry
What is your industry? How big is it?
Growth rate of your industry compared to gross domestic product
Hopefully your industry’s rate is higher
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
Try to fill in as much as you can
Factor -2 years Last year This year Next year 5 years
Total revenue
Total units sold
Total employed
Industry growth rate
GDP growth rate
Comparison
Sources: government statistics, trade associations, financial data from public filings and annual reports, market research, business press
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
You want to know about industry maturity: where is it in the life cycle?
New: lots of opportunities and competition, high growth rate, few leaders, high prices, few products and
services, building brand awareness
Expanding: rapid growth, a shakeout, leaders emerge, firms are vulnerable, customer loyalty begins, new features, variable pricing
Stable: plateau, slower growth, strong brand loyalty, barriers to entry, price reductions, push to differentiate
Declining: minimal growth, decreased competition, leaders cannibalize each other, loyalty weakens
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
What do you want to know?
Industry maturity: what are the risks and opportunities associated with these factors?
Growth rate
Competition
Market leaders/standards
Marketing goals
Market share strategy
Product range
Customer loyalty
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
What do you want to know?
Other factors
Sensitivity to economic cycles
Business expansion/contraction
High/low unemployment
High/low interest rates
High/low inflation
Strong/weak dollar
Seasonality
Technological change
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
Reduced to 10 questions
1. What defined market am I trying to reach?
2. What specific companies are servicing this market?
Are they successful?
What is their market share?
3. Is the market saturated or wide open? If so, why?
4. What is the size of the market?
Is it a growing market?
Is the industry stable, volatile, growing or trendy?
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
Reduced to 10 questions
5. How can I reach this market?
How do my competitors reach the market?
6. What are the business models of my competitors?
7. What do customers expect from this type of product or service?
8. What core competencies must the product or service have?
9. What are customers willing to pay for this type of product or service?
10. What is my competitive advantage?
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
Competitive analysis
Describe direct competitors in terms of
Target markets served (current customers)
Market share
Product attributes
Pricing
Promotion
Distribution including the distributor network
Services offered
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
Discuss competitor’s strengths and weaknesses
May need to consider much more than just marketing issues
Financial standing
Target market perception
R & D capabilities
Discuss competitive trends
May need to include discussion of future competitive threats
Combine into a SWOT analysis
S643: Digital Entrepreneurship Spring ‘12
II. Understanding the competition
www.etg.com/images/Market_Analysis_to_Consulting.GIF
S643: Digital Entrepreneurship Spring ‘12
Defining your market
I. Understanding the market
• What is a market?
• How does a digital market differ?
II. Understanding the competition
• What is a market analysis?
• Competitive analysis
III. Differentiation of the marketplace
• Segmentation and marketing
• Making sales projections
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
The digital consumer
The primary relationships are not between sender and receiver (as in traditional marketing)
The consumer’s relationship is with the CME with which he or she interacts
Information or content is not merely transmitted from a sender to a receiver
Mediated environments are created by participants and then experienced
Marketers must reconstruct marketing models for the interactive, many–to–many medium underlying the web
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
www.morebusiness.com/templates_worksheets/bplans/4-1.gif
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
The transition to market differentiation
We are entering a new phase where the focus is on transactions and buying/selling
Problem: how can markets be created and maintained?
A key element in creating a market is product differentiation
This means appealing to desirable market segments to maintain visibility and create defensible market positions
Survival in ecommerce means finding, maintaining, and dominating a niche
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
As the marketplace becomes congested, firms have to choose their niches
Most won’t be able to be “all things to all people”
The goal is to create a perception that there is extra value in doing business with a particular firm
Differentiation is the process of defining a market niche
Focusing on the identification of tangible-intangible customer needs
Creating a superior bundle of products and services which meet these needs
Communicating with the target market about this stuff
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
Differentiation depends on charging a competitive price and making a reasonable profit for this bundle
Kalakota and Whinston’s (1995) Law of Differentiation:
“As the blurring of distinctions among firms increases in electronic markets, survival requires identifying your unique role in the marketplace in terms of value to the customer”
One problem is that there is currently no commonly accepted procedure for doing this on the web
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
Differentiation involves:
Segmentation Setting prices
Product bundling Packaging and delivery
Service quality Ad/marketing strategies
Customer service Rewarding customer loyalty
The goals are to create:
Perceived extra value in the eyes of customers
Establish the distinctiveness and institutional image required for survival
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
Market segmentation is needed for product positioning
It divides the market into distinct customer groups
This involves demographic research:
Age, sex, income, occupation, purchasing habits, attitudes, race, family size, or religion….
A goal is to find the relationship between profits or volume and relevant demographic characteristics
Another goal is to determine differences among customers
This is used to create and fine-tune products, services and marketing strategies
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
Market segmentation characteristics
Identifiable: the attributes of a segment must be able to be measured
Accessible: must be able to communicate with and market and distribute to the segment
Substantial: should be large enough to justify expenditures
Unique needs: must respond to marketing mix
Durable: stable over time
Members should be relatively homogeneous and easily distinguishable from other segments
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
Market segmentation characteristics
Demographic characteristics
Age, gender, family size, generation, income, occupation, education, ethnicity, religion, social class
Psychographic characteristics
Activities, interests opinions, attitudes, valuesgraphics8.nytimes.com/images/2004/12/05/national/20041206_nat_STRATEGY.gif
Behavioral characteristics
Benefits sought, usage rates, brand loyalty, user status, readiness
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
www.realestateconsulting.com/images/Psychographic.gif
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
Marketing moves from satisfying customer needs to a cooperative goal of developing the market with the customer
The non-digital market has excluded the consumer
“In the new business environment, cooperation may prove more rewarding than competition, and
information – sharing more fruitful than information control.” National Academy of Sciences (U.S. Congress 1994)
The problem is how to develop reliable techniques to establish and maintain this type of cooperation
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
The web consumer
The web can transform the our identity, resulting in the relative anonymity of users in digital environments
Consumers may experience the perception of being present in a mediated environment (telepresence)
Within the web environment, consumers can engage in two main types of behavior
Experiential (e.g. Netsurfing, browsing)
Goal–directed (e.g. Product comparison, online shopping)
These behaviors compete for consumers’ attention
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
Making sales projections
A sales forecast is an estimate based on assumptions about the environment, market, and expected sales activity
These come from the industry and market analyses
Also the product pricing strategy, competitive analysis and marketing plan
An indicator of the strength of the firm in the market
An important factor used to assess the viability
These projections and their assumptions must be as realistic as possible
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
The sales projections also provide evidence to support the request for loans and/or VC funding
Asset needs and period-by-period cash flow needs
Creating a forecast
Based on assumptions of future market movement
Sales volume for a specific market
Sales volumes of competitor firms
Stage of product, industry life cycle
Can be quantitative (based on tools)
Can be qualitative (based on an experienced forecaster)
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
Quantitative: extrapolating from past sales
Time series analysis: months, quarters and years
Trend: showing linear movement over time (5%/yr)
Cyclical pattern: regular increases and decreases over time (typically 3-5 years)
Seasonal pattern: consistent increase and decrease within a year
Important: assumes that the patterns of the past will continue in the future
Are there disruptive factors on the horizon?
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
www.pmprb-cepmb.gc.ca/images/cmimages/figure315HDP-4112003-4916.jpg
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
Quantitative: estimating market potential and share
What is the sales potential of the market segment? Target area (geographical, online)? Target customers?
Market build-up method
Identifying customers and estimating potential to purchase
How many people are there in the segment and what do they spend on similar products?
Market factor method
Survey of Buying Power Index: income, retail sales, population
S643: Digital Entrepreneurship Spring ‘12
III. Differentiation of the marketplace
www.nhsgb.org/images/mkt_data04.jpg