Chapter 13
Measuring the Market and Your Place in It
In This Chapter
Understanding your position relative to your competitors
Calculating how well you are doing at finding new customers
Appreciating the value of your brand
Market KPIs are crucial to your business. Financial KPIs are important because they allow you to measure your financial performance. Customer KPIs are important because they allow you to gauge the strength of your customer relationships and whether you are growing your customer base or whether it’s remaining stagnant or contracting.
But your performance is also always relative to your market. The KPIs I detail in this chapter help you to measure your market, so you can appreciate where you really stand relative to that market and your competition.
Painting a Picture of Your Market (Market Growth Rate)
You need to be able to paint a picture of the market you operate in and understand that market, so you can accurately predict and manage the future. A KPI that can help you do that is the market growth rate. This metric lets you see whether your market is expanding or contracting, which is obviously critical for assessing future revenue growth potential.
Your business success is not only determined by how efficiently you run the business and how well you satisfy your customers. It’s also dependent on two other key factors:
- Your ability to stay relevant to your audience
- Your ability to identify future growth opportunities in existing and new markets.
Being able to identifying these markets and evaluating their growth rate is therefore a vital piece of performance data.
Understanding the health of your market
Market growth rate is a key indicator of the health of your business because it helps you to understand how robust your market is. In other words, is your market expanding or contracting? Are there still plenty people who want what you sell or are the numbers falling?
If your growth in sales is equal to or greater than the market growth rate then your business is doing well. This effectively means that you are capturing your share of market growth and there are still plenty people who want what you offer.
If your sales growth is less than market growth rate then you are not capturing your share of market growth and could be in trouble. For example your sales growth could be 10 per cent and you may, quite rightly, think that is pretty good. But if the market is growing at 20 per cent then your competitors are cashing in on that growth more than you are. And you need to know why.
Market growth can be as broad as to include a whole market or economy or narrow enough to include a geographic location or product category.
This metric can also indicate where a product is in its life cycle. For example a high growth rate could indicate that your product is in its growth phase where many people want the product but not everyone who wants one, has one yet. Conversely a lower more stable growth rate could indicate product maturation, where most of the people who want one, have one. And a low or negative growth rate means that your product is in decline, in which case you need to use that information to alter your strategy.
Market growth rate therefore delivers critical information about your business in relation to what your market is doing and what your customers are buying.
Just because your business is successful today does not automatically mean it will be successful tomorrow. Corporate history is littered with examples of businesses, often extremely successful businesses, that went into liquidation because they under-estimated the longevity of their market or didn’t act quickly enough to alter their strategy.
The video rental company Blockbuster is a classic example of how disastrous a disappearing market can be. At their height the company had about 60,000 employees and more than 9,000 stores worldwide. In the 1990s there was a Blockbuster store on just about every high street in every major town or city. Renting movies for the weekend was a common pastime enjoyed by millions. Then in 2000 Netflix arrived on the scene along with increasingly fast broadband connections and with it alternative ways to watch movies.
Blockbuster’s market changed dramatically. Instead of going to a physical store and renting movies, people had new options. They could have films posted to them or they could watch them over the internet. But Blockbuster didn’t see the writing on the wall. Ironically they turned down the opportunity to buy Netflix for $50 million, when it was still the new kid on the block. This was a decision they probably deeply regretted. Perhaps if they had paid more attention to their declining market growth rate they could have foreseen the demise of their traditional market and changed their strategy accordingly. They didn’t, though, and in 2010 they filed for bankruptcy. By 2013 all company-owned stores closed and the giant that was Blockbuster video was finished.
Options for measuring market growth rate
If you want to know your market growth rate you first need to know the size of your market. You measure the size of the market by the total number of goods or services (or the value of those goods or services) sold in that market during a specified time period (usually one year). Although market data is readily available through benchmarking databases or market research companies, unless market data is well-defined, getting a handle on the size of your market can be quite difficult.
There are different options for measuring market size such as:
- Interview and analyse your competitors: The simplest and cheapest way to measure the size of your market is to ask your competitors, other manufacturers or service providers for their sales figures. If they are publicly-listed companies you may not even need to ask them as you will be able to get the information from the annual accounts. The biggest challenge with this approach is you probably won’t want to do it and if you ask someone else they won’t want to do it either! The assumption is that these other businesses will not want to share that information but if you explain what you are trying to do up-front, offer to share the information you find, which will help them too then you will probably be surprised at what information you can find out - if you just ask. Ideally cross reference any information you get with another source such as an annual or quarterly report as they may embellish their results to look more successful than they really are.
- Collect information from intermediaries: For example, if you are producing goods that are sold in supermarkets or online portals, then they are often in a good position to provide you with a breakdown of sales of your product relative to those of your competitor products. However, increasingly they are charging for the privilege of sharing this kind of information.
- Survey customers and end-users: This is the most expensive approach because you need a large sample size to make it valid and it’s time consuming to collect and analyse.
Measuring market growth rate in practice
The key performance question market growth rate helps to answer is: ‘To what extent are we operating in markets with future potential?’
The data for this metric is accessible through existing market research data. This is obviously the most cost effective as you can piggy back on the research someone else has completed in your market. Alternatively you can conduct the research yourself and the best option is to interview and analyse your competitors to help you to assess the size of your market. You need to know this metric every year and if your market is shifting rapidly you would be wise to measure it quarterly.
Market Growth Rate (%) = Total sales in the market for this year/Total sales in the market for last year
Sales in this context can be measured in monetary terms or in the number of units. For example say you sell speed boats and jet skis so you want to know the growth rate for each market. The size of the speed boat market for 2012 was $600 million and in 2013 it was $750 million. And the size of the jet ski market for 2012 was $250 million and in 2013 it was $150 million. The market growth rates would be:
- Speed Boat Market Growth Rate = $750/$600 = 1.25
- Jet Ski Market Growth rate = $150/250 = 0.6
A market growth rate of below 1 indicates a shrinking market while a market growth rate of above 1 indicates a growing market. On that basis you could be confident in your speed boat market, as there are still plenty of people wanting speed boats. The jet ski market, however, is shrinking so you will need to re-visit your strategy and either identify new markets for jet skis that are currently not exploited or consider getting out of jet skis and into something with a buoyant market growth rate.
You can also anticipate market growth rate for the next year or years by taking into account trend data and market prediction. Looking ahead in this way can help you to pre-empt any changes to the market so you can alter your approach and minimise the impact.
Understanding Your Place in the Market (Market Share)
Knowing the market you compete in is very important but understanding your place in that market is also vital for business success. One KPI that can help assess your place is relative market share. Essentially, this metric indexes your market share against that of your leading competitors. This allows you to gauge your true market strength relative to the other businesses in your sector and can therefore identify areas of weakness or opportunities for improvement.
Market share is always relative to the market you operate in. A high market share in one industry may be considered average in another. As a result there is no global benchmark for market share that crosses industries and sectors.
Why market share matters
Relative market share matters because major players in any market tend to be more profitable than their competitors. As a result it is considered a strong indicator for increased profit and growth, because the higher the share of the market the more cash will be generated. Plus larger, dominant companies enjoy the benefits or economies of scale which means their size and buying power allows them to negotiate better prices all along the supply chain, therefore reducing costs and increasing profit still further.
This metric, however, supplies more information than just looking at profit, growth and cash flow metrics because it shows where your brand is positioned in relation to your main competitors. This comparison gives you greater insight into what’s actually happening outside your business, and what you may need to alter or tweak to super-charge your marketing and capture more market share.
Getting a good picture of your market can be tough
Although market share, relative and otherwise, is an important KPI to measure, it’s not that easy to measure and it needs to be viewed in conjunction with other KPIs to help create a complete picture.
There are many ways to measure market share. The easiest is to rank your revenue or measure the absolute volume in units sold or gross sales generated. But even then you need to qualify those measurements. For example even if you have a market share of 70 per cent you may still be losing money and therefore it’s not a sustainable strategy. Indeed, the lack of a ‘profit’ dimension is a major criticism of the Relative Market Share metric.
That said, it is useful to depict market share over time and in comparison to market growth (see Figure 13-1). This provides you with a simple picture to allow you to understand whether your market share growth is in line with the potential and growth of the overall market.
Figure 13-1: Graphic showing market share over time compared to market growth
Measuring relative market share in practice
The key performance question relative market share helps to answer is: ‘How well are we growing market share in comparison to our competitors?’ The data you will need to calculate this metric is available from your accounts information and your competitor’s annual reports or market research.
The easiest way to measure relative market share is to simply break down the overall market size into the chunks that your company has and then to the same for all the other major players in that market. You can do this by simply applying this formula to yourself and your competitors:
Relative Market Share A (%) = Your Market Size/Overall Market Size × 100
A more formal way of measuring relative market share, often done on an annual basis, is to look at your market share relative to the market share of your biggest competitor:
Relative Market Share B (%) = Your Market Share/Your largest competitor’s market share
You can calculate relative market share using units sold, revenue or percentage market share. For example, say Company A sold 7,500 units, creating revenue of $187,500, and enjoyed a market share of 20 per cent. If the management of Company A wanted to compare their company’s performance to Company B, the market leader, which sold 25,000 units generating revenue of $375,000 and enjoyed a market share of 40 per cent, then they could calculate the relative market share in three ways:
- 7,500/25,000 = 0.30 relative market share in unit sold terms
- 187,500/375,000 = 0.5 relative market share in revenue terms
- 20/40 = 0.5 relative market share in percentage market share terms
These figures then have to be compared with the same figures for other players in the market.
Gauging Your Market Success (Customer Acquisition KPIs)
Knowing how you compare to your competitors and how much market share you have can help you to understand your relative strength in your industry and illuminate opportunities for improvement. But it’s also important to gauge your market success through the eyes of your customers.
How successful are your sales and marketing departments at attracting new customers? How successful are they are converting initial interest or leads into a paying customer? And how much does it cost to generate those leads in the first place? Customer acquisition KPIs can help you to answer these questions and ensure your sales and marketing initiatives are cost effective and productive.
Knowing the cost of finding new customers
A key function of sales and marketing is to let people know about your business and attract as many of them as possible to buy your product or service. There are, of course, many ways to achieve this. Some, such as TV advertising or brand awareness campaigns can cost a great deal of money. Everything from traditional direct mailing campaigns to social media campaigns cost something to create and execute, so you need to make sure that the costs are justified.
One of the most popular ways of finding out is through the KPI called cost per lead. As the name would suggest, cost per lead works out how much it costs to attract each potential customer to your product offering, and it is a powerful leading indicator of likely future revenue. The theory assumes that if you can attract potential customers cost effectively, then sales in the future will be strong.
That said, not all leads are equal, so to make this metric more accurate and indicative of future performance, calculate cost per qualified lead. A qualified lead is someone who is definitely in the market for what you are selling and is therefore sales ready.
Of course leads do not always convert into sales so it’s also important to track conversion rates.
Options for gauging customer conversion
There is no point having thousands of leads if your business can’t convert them to paying customers. The customer conversion rate works out how successful your business is at turning opportunities or potential customers into actual customers.
The definition of conversion will differ depending on the medium in which you operate. For example, if you have a chain of physical stores your conversion rate would look at how many people entered yours shops compared to how many actually bought something while they were there. Online conversion may look at product ordering or whether the visitor signed up for membership, subscribed to the monthly sales promotion newsletter, downloaded software, or actively opted-in in some form or another.
Understanding your conversion rate will give you more insight into how well your sales and marketing strategies are working. For example, if you manage to attract 1000 people to your website every month but none of them convert into a sale or even an enquiry, then there is clearly something wrong with your marketing message or the way you are positioning your products or services. You need to go back and work out what your customer really wants.
There are a number of different types of conversion rates that you may want to measure to gain more specific insights such as:
- Visitor to sales conversion rate
- Lead to conversion rate
- Online click-through rates
- Tender or quote to sale conversion rate
Measuring cost per lead in practice
The market success KPIs that are most useful are cost per lead and conversion rate.
KPI: Cost per lead
The key performance question cost per lead helps to answer is: ‘To what extent are the costs for generating new customers justified?’ The data needed to calculate this metric should be located in your marketing department.
Cost per lead = Total money spent on marketing campaign/Total leads generated
For example say you spent $90,000 on online banner advertising and you generated 15,400 leads.
Cost per lead = $90,000/15,400 = $5.84
This is a particularly useful metric to track after a campaign or marketing event and can easily be taken a step further to calculate the cost per qualified lead. By regularly calculating your cost per lead, you will be able to use the data to inform your decision making and on-going marketing strategy. For instance, if you exhibit at an industry event and the cost per lead is $2.50 but you run an online social media campaign that yields a cost per lead of $0.20 then so long as the conversion rate is comparable you would be wise to stop doing the events and test your online initiatives against some other type of campaign to see if you can improve on $0.20.
Make sure you calculate cost per lead and cost per qualified lead separately for each marketing initiative or campaign you execute. This will help you make better decisions and give you a much clearer picture of what is working and what is not. If you try to calculate cost per lead or cost per qualified lead across multiple initiatives then there are too many variables that could skew the result and you won’t get very meaningful data.
KPI: Customer conversion rate
The key performance question customer conversion rate helps to answer is: To what extent are we able to convert potential customers into actual customers?
Conversion Rate = Number of desired outcomes achieved/Number of Visitors × 100
You can use this basic formula to measure conversion rate for anything you are interested in measuring. For example you could measure the conversion rate for web page views compared to the number of people who then clicked on an advert on that page – also called click-through rate (CTR). Or you could measure the number of people who filled a shopping basket online to the number who actually completed the purchasing process and bought what they put in the shopping basket.
For example, say you are a clothes retailer with a chain of shops on the high street. You may be interested in your conversion rate from a number of different perspectives.
First you may want to find out how many people that visit your shops, actually buy something during that visit. If you calculate that across the chain 12,000 people visited your shops over a certain period and 3750 sales were made then your conversion rate would be:
3750/12,000 × 100 = 31.25 per cent
If you were running a promotion during this time so that everyone that bought something in your stores was given a $5 off online shopping voucher, you would then be interested in knowing the conversion rate for that. You know that you distributed 3750 $5 vouchers over the given period and you can tell from your online sales records that 1200 people used the voucher so your conversion rate in this context is:
1200/3750 × 100 = 32 per cent
As you can see from these simple examples the data collection method you need to use to calculate conversion rate depends on what you are measuring. And often it can be simpler to measure on line with the use of free to use web analytics tools to help you track conversion rates along the so-called conversion funnel – the path visitors take from the initial prompt to the targeted desired action (for example, a purchase).
In the physical world retailers often use simple counting methods where they have the manager or sales assistant actually count the number of people who enter the shop over a given period of time, and then compare that number to sales made. There are, however, more sophisticated tools that allow you to track customers using camera technology and software that will automatically track and report conversion rates. For example, one of my clients has installed a device that tracks mobile phone signals and therefore any customer who carries one (which is almost everyone nowadays). This allows them to count the number of customers who pass the shop, and the ones that enter the shop. Comparing these numbers with sales transactions gives them a good proxy for conversion rates.
Charting the Power of Your Brand
A strong corporate or product brand is enormously valuable. It represents a promise or value assumption that is capable of influencing consumer behaviour into the future.
Companies with a strong brand like Coca-Cola don’t have to work as hard to win customers because they trust the brand and are therefore happy to continue to buy it – even paying a little extra for the peace of mind. This trust translates into future revenue security for the business so charting the power and potency of your brand may be important.
The value of the brand is often referred to as brand equity.
What brand equity means for your business
Brand equity is the positive or negative value that a brand adds to your products and services. In other words if you have a strong positive brand customers will often view your product as being of a higher quality even when there is no measurable difference in quality. As a result they are often happy to pay more than your competitor’s products to secure the branded product. Conversely, if your product receives bad press this can negatively impact your brand and sales.
There are three main benefits of positive brand equity:
- Price premium: The ability to charge more for your product or service
- Long-term loyalty: The ability to keep customers coming back and buying again and again.
- Increased market share: If people love your brand and keep coming back you will be able to secure a much higher market share.
Brand equity has become a very important measure in the eyes of investors because it is seen as a proxy or pre-cursor for profit. Often the largest part of a company’s market value is in non-tangible assets such as brand, reputation, trademarks and expertise rather than the more traditional tangible assets such as factories, plant and machinery.
If you have a brand then you need to measure and protect it, because if the brand is diminished in the eyes of the customer then there will be a knock-on fall in the overall value of your business. Brand equity is not simply nice to know, but has significant financial implications. This metric allows you to maintain, build and leverage that equity so as to increase return on assets.
Finding your unique formula
In order to measure brand equity accurately you will need to decide what specifically you want to measure. Qualitative measures can help you to identify associations to a brand, its strength, desirability and uniqueness. Consider using face-to-face interviews or focus groups to gather this initial qualitative data.
However you will also need to formulate some quantitative measures to provide a more solid grounding for strategic and tactical recommendations. Quantitative brand tracking studies are often used to measure brand awareness, usage, attitudes, and perceptions. Different aspects of awareness such as recall and recognition may also tell you how strong a brand is and inform your marketing decision making and campaign design to further enhance brand equity.
Measuring brand equity in practice
The key performance question brand equity helps to answer is: ‘How much value is driven by our brand?’
The formula for measuring brand equity depends on what you are actually measuring. Some measurements look at brand equity from the company level, some at the product level and others are at the consumer level.
- Company level: Measures the brand as a financial asset. To calculate brand equity as an intangible asset, work out the value of the company using your market capitalization. Then subtract tangible assets and ‘measurable’ intangible assets. What is left is your brand equity.
- Product level: Compares a no-name or private label product to an ‘equivalent’ branded product. This is the easiest brand equity to calculate because it only requires you to compare selling price. Assuming all else is equal the difference between a branded product and non-branded product is the brand equity. For example a can of Coca-Cola and a can of supermarket cola are the same size, contain the same amount and probably have fairly similar ingredients so you can safely assume that the difference between the selling prices is due to the value of the brand.
- Consumer level: This measurement seeks to find out what associations the consumer has with the brand. This approach is interested in measuring the awareness, including recall, recognition and overall brand image. You can use free association tests and projective techniques to uncover the tangible and intangible attributes, attitudes, and intentions a customer has regarding your brand. Brands with high levels of awareness and strong, positive attributes enjoy high equity brand.
None of these measures is absolute and definitive but they will give you a sense of your brand equity. Use multiple measures of brand value to create a more complete understanding of your brand.