In The Marketing Plan, management and marketing expert William M. Luther asserts that an effective marketing plan should encapsulate your business goals for the next five to ten years and the strategies you’ll use to achieve them. However, he argues that before you can define where you want to be and how you’ll get there, you first need to understand three key variables that will impact your venture’s success.
This guide walks you through these three variables and concludes with additional resources and advice to help you complete your marketing plan:
Luther explains that market size indicates the total number of potential customers for your product or service—the larger the size, the more potential there is to make a profit. Use the following three-step process to define your market size:
How to Research Market Size
Luther’s explanation covers how to determine your target market so that you can define your market size. However, this explanation misses a crucial piece of advice: how to research the information you need to complete this step. Marketing experts offer practical advice to help you research effectively.
First, you’ll need to gather relevant data regarding market demand for your product or service. To do this, use the following two strategies:
Use SEO tools to analyze how many people are searching for similar products and services to yours and what businesses and distribution channels they use to fulfill their needs.
Sign up for social listening tools and make use of analytical reports to understand how much demand there is for the specific benefits you’re offering.
Second, you’ll need to understand shifts in the data to determine the average size of your market. To do this, consider how demand for particular products and services can fluctuate according to the following three factors:
Availability—things in short supply usually experience increased demand. For example, fuel shortages prompt consumers to hoard gas.
Season—some products and services experience demand during certain times of the year. For example, people only tend to search for chocolate bunnies during the run-up to Easter.
Economic and natural events—unexpected downturns or natural disasters impact the popularity of certain products and services. For example, the demand for toilet paper skyrocketed during the initial phase of the Coronavirus pandemic.
Luther defines market share as the percentage of a target market’s total sales generated by a business. He argues that your business should aim to acquire at least 30 to 50% of your target market to guarantee long-term profits. If you acquire less than 30% of the market, you’re unlikely to make enough revenue to get ahead of your competition and maintain your position. If you attempt to acquire more than 50% of the market, your costs to achieve this may outweigh the amount of profit you can make.
(Shortform note: It’s difficult to confirm whether acquiring 30 to 50% market share guarantees long-term profits. This is because, as Luther states, these profits depend on the size of the market. They also depend on the production cost of your product or service and the price you charge for it. For example, your product costs $10 to produce and your market size totals 1,000 customers. If you price your product at $15, a 30% share won’t generate high profits. On the other hand, if you price your product at $500, you’ll generate substantial profits. We’ll delve deeper into this topic at the end of this section.)
Luther explains that if you acquire at least a 30% market share, you’ll benefit from reduced costs that strengthen your position in the market. This is because business costs fluctuate in proportion to the volume of products and services produced—the more you produce to fulfill customer demand, the more resources you purchase in bulk, and the less you pay per unit.
This results in savings that you can allocate toward improving business operations—which means you can provide better-quality products and services and more effective customer service than the competition. These savings also mean that you can afford to charge lower prices for your products and services, because they reduce your reliance on profits to sustain your business.
(Shortform note: There are multiple ways to measure your market share. For instance, you could measure your share based on how many customers you serve, or based on your revenue compared to the total sales in your market segment. The calculation we offer below is one of the most useful and straightforward ways to calculate market share.)
Calculate your current market share by dividing how many customers you serve in this market by the total number of customers in the market (the market size figure you calculated above). Then multiply the result by 100.
For example, the market size for your tooth whitening product is 100,000. You serve 1,000 customers. You calculate your market share as follows: (1,000 ÷ 100,000) x 100 = 1% market share. This means that your competitors control 99% of your target market.
To acquire 30 to 50% of the market as Luther suggests, figure out the total number of customers you’ll need to serve to achieve this. For example, for your tooth whitening product, 30% of 100,000 = 30,000 customers.
Businesses With Low Market Shares Can Achieve Long-Term Success
Business experts confirm Luther’s argument that businesses with high market shares enjoy many advantages, such as more bargaining power with suppliers, economies of scale, and operational efficiency—resulting in lower costs and higher profits. These profits allow them to outperform the competition and maintain their market position.
However, there is a limit to how low businesses can bring their costs down—hence why Luther advises against acquiring more than 50% of the market. After a certain point, the costs spent on outperforming the competition to acquire market share will outweigh the savings made from acquiring them, resulting in minimal profits.
Unfortunately, it’s simply not possible for every business to acquire high market shares—since each market can only accommodate three high-share businesses (assuming they each hold 33% of the market). Further, many businesses entering large markets won’t have the resources to fulfill customer demand at this level. So, does this mean that they should just give up on their product or service?
According to marketplace studies, even though there is a clear correlation between market size, market share, and profitability, low-share businesses can still achieve long-term success and profitability. However, their success is reliant on the following three conditions:
The market’s growth rate is less than one percent: Low-growth markets benefit from less competition. This creates a more stable environment for businesses to define and protect their positions in the market.
Consumers don’t expect continual upgrades: Markets in which the products or operational processes remain consistent allow low-share businesses to avoid the high costs associated with accommodating innovative trends.
Businesses don’t offer customization or additional services: To keep operational costs to a minimum, low-share businesses focus on delivering standardized products that don’t require subsequent servicing or technical support.
If you don’t have the resources to acquire at least 30% of your intended market as Luther suggests, consider how you can tailor your offer to fit in with these three conditions.
Now that you understand how to calculate your target market’s size and your ideal market share, let’s discuss how these figures fluctuate according to the market’s life cycle and growth rate. Luther argues that understanding the market’s life cycle and growth rate will help you predict two things about the market you intend to enter: First, if demand for your product or service is currently on the rise or in decline. Second, what operational procedures you’ll need to focus on to maximize your profits.
According to Luther, every market moves through three stages that reflect the amount of consumer interest (the market size) in a particular type of product or service: introductory, early growth, and late growth to decline. Let’s explore how entering the market during each of these three stages impacts your venture’s success.
During the introductory stage, a new product or service enters the market. The market size is small since customers are not yet aware of this commodity. Luther argues that businesses that enter the market at this stage benefit from fewer competitors. This gives them the chance to dominate the market as consumer interest grows.
However, there are risks involved since not every new product or service gains enough traction to enter the next stage. According to Luther, businesses should only enter the market during this stage if they can afford to make a loss and have resources to spare for research and development and building customer awareness for new products and services.
The Pros and Cons of Entering the Market During the Introductory Stage
Marketing experts Al Ries and Jack Trout (The 22 Immutable Laws of Marketing) expand on the benefits of entering the market during the introductory stage. They argue that businesses that are first to enter their markets are typically more successful than those that follow, even if the latecomers have better products. Further, these first entrants tend to acquire and hold onto the largest market share throughout the market’s life cycle.
This is due in large part to consumer attachment and perception: When consumers adopt a new product, they become so attached to it that they unconsciously perceive the business that first introduces the product as synonymous with the product itself. For example, people often refer to tissues as Kleenex—because Kleenex was the first brand to offer facial tissues. This form of attachment makes it difficult for latecomers to wrestle customers away from early entrants.
While being the first business to enter a market does offer many advantages, Luther’s right to warn about the costs and risks involved with entering the market at this stage:
No revenue during the development stage: Businesses need to engage in intensive research and development before they can introduce a product or service into the market. This can be a long and costly process, depending on the complexity of the product or service.
High marketing costs: When releasing new products and services, businesses need to focus their marketing efforts on educating customers about the benefits of this new offer to build demand. This requires a great deal of trial and error—for example, testing different communication channels or promotional strategies. During this time, the costs still outweigh the revenue.
High production costs: Since there isn’t sufficient demand at this stage, businesses can’t risk being stuck with a large inventory of stock. Therefore, they need to limit how much they produce which results in higher operational costs—because it costs more to produce small amounts.
There’s no guarantee: Despite all of the resources businesses funnel toward introducing new products, they can’t guarantee that they’ll sell enough to recoup their costs and make a profit.
Once a product or service gains enough traction, it benefits from growing consumer demand—thus, the market size increases. As a result, businesses increase production and the commodity becomes more widely available. Luther argues that companies that wait to enter the market until it’s experiencing a growth rate of five to 25% a year benefit from fewer risks—they save money on research and development because they just need to copy or improve upon the existing commodity.
(Shortform note: Luther suggests that the best time to enter a market is when it’s at a growth rate of five to 25% per year, but he doesn’t elaborate on how to figure out whether your desired market falls within this range. Business experts clarify how to determine the growth rate of a market: First, find the market size for at least two successive time periods—for example, year one and year two. Subtract the market size for year one from year two. Then, divide the result by the market size for year one and multiply by 100 to convert the result to a percentage. For example, if the market size was 100,000 in year one, and 125,000 in year two, you would calculate the growth rate as follows: (125,000 - 100,000) ÷ 125,000 x 100 = 20%.)
However, by this time, customers are already familiar with the businesses that introduced the original commodity. Therefore, Luther argues that businesses entering at this stage can only gain market share by taking customers away from existing competitors. This requires a heavy investment in branding, advertising, and sales.
Latecomers Build Market Share by Appealing to New Customer Groups
Marketing experts clarify why entering the market at this stage requires a heavy investment in branding, advertising, and sales. Once the market moves to the early growth stage, instead of building awareness to create demand, businesses need to convince consumers that their product or service is superior to all other offers in the market.
However, as previously discussed, businesses have a hard time achieving this once consumers begin to associate brand names with products—even if latecomers manage to produce a superior product, consumers will still regard them as inferior to the brand names they’re already familiar with.
Therefore, instead of trying to steal customers away from existing competitors to build market share, new entrants should focus on appealing to customer groups that have not yet purchased a version of the product. Common ways to achieve this include:
Modifying the offer to fulfill different customer needs: For example, including additional features to accommodate specialized needs.
Marketing the offer through different communication channels: For example, taking advantage of mass marketing to reach a wider audience.
Developing different customer relationships: For example, offering extra after-sales support or content-co-creation facilities.
Adapting the price of the offer to accommodate different budgets: For example, offering a simplified, cheaper version of the product.
By this point, the product or service is widely available and the leading competitors have established themselves. Many consumers have bought a version of the commodity and are now attracted by innovative alternatives that offer new and improved features—for example, when people stopped buying cassettes in favor of CDs. As a result, the market size reaches its peak and then begins to shrink.
Luther argues that businesses should avoid entering the market at this stage due to two major obstacles: The market is saturated with competitors that are too strong to outmaneuver—because they’ve optimized business operations and benefit from lower costs—and it’s too difficult to revive consumer interest.
(Shortform note: Business experts expand on what Luther says about shrinking markets by explaining that, by this point, established businesses have already given up on increasing their profits in the existing market. Instead of attempting to fulfill customer needs, they’re more focused on reducing their inventory as quickly as possible so that they can allocate their resources toward releasing the next big thing. One way they achieve this is by slashing their prices so low that it’s impossible for new competitors to outmatch them.) Therefore, as Luther argues, it won’t be profitable to enter the market at this stage.
Up until now, we’ve discussed how consumer interest impacts the success of your product or service. We’ll now explore how other businesses offering similar benefits to yours impact your market share and profits. Understanding how many competitors you have and what their capabilities are will help you determine effective strategies to outmatch them.
Luther argues that the ideal market has few competitors providing adequate substitutions for your product or service—this commonly occurs during the introductory stage of the market’s life cycle. During this early stage, potential customers are more likely to buy from you because they have less choice. This makes it easier for you to gain market share, drive your costs down, and strengthen your position before other competitors begin to invade the market. Further, because they can’t find suitable alternatives, customers automatically perceive your product or service as more valuable. This lets you raise prices, increase your profits, and further strengthen your hold over the market.
(Shortform note: How can you come up with ideas for a unique product or service that has no substitutions? In Blue Ocean Strategy, W. Chan Kim and Renée Mauborgne argue that you can achieve this by examining how you can pursue both differentiation (raising standards and creating new features) and low costs (eliminating unnecessary features and cutting costs). For example, Cirque du Soleil achieved this by adding elements of theater and cutting animal acts from their performances. These simple changes helped them to redefine circus entertainment, appeal to new customer groups, bypass competition, and generate billions of dollars in revenue.)
Luther suggests that you can create these ideal conditions by finding segments in the market that are in the introductory life cycle stage. This involves splitting your target market into different groups of customers and honing in on needs that are yet to be met.
Let’s explore how this would work for your tooth whitening product. You originally decided that your target market includes eco-friendly online consumers who want whiter teeth. However, because many competitors already cater to this market, your chances of gaining market share with your current product are slim. To counter this, you further refine your target market to include customers who want a flavored version of the product. Since this is something that other competitors don’t provide, you instantly increase your odds of success.
(Shortform note: Marketing experts expand on this by suggesting four ways to approach market segmentation: demographic, geographic, psychographic, and behavioral. Each way offers its own unique purpose—you’ll need to consider which way(s) will help you to meet your specific business goals. For example, there may be little value in segmenting customers according to their geographic location if you intend to sell and distribute your products and services solely through online channels.)
Further, Luther argues that the only way to maintain your share of the market and subsequent profits is to introduce different products and services into multiple market segments. This puts you in a position to maintain a large overall market share even when customer interest declines for some of your products and services.
For example, you enter the dental hygiene market by targeting the flavored tooth whitening segment and acquire a 25% share. You also introduce a new product into a different segment of the market—such as bamboo toothbrushes for the eco-friendly toothbrush segment—and acquire a 15% share of that segment. Over time, interest in your original product wanes, and your share of that segment drops to 20%. However, your second product maintains its position leaving you with a total of 35% market share.
(Shortform note: Business experts offer additional insights into why you should cater to multiple market segments: It attracts a wider range of consumers and further promotes awareness of your brand. This increases your overall sales and provides financial stability even when faced with demand fluctuations—resulting in a secure position that allows you to compete more strongly in your industry. However, while this sounds good in theory, many companies have tried and failed to cater to different segments. (For example, did you know that Coca-Cola began a wine business in 1977?) You can avoid these pitfalls and increase your chances of success by analyzing the variables covered in this guide for each new market segment you intend to target.)
While it would be ideal to find a market with few competitors, your ideal market may already be saturated with competitors. In this case, it’s possible to outmatch those competitors who have low market shares and inadequate resources by attempting to better them. Luther suggests that you can achieve this in four ways:
How to Analyze and Improve Upon the Competition
Business experts offer complementary advice to help you apply Luther’s four methods: Seek out your competitors’ strengths and weaknesses. They suggest four ways to learn more about the competition so that you can generate ideas to outmatch them:
Attend professional conferences and trade shows: Visit competitors’ booths to see what they offer and how they interact with customers.
Analyze their website and SEO strategy: In addition to visiting competitors’ websites, use SEO tools to analyze the keywords and Adwords they’re buying, their site traffic, and website ranking.
Examine their social media presence: Find out what platform they use, what type of content they post and how often they share it, how many followers they have, and how responsive they are to customer queries and concerns.
Sign up for their newsletter: This will give you in-depth knowledge of their email marketing strategy—what kind of content they send and how often.
Use this information to refine your product or service until it outperforms what’s currently on the market. Here are some examples of how this information complements Luther’s methods:
Your product or service: If a competitor’s customers request specific upgrades or features, include these upgrades and features in your product or service.
Your marketing: Differentiate the benefits that your product or service offers and make use of endorsements and free trials to provoke a more positive response.
Your costs: If your competitor’s customers aren’t using some of the existing product’s features, remove them from your product to reduce your costs.
Your customer service: If your competitor is slow to respond to customer concerns on social media, plan ways to strengthen your own social media approach.
However, Luther argues, there isn’t much point in going up against competitors that already dominate the market, because their position will be too strong to compete against—they’ll have the advantage of a favorable cost structure and will have the resources to quickly outmatch any strategies you use to gain market share.
(Shortform note: Luther implies that dominant competitors have more resources than you, therefore, you shouldn’t attempt to outmatch them. However, your chances of success aren’t as bad as he makes out. Some businesses use their resource limitations to inspire innovations that outperform strong competitors. For example, Southwest Airlines used its resource constraints to reposition its offering, differentiate itself from competitors, and become one of the most profitable airlines in the industry—proving that it is possible to go up against dominant competitors and succeed.)
Therefore, instead of attempting to outmatch dominant competitors, Luther suggests that you should use marketing strategies to differentiate yourself from the competition and establish your own unique position in the market. This involves marketing both your business and your products and services in a way that differs from your competitors and aligns with what customers most want. Luther identifies two ways to achieve this: Define your brand’s personality and reinforce your marketing message. Let’s explore each of these methods in detail.
Luther suggests that you should consider how you want your customers to perceive your business and what will influence them to choose you over competitors and remain loyal to you. For example, if you intend to target eco-friendly consumers, you can appeal to them by ensuring that all of your operational procedures are as environmentally friendly as possible.
Then, look for ways to bolster customer perception by engaging in activities that will garner positive publicity. For example, eco-friendly consumers are more likely to buy from and remain loyal to companies that publicly show their support for environmental programs and sustainability projects.
(Shortform note: Marketing professor Byron Sharp (How Brands Grow) argues that the majority of consumers don’t care enough about branding for it to impact their purchasing decisions. This is due to over-saturated markets: There are simply too many brands trying to distinguish themselves and appeal to consumers. To cope with this influx of information, consumers completely filter out all of the brand messaging they encounter. So, even if you design your brand to appeal to your target market and garner positive publicity, it’s more than likely that your message won’t get past your audience’s mental filter.)
For each of your products and services, Luther argues that your marketing message should focus on the unique benefits that you’re offering in a way that appeals to your target market. This requires engaging in demographic and psychographic research to figure out what your potential customers’ interests and priorities are. Aligning your message in this way ensures two things: that your target audience will pay attention to your marketing message, and that they’ll immediately understand why your offer is superior to others in the market.
Once you’ve defined your marketing message, you should target the media that your potential customers engage with the most often, and ensure that all of your marketing materials reinforce the same benefits. According to Luther, reinforcing your message this way guarantees that customers will automatically associate your product or service with the fulfillment of their needs—thus forgetting your competitors. (Shortform note: While reinforcing your marketing message will make it more memorable, one drawback is that you’ll find it difficult to reposition or reframe the benefits—something you’ll need to do if you intend to introduce your offer into different markets.)
Advice on Appealing to Your Target Market
Marketing experts expand on Luther’s advice to target your marketing message with a more in-depth explanation of what influences consumer decisions. They identify four influential factors to help you better understand and appeal to your target market.
Individual factors: This includes a person’s occupation, age, economic status, lifestyle, personality, and preferences.
Psychological factors: This includes their drive to meet a certain emotional need, such as comfort, how susceptible they are to external influence, how skilled and knowledgeable they are, their attitudes and beliefs, and their prior experience with similar products and services.
Social factors: This includes what their culture, social class, religion, family, or the type of people they want to associate with think about the products and services in question.
Cognitive factors: This includes how willing they are to expose themselves to new and relevant information.
Once you understand what influences your potential customers, the next step is to craft a marketing message that provokes a feeling of need. The authors of Positioning suggest that you can achieve this by over-simplifying the value you intend to offer so that your customers can immediately understand the benefits they’ll receive. For example, if you sell stylish office wear, focus on a simple benefit your customers get from buying your designs—such as colleagues complimenting them, perceiving them as capable, and automatically respecting them more.
Finally, management experts suggest tracking, collecting, and integrating data—such as demographic, psychographic, or clickstream—about potential customers and the circumstances in which they make purchases of similar products and services. This will help you test how effective your marketing message is and will narrow down what media to target.
Now that we’ve discussed the three main variables that impact the success of your product or service, let’s explore how to use this information to complete your marketing plan.
Once you’ve completed the research to determine how each of these variables will affect your venture’s success, you’ll have a good idea about which market you should target and the strategies you need to use to beat the competition. Luther suggests that you should test these ideas by calculating the profitability of different pricing, budgeting, and sales strategies for your product or service—the published edition of The Marketing Plan provides access to online software to help you achieve this.
(Shortform note: In addition to using Luther’s software to calculate the profitability of different strategies, consider developing prototypes of each strategy to test consumer responses. According to management experts, prototypes are the most effective way to gather real-world data that tests the viability of different strategies. For example, use your current email database to test how your existing customers respond to different pricing or sales methods for potential products and services.)
After you’ve tested your ideas, you’ll have enough information to complete your marketing plan. According to Luther, an effective marketing plan should include the following three components:
Advice on Setting Goals, Strategies, and Objectives
While Luther asserts that your marketing plan should include long-term goals, strategies, and objectives, he doesn’t provide practical advice on how to come up with them. Therefore, we’ve adapted an effective goal-setting process from Measure What Matters to help you define your business goals and create the necessary strategies and objectives to achieve them.
Define your company’s overall goal: This is your vision of where you want to be in the next five years. It needs to be clearly defined and action-oriented. For example, acquire 35% of the market and generate annual revenue of $500,000.
Identify individual objectives: Every individual within your various departments and teams needs to identify their objectives. The objectives they define for themselves must align with the company’s main objective. For example, your sales colleague might set an objective to acquire X number of customers by the end of the year.
Define your key results: Your key results must be measurable sub-goals towards achieving your final vision. They need to include specific results and deadlines. To identify your key results, ask yourself, “What steps do I need to complete to reach my objective?” For example, your sales colleague’s key results might be to increase online sales by five percent every month, increase offline sales by 10% every month, and so on.
Regularly check progress: Checking the progress of each key result provides valuable insights that will help you to stay on track—it helps you to assess the effectiveness of your current strategy and provides an opportunity to revise or update your key results. The frequency of your check-ins depends on the length of time needed to achieve each key result.
Using this process to define both your long-term and short-term goals will ensure that all of your team members are:
Focused on one final objective
Aligned towards achieving this objective
Accountable for the progress they make towards achieving this objective
Create a brief overview of what you’re selling and to whom, the size of your target market, and your market share goal.
Think of one product or service you intend to profit from. What specific benefits does it offer?
What is the specific market you’re targeting? Narrow this down to a group of customers that rely on a common pool of competitors and distribution channels. (For example, people who want to buy designer jewelry on online auction sites.)
What is the size of your target market?
Consider your target market’s life cycle stage, your current resources, and the strategies you’ll need to employ to acquire market share. What share of the market can you realistically aim to acquire?
Consider your competitors and the strategies you can use to outmatch them.
Describe one product or service you intend to profit from and your target market. Write down the name of at least one of your competitors.
Why should customers choose to buy from you? How is your product or service currently better than what your competitor is offering?
Describe at least one thing you can improve to gain a competitive advantage. (According to Luther, there are four ways to be better than the competition: provide a better offer, pretend to provide a better offer, provide a cheaper offer, or provide better customer service.)
Consider how you want consumers to perceive your business. Write down one way that you can differentiate your brand or your marketing message to influence consumers to choose you over the competition.