Utilize the "4 P's" When Projecting Business Plan Assumptions for New Products
by: Geoff Ficke
Prospective clients often present my marketing and product development consulting firm completed Business Plans as they attempt to elicit interest in their projects. Invariably the assumptions that their sales, income and profit projections describe are unrealistic. I am then asked how to best assemble believable, supportable numbers that will excite, not scare off investors, venture capital or partners.
A Business Plan is simply a document that describes a commercial opportunity and quantifies, qualifies and narrates details of the offering. The exercise of writing a Business Plan sounds fairly mundane and easily accomplished. It is not. I have rarely read a Business Plan submitted by a novice that was worth spending more than a minute or two contemplating.
The Harvard Business Review in a recent article mentioned use of the "4 P's" for Potential when projecting budgets, sales and profits. This is a simple, easily understood template for aspiring entrepreneurs to consider utilizing. The "4 P's" of Potential are Population, Penetration, Placement and Purchase Frequency. The "4 P's of Marketing that are essential to customizing a brand and marketing strategy are; Product, Price, Placement, and Promotion.
The "4 P's" of Potential, if accurately researched, detailed and confirmed are invaluable in supplying investors with assumptive numbers that will withstand intense scrutiny.
Consider:
Population
What is the real size of the actual population that would be interested in potentially buying your product? If you were marketing a snack cracker, it could be the whole population of a country. Most of us eat snack crackers at some time.
If you have a Pet Product, specifically a dog snack treat, the market is confined to the 77.5 million dog owners in the United States. If it is a cat snack food the market reach is a bit larger, approximately 94 Million licensed cat owners.
Placement
Now that you know the size of the consumer population base that can potentially purchase your product how do you surmise market Placement? Let's assume that you want to introduce a cosmetic product and it will be moderately priced (Price = one of the "4 P's" of Marketing). Your research indicates that there are approximately 75, 000 stores in the United States that carry competitive mid-priced brands such as Oil of Olay skin care, Maybelline and Cover Girl cosmetics or Revlon perfumes. As a small beauty product brand or start-up you will not achieve deep Placement in early stages of existence, certainly not big box distribution until the brand shows sales traction on a local or regional level. If you gain Placement in 1.5% of the discovered universe of 75,000 outlets in Year 1, you would achieve distribution in 1,125-doors. As the brand develops in year 2, Placement can be expected to easily grow to 2.5% or 1,875-doors, year 3, etc.
Penetration
How much of the Population will you penetrate with purchase of your product?
There are 17 million licensed hunters in the United States. If your exciting new camouflage, stealth hunting boot was able to gain 1% Penetration of this class in the first full year of sales, you would sell 170,000 units.
Purchase Frequency
A consumable product (food, drink, vitamin, cosmetic, household cleaner, etc.) has a much more frequent usage and repurchase rate than a dog leash, a hunting boot or other hard goods. Another term for Purchase Frequency that is often used is Sales Turnover. A Gourmet Meat Marinade might turn inventory levels three times in a year in a specialty store. A popular priced, higher volume marinade might turnover 10 times in a national supermarket outlet. Purchase Frequency is determined by utility of the product, daily or occasional use, price, packaging size and geography. A sun care product will turn over monthly in warm weather markets, only seasonally in colder weather climes.
Here is a simple formula that can be used to divine the Potential Size of a market for a product using the "4 P's" during Year 1 of distribution:
Placement = 2% of 100,000 stores = 2000 placements
Population of Women Age 35 to 60 for an Anti-aging Skin Care Treatment
USA only = 55,000, 000
Penetration of potential buying Population
.001% of 55,000,000 = 55,000
Purchase Frequency = 3 Sales Turns per each full year of sales
Assuming a regimen (example only) of $40 X 55,000 consumers X 3 Repurchases and the above indicates that achievement of these 4 P's of Potential would generate $6.6 million in sales.
This does not reflect new product extensions, international distribution or other variables. If the "4 P's" of Potential are fully, deeply and diligently vetted, this number, while still an assumption is much more realistic and believable to the most difficult audience on earth: the cynical investor. This is the best to qualify, quantify and narrate the assumptions that are the cornerstone of any Business Plan.
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