Bulletin Vol. 1 No. 8 December 2002

B U L L E T I N

Tools and Resources for Data-Driven Market Research

Vol. 1 No. 8 December 2002


	IN THIS ISSUE: Business vs. Family: Who Wins at the Holidays? Forecasting a Market Area's Sales: Belinda's Bullish on Broad Ripple	Bulletin Archive

FROM THE EDITOR

As the holidays approach, many of us notice our personal lives demanding more of the attention we typically spend on our business pursuits. For entrepreneurs, especially those in family businesses, the conflicting demands on our time can be downright painful. This month’s quiz asks:

Business vs. Family: Who Wins at the Holidays?

This quiz is designed to help you evaluate your risk for stress and its unfortunate fall-out this holiday season. Respond to the questions, then calculate your score. Are you effectively balancing your business and family life this holiday season?

Click here to take our quiz and find out!

TOOL BITS

Forecasting a Market Area's Sales: Belinda's Bullish on Broad Ripple

Belinda is planning to open a cosmetics boutique in an Indianapolis neighborhood, specializing in products for women of diverse skin tones. In the last two issues of the Bulletin, we have followed Belinda as she researched locations by using the Household Spending tool and the Demographic Profile tool.

Belinda is now planning to open up shop in Broad Ripple, but there is one more important step to take before she begins. She is interested in estimating what her sales are going to be for her first year.

A quick estimate is easy to make using the Household Spending report. The first line of that report shows the market potential for any selected product in any selected geography. All that is necessary is to estimate the market penetration—the percentage of that market potential one business is likely to capture in a given year. Belinda tried this method, estimating a market penetration of 5% for her first year. The market potential for her selected product category (Personal Care Products) within her selected geography (Zip code 46220), multiplied by 5% market penetration, yielded a result of $98,777. Belinda could use this quick estimate in her business plan, but since she has a specific target market in mind, she decides to use that information to make a more accurate estimate.

Using demographics to estimate market potential

Whether you have one sales area like Belinda or 100, it is possible to make a more specific estimate by determining as accurately as possible who your customers are, how many are located in each trade area or sales territory, and calculating how much that target market is likely to spend.

Belinda already has an image of who her customers are from the Household Spending report. To review Belinda’s findings (discussed in Bulletin vol. 1 no. 6), she found that her potential best customers share these demographic attributes:

Age of Householder: 25 to 54 years old
Race of Householder: African-American, Hispanic/Latino, and Other
Household Income: $100,000 and over
Housing Unit Occupancy: Owner-Occupied

She decides to use the “Age” and “Race” attributes in her market potential computation. She will need to break the total population in her chosen Zip code into two categories—those who fit her target market description (Non-Whites 25-54) and those who don’t. She will estimate a higher market penetration for her target market and a lower one for her non-target market. Click the numbered links below to follow along with her spreadsheet as she makes her calculations. To view her source Household Spending report, click here.

She finds the market potential for the 25 to 54 year olds in Broad Ripple by summing up the market potential for the class breaks “25-34”, “35-44” and “45-54”. The result is $1,439,052. [1]
She finds the percentage of Non-White households in Broad Ripple by totaling the percentage given for the class breaks “African-American, Non-Hispanic”, “Other, Non-Hispanic” and “Hispanic-Latino”. The result is 13.68%. [2]
She multiplies the “25-54” household potential by 13.68%. The result is her target market—Non-Whites aged 25-54. There are 1,496 households that meet this description, with a total market potential of $196,862. [3]
She finds the total that does not fit her target market. To do so she subtracts her target market from the total households in the chosen Zip code. The result is $1,778,676. [4]
She estimates a market penetration of 30% for the target market and 3% for the non-target market. [5]
To find her estimate of total annual sales, she multiplies the market potential for the target market by 30% and the market potential for the non-target market by 3%. She totals the two results. Her calculation ends with an estimated annual sales of $112,419 for her first year. [6]

With that information, Belinda can decide how much she can afford to spend on her shop’s rent, product inventory, and other overhead costs—and still make a profit.

There are several assumptions worth noting in the method described here. Belinda’s estimate of spending by her target population is probably low, because the Household Spending report indicates that on average the Non-White race categories spend more than the overall population on Belinda’s product category. She could use the Demographic Index on the Household Spending report to fine-tune that calculation if she wanted to pursue that line of thought.

Her assumption of 30% market penetration for her target market may be over-ambitious. Market penetration will be affected by a variety of factors, including her spending on advertising, her success in attracting publicity, the pedestrian and traffic counts in her neighborhood, and competitors in the area. She will need to do more research to check her assumptions—research Third Wave could supply.

From this calculation Belinda has gained the information she needs to finalize her business plan. She is confident in the location, the market she is targeting, and her potential sales.

Resources:
This article on bCentral gives another example of making an annual sales estimate: "Forecasting a market-area's sales—with accuracy"

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Best regards,
Sarah White, Editor, the Bulletin
Third Wave Research

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The BULLETIN is published occasionally by Madison, Wisconsin-based Third Wave Research. Editor Sarah White and other associates of Third Wave Research write articles that appear in bCentral's "Demographics" and "Market Research" topic areas. For information about Third Wave Research's services, click here.

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