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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.

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Presentation on theme: "S643: Digital Entrepreneurship Spring 12 Defining your market I. Understanding the market What is a market? How does a digital market differ? II. Understanding."— Presentation transcript:

1 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

2 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

3 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)

4 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

5 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)

6 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

7 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)

8 S643: Digital Entrepreneurship Spring 12 I. Understanding the market Supply and demand curves in a market Assumes perfect competition with many buyers and sellers P 0 Q 0 Supply: how much will be made at a given price As supply increases, price increases and quantity decreases P 1 Q 1 Demand: how much will be bought at a given price As demand increases, prices and supply increase P 2 Q 2 Price Quantity Demand Supply P0P0 P2P2 P1P1 Q0Q0 Q2Q2 Q1Q1

9 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

10 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 consumers ability to search for good information about the good

11 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

12 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

13 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

14 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

15 S643: Digital Entrepreneurship Spring 12 I. Understanding the market The digital marketplace Verity, J. (1999). Digital Marketplaces. White Paper. p6.

16 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

17 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

18 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

19 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 organizations strategy Selecting a target market and positioning the product or service

20 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?

21 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 industrys rate is higher

22 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

23 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

24 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

25 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

26 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?

27 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?

28 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

29 S643: Digital Entrepreneurship Spring 12 II. Understanding the competition Discuss competitors 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

30 S643: Digital Entrepreneurship Spring 12 II. Understanding the competition

31 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

32 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 consumers 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

33 S643: Digital Entrepreneurship Spring 12 III. Differentiation of the marketplace

34 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

35 S643: Digital Entrepreneurship Spring 12 III. Differentiation of the marketplace As the marketplace becomes congested, firms have to choose their niches Most wont 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

36 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 Whinstons (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

37 S643: Digital Entrepreneurship Spring 12 III. Differentiation of the marketplace Differentiation involves: Segmentation Setting prices Product bundling Packaging and delivery Service qualityAd/marketing strategies Customer serviceRewarding customer loyalty The goals are to create: Perceived extra value in the eyes of customers Establish the distinctiveness and institutional image required for survival

38 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

39 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

40 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, values graphics8.nytimes.com/images/2004/12/05/national/ _nat_STRATEGY.gif Behavioral characteristics Benefits sought, usage rates, brand loyalty, user status, readiness

41 S643: Digital Entrepreneurship Spring 12 III. Differentiation of the marketplace

42 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

43 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

44 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

45 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)

46 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?

47 S643: Digital Entrepreneurship Spring 12 III. Differentiation of the marketplace

48 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

49 S643: Digital Entrepreneurship Spring 12 III. Differentiation of the marketplace


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