Transcript 4th Chapter Marketing Research and Financial Plan

Marketing and
Financial Plan
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Introduction
 The entrepreneur needs to develop at least
one unique Product/Service as soon as the
firm starts up.
 However, if the product is not sold as
originally planned, the firm will experience
its first “death valley” due to a cash flow
problem, which in the worst scenario will
lead to bankruptcy
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What is Marketing
 Marketing is a product or service selling related
overall activities.
 It generates the strategy that underlies sales
techniques, business communication, and
business developments.
 It is an integrated process through which
companies build strong customer relationships
and create value for their customers and for
themselves.
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Definition
 Marketing is defined by the AMA as
“Marketing is the activity, set of institutions,
and processes for creating, communicating,
delivering, and exchanging offerings that
have value for customers, clients, partners,
and society at large. ”
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Cont…
 Marketing is used to identify the customer,
satisfy the customer, and keep the
customer.
 The term marketing concept holds that
achieving organizational goals depends on
knowing the needs and wants of target
markets and delivering the desired
satisfactions.
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Marketing strategy
 The
concept of marketing strategy
encompasses the strategy involved in the
management of a given product.
 A plan is required in order to effectively
manage company’s products and evidently, a
company needs to weigh up and ascertain
how to utilize its finite resources.
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Marketing …
 Some prominent marketing strategy
models include:
 Marketing
specializations: reorientation of
business marketing strategies to meet the
challenges of the global marketplace
 Buying behavior: behavioral process of how a
given product is purchased (B2C or B2B)
 Use of technologies
 Services marketing…
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 Market research and marketing research are
often confused.
 'Market' research is simply research into a
specific market. It is a very narrow concept.
 'Marketing' research is much broader. It not
only includes 'market' research, but also areas
such as research into new products, or modes
of distribution such as via the Internet.
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Marketing research
 Marketing research is the function that links
the consumer, customer, and public to the
marketer through information - information
used to identify and define marketing
opportunities and problems; generate, refine,
and evaluate marketing actions; monitor
marketing performance; and improve
understanding of marketing as a process.
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Marketing Research
 Marketing research is the process by which
information about the market environment is
generated, analyzed, and interpreted for use
as an aid to marketing decision making
 Remember! Marketing Research does not
forecast with certainty what will happen in
the future
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Cont…
The marketing research process
includes five P’s
(1) Purpose of the research,
(2) Plan of the research,
(3) Performance of the research,
(4) Processing of research data, and
(5) Preparation of a research report.
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1. Purpose of the Research
The purpose of the research is to clarify
the following:
 The
current situation involving the
problem/situation to be researched
 The nature of the problem/situation
 The specific questions the research is
designed to investigate
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2. Plan for the Research
 Some of the key terminologies are as follows:
 Primary data: data collected specifically for the
research problem under investigation.
 Secondary data: data previously collected for other
purposes, but can be used for the problem at hand.
 Qualitative research: typically involving face-to-face
interviews with respondents (focus groups and long
interviews).
 Quantitative
research: systematic procedures
designed to obtain and analyze numerical data.
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Cont…
 Some Quantitative researches include
 Observational research—watching people
 Survey research— questionnaire by mail, phone, or
in person
 Experimental research— manipulating one variable
and examining its impact on other variables
 Mathematical
modeling research —typically
involving secondary data, such as scanner data
collected and stored in computer files from retail
checkout counters
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3. Performance of the Research
 This process involves preparing for data
collection as well as actually collecting data.
 Questionnaire preparation and actual data
collection should be done carefully.
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4. Processing of the Research Data
 Qualitative
research data consist of
interview records that are contentanalyzed for ideas or themes.
 Quantitative
research data may be
analyzed in a variety of ways depending
on the objectives of the research.
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5. Preparation of the Research Report
 The limitations of the research should be carefully
noted.
 Test market areas may not be representative of the
market in general, or sample size and design may
be incorrectly formulated, partially because of
budget constraints.
 Remembering and carefully taking care of the above
points, the research report assists in directing the
marketing strategy of a company
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Target Market
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Target Market
 A target market is a group of customers that
the business has decided to aim its marketing
efforts and ultimately its merchandise towards.
 A well-defined target market is the first
element to a marketing strategy.
 Once these distinct customers have been
defined, a marketing mix strategy can be built
by the business to satisfy the target market.
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Target Market
 Widely used criteria or dimensions for market
segmentation include
 1. Demographic
 These factors include age, gender, race, education,
marital status, income etc…
 2. Psychographic
 Attitude, interests, and opinions (AIO) comprise
the psychographic dimensions. These may be
socio-cultural, religious, philosophical, ethical,
political, economic, technological etc…
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Target Market
 3. Usage Related
This category deals with how the product is
actually used.
 Quantity:
A large bottle of wine is a product for
heavy drinkers, and a half-size lunch is a
product for weight watchers.
 Timing:
and most clothes are seasonal products.
 Application: The specific purpose of usage is
critical. Medical doctors and their patients do
not hesitate to purchase expensive devices
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Marketing Mix Four Ps
 The marketing mix is the set of controllable
variables that must be managed to satisfy
the target market and achieve organizational
objectives.
 These controllable variables are usually
classified according to four major decision
areas—four Ps: product, price, place (or
channels of distribution), and promotion
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1. Product
 Product differentiation is the most essential
factor to marketing promoters. You must
differentiate your product from your
competitors’ products in the following ways:
 Quality: the product requires reliability and
lifetime.
 Quantity:
You need to produce the product as
much as the market desires
 IP
protection: Is your product protected from
imitation manufacturing by other companies?
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Product Life Cycle
 Every product has a life cycle. The product
life cycle is segmented into
 Introduction,
 Growth,
 Maturity,
 Saturation,
 Decline, and finally
 Abandonment.
Are sometimes
merged together
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Product Life Cycle
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Product Life Cycle
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PLC Cont…
 1. Introduction: This stage is characterized
by research and development (R&D). Sales
and profit are usually very low, although
costs may be substantial.
 2. Growth: This stage is characterized by
increased sales and initial profits. Heavy
promotional costs are often incurred,
which hinder gross profit.
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PLC Cont…
 3. Maturity: This stage is characterized by
the peak and attempted maintenance of sales
levels.
 4. Saturation: The maximum profit is usually
obtained sometime after the maximum
production quantity (saturation) occurs.
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PLC Cont…
 5.
Decline: This stage is characterized by
perceived futility in an attempt to maintain
market share.
 Typically,
 6.
this is accompanied by cost cutting.
Abandonment: At this stage the
product’s performance no longer merits
inclusion in the firm’s product line.
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2. Price
 Price is what the customer pays for the
product. Four
introduced here:
1.
2.
3.
4.
pricing
Cost-plus pricing,
Fair/parity pricing,
Skimming pricing, and
Penetration pricing
schemes
are
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Pricing
1. Cost-Plus Pricing
 The
product should not be sold for less than the
manufacturing cost. The concept of cost-plus
pricing involves setting a price that factors into a
given profit margin (e.g., cost plus 25% profit).
2. Fair/Parity Pricing
 Set
based on customer-oriented market research.
This pricing involves setting a price that roughly
matches that of competing brands within the
product class.
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Pricing
3. Skimming Price
 This
option involves charging a high price relative
to other brands within the product class.
 The success depends on the high product quality
and differentiated performance. (E.g. Sony’s
products sell well even when the price is 20%
higher than other brand products.)
4. Penetration Price
 This
scheme involves charging a low price on the
assumption of selling the brand in enormous
quantities.
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 Most
high-tech entrepreneurs will accept a
compromise between the skimming price
and cost plus price.
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3. Place
 Place means the product’s channels of
distribution or how it is conveyed from the
producer to the end user.
Its functions include manufacturing,
transportation, warehousing, wholesaling,
and retailing.
 The
more the intermediate functions or channels
are involved, the higher the percentage of
selling price it can command.
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Place
 If an organization controls all the channels of
distribution for its product, it is vertically
integrated .
 If the manufacturer acquires a company to
access the raw materials, it is backward
integrated .
 If the wholesaler acquires a retailer to
expand distribution, it is called forward
integrated .
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4. Promotion
 Promotion involves communication of the
product attributes and the corporate image
in the most favorable light possible to
intermediary sellers (i.e., trade advertising
and trade promotion) and to end users (i.e.,
consumer advertising and consumer
promotion).
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Financial Plan
Financial Plan
 This plan allocates future income to various types
of expenses, such as rent or utilities, and also
reserves some income for short-term and longterm savings.
 Financial planning is the long-term process of
wisely managing your finances so you can achieve
your goals and dreams, while at the same time
negotiating the financial barriers that inevitably
arise in every stage of your business.
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Financial Reporting
Common mistake among business owners: “Failing
to collect and analyze basic financial data.”
 One-third of entrepreneurs run their companies
without any kind of financial plan.
 Only 11 percent of business owners analyze their
companies’ financial statements as part of the
managerial planning process.
 Financial planning is essential to running a
successful business and is not that difficult!

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Financial Statements
 A firm needs to generate their annual
financial report by law, which includes the
balance sheet , income statement , and
cash-flow statement .
 These financial statements should be
prepared according to Generally Accepted
Accounting Principles (GAAP).
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Balance Sheet
 The balance sheet is a “snapshot” of a business
at a particular point in time.
 It reveals financial resources the company owns
(assets), debts it owes to the others (liabilities)
 Built on the accounting equation:
Assets = Liabilities + Owner’s Equity
 Net income (or net loss) represents the net
profitability of the firm. This is commonly
referred to as its bottom line .
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Income Statement
 Income
Statement – “Moving picture.”
Compares the firm’s expenses against its
revenue over a period of time to show its net
income (or loss):
Net Income = Sales Revenue - Expenses
 The
income statement represents the
profitability of a business over a period of
time.
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Cash Flows Statement
 Statement of Cash Flows – shows the change in
the firm's working capital over a period of time
by listing the sources of funds and the uses of
these funds.
 The cash-flow statement exhibits sources and
uses of cash over a given period of time.
 The focus is on generating income and honoring
obligations (e.g., loans and debts).
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Cash Flows Statement
As the saying
goes,
“Positive cash
flow, not Profit
(on the books),
pays for
lunch.”
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Ratio Analysis



A method of expressing the relationships
between any two elements on financial
statements.
Important barometers of a company’s
financial position.
Only 27 % of small business owners
compute financial ratios and use them to
manage their businesses.
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Interpreting Ratios



Ratios – useful yardsticks of comparison.
Standards vary from one industry to another;
key is to watch for “red flags.”
Critical numbers – measure key financial and
operational aspects of a company’s
performance. Examples:
 Sales per labor hour at a supermarket
 Food costs as a percentage of sales at a
restaurant
 Load factor (percentage of seats filled with
passengers) at an airline
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Summary
Liquidity Ratio
Current Ratio
Quick Ratio
Leverage Ratio
Debt Ratio
Debt to Net Worth Ratio
Times Interest Earned Ratio
Operating Ratio
Average Inventory Turnover Ratio
Average Collection Period Ratio
Average Payable Period Ratio
Net Sales to Total Asset Ratio
Profitability
Ratio
Net Profit on Sales Ratio
Net Profit to Asset (Return on Asset) Ratio
Net Profit to Equity Ratio
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Putting Your Ratios to the Test
When comparing your company’s ratios to your industry’s standards, ask the
following questions:
1. Is there a significant difference in my company’s ratio and the industry
average?
2. If so, is this a meaningful difference?
3. Is the difference good or bad?
4. What are the possible causes of this difference? What is the most likely
cause?
5. Does this cause require that I take action?
6. If so, what action should I take to correct the problem?
Source: Adapted from George M. Dawson, “Divided We Stand,” Business Start-Ups, May 2000, p. 34.
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Capital Budgeting
 Budgeting for the acquisition of “capital
assets”
 Capital budgeting (or investment appraisal) is
the planning process used to determine
whether an organization's long term
investments such as new machinery,
replacement machinery, new plants, new
products, and research development projects
are worth pursuing.
Capital budgeting
 Some Capital budgeting techniques include
(a) Payback period
(b) Internal Rate of Return
(c) Net Present Value
(d) Accounting Rate of Return
(e) Profitability Index
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Payback Period
“Time period required to recover the cost of the
investment from the annual cash inflow produced
by the investment.”
It refers to the period of time required for the return
on an investment to "repay" the sum of the original
investment.
Amount invested
Expected annual net cash inflow
Example
A company is considering an investment of $130,000
in new equipment. The new equipment is expected
to last 10 years. It will have zero salvage value at
the end of its useful life. The straight-line method of
depreciation is used for accounting purposes. The
expected annual revenues and costs of the new
product that will be produced from the investment
are:
Sales
Cost of goods sold
Depreciation expense
Selling & Admin expense
Income before income tax
Income tax expense
Net Income
$200,000
$145,000
13,000
22,000
180,000
$20,000
7,000
$13,000
Computation of Annual Cash
Inflow
Expected annual net cash inflow =
Net income
$13,000
Depreciation expense
13,000
$26,000
Cash Payback Period
$130,000 / $26,000 = 5 years
Payback Period –
Uneven Cash Flows
One company wants
to install a machine
that costs $16,000
and has an 8-year
useful life with zero
salvage value.
Annual net cash
flows are:
Year
0
1
2
3
4
5
6
7
8
Annual Net
Cash Flows
$ (16,000)
3,000
4,000
4,000
4,000
5,000
3,000
2,000
2,000
Cumulative
Net Cash
Flows
$ (16,000)
(13,000)
(9,000)
(5,000)
(1,000)
Payback Period –
Uneven Cash Flows
We recover the $16,000
purchase price between
years 4 and 5, about
4.2 years for the
payback period.
Year
0
1
2
3
4
4.2
5
6
7
8
Annual Net
Cash Flows
$ (16,000)
3,000
4,000
4,000
4,000
5,000
3,000
2,000
2,000
Cumulative
Net Cash
Flows
$ (16,000)
(13,000)
(9,000)
(5,000)
(1,000)
Payback = 5 years
Using the Payback Period
Payback = 3 years
Consider two projects, each with a 5-year life
and each costing $6,000.
Year
1
2
3
4
5
Project One
Net Cash
Inflows
$
2,000
2,000
2,000
2,000
2,000
Project Two
Net Cash
Inflows
$
1,000
1,000
1,000
1,000
1,000,000
Would you invest in Project One just because it has
a shorter payback period?
2. Internal Rate of Return (IRR)
 IRR is the rate of return at which the
discounted present value of receipts and
expenditures are equal
 Interest yield of the potential investment
 The interest rate that will cause the present
value of the proposed capital expenditure to
equal the present value of the expected
annual cash inflows.
IRR
 Internal rates of return are commonly used to
evaluate the desirability of investments or
projects.
 The higher a project's internal rate of return,
the more desirable it is to undertake the
project.
Assuming all projects require the same amount of upfront investment, the project with the highest IRR
would be considered the best and undertaken first.
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IRR
Given the (period, Cash flow) pairs (n, Cn)
where n is a positive integer, the total number
of periods N, and the net present value NPV,
the internal rate of return is given by r in
A rate of return for which this function is
zero is an internal rate of return.
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Example
 Two project investments may be given by the
sequence of cash flows
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Solution
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Internal Rate of Return
 STEP 1.Compute the internal rate of return
factor using this formula:
Capital Investment
Annual Cash Inflows
$130,000 /
$26,000
=
5.0
Internal Rate of Return Method
 STEP 2. Use the factor and the present value
of an annuity table to find the internal rate of
return.

Locate the discount factor that is closest to 5.0
on the line for 10 periods.
(N)
Periods
10
PRESENT VALUE OF AN ANNUITY OF 1
6%
7%
8%
9% 10% 12%
7.360
7.024
6.710
6.418
6.145
5.650
14%
15%
5.216
5.019
Capital budgeting techniques
(a) Payback period
(b) Internal Rate of Return
(c) Net Present Value
(d) Accounting Rate of Return
(e) Profitability Index
Others… (Reading Assignment)
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Comparing Methods
Basis of
measurement
Measure
expressed as
Strengths
Limitations
Payback
period
Cash
flow s
Number
of years
Easy to
Understand
Accounting
rate of return
Accrual
income
Percent
Easy to
Understand
Net present
Internal rate
value
of return
Cash flow s
Cash flow s
Profitability
Profitability
Dollar
Percent
Amount
Considers time Considers time
value of money value of money
Allow s
Allow s
Accommodates
Allow s
comparison
comparison
different risk
comparisons
across projects across projects
levels over
of dissimilar
a project's life
projects
Doesn't
Doesn't
Difficult to
Doesn't reflect
consider time consider time
compare
varying risk
value of money value of money
dissimilar
levels over the
projects
project's life
Doesn't
consider cash
flow s after
payback period
Doesn't give
annual rates
over the life
of a project
Breakeven Analysis
 The breakeven point is the level of operation
at which a business neither earns a profit
nor incurs a loss.
 It is a useful planning tool because it shows
entrepreneurs minimum level of activity
required to stay in business.
 With one change in the breakeven
calculation, an entrepreneur can also
determine the sales volume required to
reach a particular profit target.
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Calculating the Breakeven Point
Step 1. Determine the expenses the business can
expect to incur.
Step 2. Categorize the expenses in step 1 into fixed
expenses and variable expenses.
Step 3. Calculate the ratio of variable expenses to net
sales. Then compute the contribution margin:
Contribution Margin = 1 -
Variable Expenses
Net Sales Estimate
Step 4. Compute the breakeven point:
Breakeven Point $
=
Total Fixed Costs
Contribution Margin
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Example: Calculating the Breakeven Point
Step 1. Net Sales estimate is $950,000 with Cost of
Goods Sold of $646,000 and Total Expenses of
$236,500.
Step 2. Variable Expenses of $705,125; Fixed
Expenses of $177,375.
Step 3. Contribution margin:
Contribution Margin = 1 -
$705,125
$950,000
= 0.26
Step 4. Breakeven point:
Breakeven Point $ =
$177,375
0.26
= $ 682,212
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Breakeven Chart
Breakeven Point
Sales = $682,212
Revenue
Line
Total Expense
Line
$682,212
Fixed Expense
Line
0
$682,212
Sales Volume
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END
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