MarketFeasibility study

Chapter 4

Feasibility Study

Econ 4315

Prepared by: Abd ElRahman J. AlFar

Introduction

• Once you have validated your idea by assessing the legal validity ofyour project; the next step is preparing the market feasibility study.

• Market feasibility study is considered to be the most important studyof the detailed studies.

• This study is essential to the rest of the feasibility studies, withouthaving a market study it’s difficult to go for further studies of thedetailed feasibility study

Introduction (cont.)

you cannot continue further Steps or process if the result of the market feasibility study is negative, but there are other choices to follows:

1. Modify market study broadened to include other market elements were not included in the study previously (e.g. find other markets were not included in the study to increase sales and thus increase cash flow).

2. Find any other investment alternatives to find a new project.

That market study prepared to achieve and assure, some of the main objectives of the project, which cannot start without specifying these goals confining it broadly.

The difference between market and marketing research• Market research is any organized effort to gather information about

target markets or customers. It is a very important component offeasibility study.

• Market research is one of the key factors used in maintainingcompetitiveness over competitors. Market research providesimportant information to identify and analyze the market need,market size and competition. Market-research techniques encompassboth qualitative techniques such as focus groups and in-depthinterviews, as well as quantitative techniques such as customersurveys, and analysis of secondary data.

The difference between market and marketing research (cont.)

• Marketing research is "the process or set of processes that links the producers, customers, and end users 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

Goals for Market Study:

We can set up the goals of the market feasibility study as follows:• Determine the market structure and shape.

• Determine exact demand for product.

• Identify the factors affecting the market demand and supply.

• Identify the micro and macro size of the market.

• Identify market targeted groups, and market segments.

• Selecting the price policy and the best price mechanism to sell the products.

Important questions for the market study(MS):

In this context, several questions to be asked, what is the main purpose to study the market?

• What you are going to sell? (Why this product not the another? How can you be sure about what you are proposing?)Make no definite statement unless you can back it up!

• Who are your customers?

• (Why them? What makes you so sure of this?)

• How will you operate and how will you sell your product?

• Why this way and not another? How can you back that up?)

• How much: What is the estimated level of sales?What makes you expect to meet this forecasted level of sales turnover?What evidence is there to prove that this is a realistic estimation and can be achived?

• Whereabouts? (area & site) What are your reasons for thinking this is the ideal location, particularly if you are counting on a local customer base?

Market feasibility study stages:

• Factors determining supply and demand in the market.

• Identifying the data and information needed to study market factors.

• Identify sources and methods of data, information collection and required analysis.

• Data analysis and information prior to accessing previous goals and signpost market policy.

• Specifies the size of the demand and market quota (the project share in the market total supply) for project.

Factors determining supply and demand in the market.First: Factors affecting demand:

• Market structure.

• Price of commodities.

• Price of alternative commodities

• Price of complementary goods.

• Consumer’s income.

• Consumers tastes.

• Gross national income and its distribution mechanisms.

• The use and the quality of the goods.

• Population and its distribution, gender and geography and education.

• Population growth rate.

• National developments, investments planes.

• Consumer expectations.

• The governmental interferences.

• The consumer traditional way of marketing.

second: factors affecting supply:

• Price of goods itself

• Prices of factors of Product and services prices.

• Level of technological and advancement of the project.

• Investment environment.

• Elasticity of supply of production factors.

• Time of production process of goods or services.

• Changes in stock and storage capacity of the project.

Third: Sales projection

• Different methods are used in sales projection, regression analysis;either simple or multiple are important methods for the projection.The projection depends on time series data is another method. Ifthere is no enough data, the projection depends on Delphi techniqueis the most suitable method for the sales projection.

The most important data and information required for market study1. populations Data,

• Current population and its distribution. (geographical, age, education... ... etc.).

• The population growth rate.

2. Data related to individual and national income.

• National income distribution over various sectors.

• national spending.

• income per capita.

• Personal income distribution on individual consumption.

• Income distribution at different population groups.

The most important data and information required for market study (cont.)3. Data on transport and communications (transportation used within different State).

4. Data on alternative and complementary goods.

5. Data on exports and imports and quantity that include globaldemand trends toward our country products with world price index.

6. Any information on consumers (food preferences, favorable charges,their motives ... purchasing habits ...).

7. State policies (boundaries and incentives).

We can use two different sources of information to get all the above data.• First: primary sources, field collection of data and information

imperative is obtained directly from the field or from research communities that are targeted by researchers or specialists.

• Second: secondary sources, a collection and obtaining of data and information from existing reliable sources of the most important institutions or organizations in the country.

The most important secondary sources, A. statistical services publications of centralized State. B. ready-made information from published research and articles. c. periodic or seasonal reports of similar projects, most reliable data of these reports are regular sales men reports.

Field tools for collecting primary data or filed information:• Researchers uses different tools for collecting data, tool differs from

researcher to another for different objectives of compiling thisinformation and, depending on the purpose of the study.

Some of these tools are:

1. Survey or questionnaire

2. scientific observation

3. The interview

1. Survey or questionnaire:-

• a list of questions developed by the researcher by consulting certain specialists in this area. The questionnaires are of different types:

- Facts or reality questionnaire:-Aims to obtain data and information directly from field to express certain facts; (such as age, sex and nationality).

- Opinion surveys:-Aims to know the attitude of the public in a particular case at a specific time.

- motives questionnaire:-Aims to find out the real Enhancement and motivations behind an act or public behaviors.

2-scientific observation

• It is process of research observation based on certain strategies identified in advance and monitored by a researcher in some cases.

3. The interview:-

• It’s the best way to answer the survey questions.

• The interview is of two types normally:- Single individual interview

- Group or collective interview.

Steps and Indicators for Market Study:

1. Demand estimations

2. Supply projection

3. Determining the market gap

4. targeted group

5. Identification of price policy

1. Demand estimations

• Demand is a buyer's willingness and ability to pay a price for a specific quantity of a good or service. Demand refers to how much (quantity) of a product or service is desired by buyers at various prices.

• Quantity demanded: is the amount of a product people are willing or able to buy at a certain price.

• Demand curve: s the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at that given price. And shows a negative relationship between price and quantity demanded.

• demand equation is the mathematical expression of the relationship between the quantity of a good demanded and those factors that affect the willingness and ability of a consumer to buy the good.

Q𝑑 = f(P; P𝑟𝑔, Y)

If we consider other factors are constant except the Price the equation is going to be

There are two types of demand:1- Real or effective demandIt is the quantities actually the consumers wish to purchase at a certain prices level at a given time. This type of demand required three conditions to be provided:

• Need the consumer should be in real need for the commodity and cannot delay buying the commodity for later time.

• Desire The desire to buy and have the commodity.• Ability to have the power to pay for the price of the demanded goods or services.

2- Ineffective demandThis type of demand is considered in the absence of the above preceding conditions.

Amount or the size of demand (Aggregate demand):

We can get the aggregate demand by using one of the following equations:

1. Aggregate demand = total consumer demands + governmental demand + business demand + net exports

2. Average demand per capita = size of aggregate demand / population

Why to concern about demand elasticity ?

Demand elasticity is a measure of the sensitivity of the quantity variable, Q,to changes in the price variable, P. Elasticity answers the question of thepercent by which the quantity demanded will change relative to (divided by)a given percentage change in the price.

Elastic demand occur when the percentage change in demanded quantity asa result of price change is greater than the percentage change in price of agood.

Inelastic demand occur the percentage change in demanded quantity as aresult of price change is less than the percentage change in price of a good.

Why to concern about demand elasticity ?

• As a suppliers or owners of a project we have to know that when the prices increases in elastic goods the net profit will decrease, whereas in inelastic goods if the price increase the net profit will increase.

2. Supply projection

• Supply is the amount of a product per unit of time that producers are willing to sell at various given prices when all other factors are held constant.

• Quantity supplied: is the amount of a good that sellers are willing to sell and are able to sell.

• Supply curve, in economics, graphic representation of the relationship between product price and quantity of product that a seller is willing and able to supply. And show a positive relationship between

• The supply function is the mathematical expression of therelationship between supply and those factors that affect thewillingness and ability of a supplier to offer goods for sale. Anexample would be the curve implied by

Q𝑠 = f(P; P𝑟𝑔)

If we consider other factors are constant except the Price the equation is going to be

3. Determining the market gap

• Determining the gap between supply and demand in the targetedmarket of the product is a good indicator, to know how easy ordifficult the market strategy for the goods to be produced is.

• Market gape is a difference between demand and supply (demand –supply= surplus or deficit in size supply).

Strategies of market gap results

• Supply – demand = (+)

surplus stop studying and begin to search other investment alternativesbecause the supply in a state of surplus.

• Supply – demand = (-)

deficit continue work on your study because the supply in a state ofdeficit, which represent a chance for investment

• Supply – demand = (0) market is at equilibrium state and cannotaccommodate more goods. In this case to continuing in your studdingor to look for other alternatives depends on the entrepreneursdecision, and whether investment depends on factors other than oronly on the current demand, for example, the strategic importance ofthe good, business plan development. If the decision of entrepreneuris to invest then you are requires immediately fined another targetedmarket group of the production to be produced.

4. Targeted group

• A target market is a group of customers a business has decided to aimits marketing efforts and ultimately its merchandise towards.

• A target market consists of customers that share similarcharacteristics, such as age, location, income and lifestyle, to which abusiness directs its marketing efforts and sells its products.

• Target markets can be separated into primary and secondary targetmarkets.• Primary target markets are those market segments to which marketing efforts

are primarily directed.

• secondary markets are smaller or less important.

For instance, the primary target market for a jewellery store might bemiddle aged women who care about fashion, and their secondarytarget market could be middle aged men who may want to buy gifts forthe women in their lives.

Why it is important to determine your target market ?• It is important for a business to identify and select a target market so

it can direct its marketing efforts to that group of customers andbetter satisfy their needs and wants.

• It allows for better understanding of customers and therefore enablesthe creation of promotional materials that are more relevant tocustomer needs.

• targeting makes it possible to collect more precise data aboutcustomer needs and behaviors and then analyze that informationover time in order to prepare and refine market strategies effectively.

Market segmentation

• Geographic - Addresses, Location, Climate, Region

• Demographic/socioeconomic segmentation - Gender, age, wage, career, education.

• Psychographic - Attitudes, values, religion, and lifestyles

• Behavioral segmentation - (occasions, degree of loyalty)

• Product-related segmentation - (relationship to a product)

Marketing Mix (4 P's)

• The 4p's, also widely known in the market as the Marketing Mix, is a business tool commonly used in marketing that covers four pieces to help a particular business in reaching and deliver its products to target consumers. This four piece includes Product, Price Promotion, and Place. It is proven to be known that marketing mix is a crucial part that must be implemented in marketing as it has the ability to determine a group of a particular target consumer's needs, likes, and most importantly suitability.

Pricing Policy

Pricing policy refers to the way a company sets the prices of its services andproducts basing on their value, demand, cost of production and the marketcompetition. Pricing policy is essential for all companies as it provides aguideline for creating profits and areas that bring in losses. Pricing policiescan be as follow :• Line pricing• Loss leader• Price/quality relationship• Premium pricing• Demand-based pricing• Multidimensional pricing• Micromarketing

• Line pricing is the use of a limited number of prices for all productoffered by a business. E.g. each product had a price scale 5-10 ILS.

• A loss leader is a product that has a price set below the operatingmargin. This results in a loss to the business on that particular item inthe hope that it will draw customers into the store and that some ofthose customers will buy other, higher margin items.

• The price/quality relationship refers to the perception by mostconsumers that a relatively high price is a sign of good quality. Thebelief in this relationship is most important with complex productsthat are hard to test

• Premium pricing (prestige pricing) is the strategy of consistentlypricing at, or near, the high end of the possible price range to helpattract status-conscious consumers. The high pricing of a premiumproduct is used to enhance and reinforce a product's luxury image.

• Demand-based pricing, also known as dynamic pricing, is a pricingmethod that uses consumer demand - based on perceived value - asthe central element.

• Multidimensional pricing is the pricing of a product or service usingmultiple numbers. In this practice, price no longer consists of a singlemonetary amount, but rather consists of various dimensions (e.g.,monthly payments, number of payments, and a down payment).

Pricing Objectives

• maximize long-run profit

• maximize short-run profit

• increase sales volume (quantity)

• increase cash sales

• Increase market share

• stabilize market or stabilize market price: an objective to stabilize pricemeans that the marketing manager attempts to keep prices stable in themarketplace and to compete on non-price considerations.

• company growth

• maintain price leadership

• discourage new entrants into the industry

• match competitors prices

• encourage the exit of firms from the industry

• survival

• avoid government investigation or intervention

• obtain or maintain the loyalty and enthusiasm of distributors.

• enhance the image of the firm, brand, or product

• Be perceived as “Fair” by customers and potential customers

• create interest and excitement about a product

• discourage competitors from cutting prices

• use price to make the product “visible"

• social, ethical objectives

Developing of Sales Plan

Developing of the sales plan includes the following three components :

• Pricing plan

• Promotion plan

• Distribution plan

Pricing plan

Most organizations have pricing strategies in place to ensure that decision making by their sales staff is consistent.

The company has to ask the following questions related to its planned prices:

• What's the right price for this product?

• How to set the prices?

Promotion plan

What plans do you have for promotions related to the following points:

• Objectives

• Advertisement

• Message

• Budget

• Tools

• Media

• The appropriate time

Distribution plan

What plans do you have for distribution related to the following components:

• Objectives

• Efficient channels of distribution

• Will you have a warehouse close to your customers ?

• Intensity of distribution (intensive to exclusive)

• Types of wholesalers and retailers (discounters, etc)

• Degree of channel directiveness

• Adequate stock levels

Assignment #3

According to what u have learnt in market feasibility study chapter, prepare a market feasibility for your suggested project. Focus mainly on the followings:• General information about the Palestinian economy in Palestine.• Information and data about the targeted sector and sub-sector.• Geographical potential for investment • Demand and supply determinants.• Sales forecasting [based on qualitative analysis]• Targeted customers analysis • Competitors analysis • Pricing plan.• Market entry time and plan.

Assignment #3