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Utilize the "4 P’s" When Projecting Business Plan Assumptions For New Products
Prospective clients often present my marketing consulting and product development company with completed business plans as they try to generate interest in their projects. Invariably, the assumptions that describe your sales, revenue and profit projections are unrealistic. Then I get asked how to put together credible and compatible numbers that excite, not scare, investors, VCs or partners.
A business plan is simply a document that describes a business opportunity and quantifies, qualifies and narrates the details of the offering. The exercise of writing a business plan sounds quite mundane and easy to accomplish. Is not. Rarely have I read a business plan presented by a newbie that was worth spending more than a minute or two on.
The Harvard Business Review in a recent article mentioned the use of the “4 P’s” for potential when projecting budgets, sales and profits. This is a simple and easy to understand template for aspiring entrepreneurs to consider using. The “4 P’s” of potential are population, penetration, placement, and frequency of purchase. 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 studied, detailed and confirmed, are invaluable in providing investors with hypothetical numbers that will stand up to intense scrutiny.
What is the actual size of the actual population that would be interested in potentially buying your product? If you market a snack cookie, it could be the entire population of a country. Most of us eat cookies for a snack at some point. If you have a pet product, specifically a dog snack, the market is limited to the 77.5 million dog owners in the United States. If it’s a cat snack, the market reach is slightly larger, approximately 94 million licensed cat owners.
Now that you know the size of the consumer population base that can potentially buy your product, how do you figure out market placement? Let’s say 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 mid-priced competitive brands such as Oil of Olay skin care, Maybelline and Cover Girl cosmetics, or Revlon perfumes. As a small beauty brand or start-up, you won’t achieve deep placement in the early stages of existence, certainly not large box distribution until the brand shows local or regional sales traction. If you win placement in the top 1.5% of the discovered universe of 75,000 outlets in year 1, you’d achieve distribution in 1,125 doors. As the brand develops in year 2, placement can easily be expected to grow to 2.5% or 1,875 doors, year 3, etc.
What portion of the population will be penetrated by purchasing your product? There are 17 million licensed hunters in the United States. If your exciting new stealth camouflage hunting boot could get 1% penetration in that class in its first full year of sales, you’d sell 170,000 units.
A consumable product (food, drink, vitamins, cosmetics, household cleaner, etc.) has a much more frequent use and repurchase rate than a dog leash, hunting boot, or other hard goods. Another term for frequency of purchase that is often used is sales turnover. A gourmet meat marinade may change inventory levels three times a year at a specialty store. A higher priced, higher volume marinade can bill 10x in a national supermarket. Frequency of purchase is determined by product utility, daily or occasional use, price, package size and geography. A sun care product will be delivered monthly in warm climate markets, only seasonally in colder climates.
Here is a simple formula that can be used to guess the potential size of a market for a product using the “4 P’s” in year 1 of distribution:
Placement = 2% of 100,000 stores = 2,000 locations
Population of women aged 35 to 60 for an anti-aging skin care treatment
US only = 55,000,000
Penetration of the potential buyer population
.001% of 55,000,000 = 55,000
Purchase frequency = 3 sales turns for each full year of sales
Assuming a regimen (example only) of $40 X 55,000 consumers X 3 buybacks and the above indicates that achieving 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 reviewed, this number, while a guess, is much more realistic and believable to the toughest audience on earth: the cynical investor. This is the best for qualifying, quantifying and narrating the assumptions that are the cornerstone of any Business Plan.
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