What is the measure of worth to the firm for this business concept?

Various measures of business stake can be used to estimate the worth of a successful venture. It is desirable to estimate the earnings and prepare a venture costs and revenue statement (Proforma). At the early phase of a venture, sufficient information for such a credible assessment is usually not available.

At a minimum, the feasible sales potential in units sold either in total or annually should be estimated. The Functional Potential is the total market where the product has both fitness for use and a price range that could be acceptable. The Opportunity is defined as the probable market after adjustment for share and penetration.

What are the specific applications for the products and services?

The evaluation of market potential focuses on specific applications into which the product or service will be sold. These "applications" should represent separate opportunities or markets for the business. In some cases, the applications can be different major customers or separate industries.

Since the total opportunity will be assessed based on the sum of the opportunities of the applications, they should be selected to be as independent as possible.

For each application the customer should be identified, with a description of his use.

What customer benefits will be derived from the products and services?

The value of the product to the customer is determined by the benefits that are derived from the product's use. The benefits focus on the specific applications for the product in the users' environment and the nature of potential competition.

Special attention should be made for needed changes in practice in order to use the product. Organizations use products in specific ways. If those procedures must be changed in order to use the product, the benefits that can be derived will be limited.

What are the existing competitive products and services which our product offering (products and services) will replace?

There is almost always some type of competition, either potential or existing, for the product offering. Both in-kind and functional competition should be considered. In particular, functional competition should be examined closely.

What should be the price of the product offering (products and services)?

Price range often limits the acceptability of a product. Premium products are generally limited to a small segment of a larger application segment. Estimate the price in terms of existing and potential competition.

What must be the maximum cost for the product to make the venture profitable?

What should be the gross earnings (contribution) of the product offering (products and services)? The test of potential financial worth of the venture is "acceptable" earnings. The minimum measure of earnings is the Contribution Margin, which is the difference between the target sales price and the variable cost. Contribution Margin does not consider allocated fixed costs or overhead.

Contribution Margins of greater than 50% are desirable.

Contribution Margins of less than 30% are not desirable.

The highest target variable costs are calculated based on the targeted price and the minimum contribution margin.

Contribution = (Targeted Price - Variable Cost)/Targeted Price Margin

Variable Cost = (1 - Contribution Margin) X (Targeted Price)

What fraction of all applications can use these products and services?

Fitness for use includes limitations due to price, benefits, and use condition. In particular, focus on needed changes in practice and limited benefits due to those changes. Required changes in practice, including changes in source of supply, can greatly change the usefulness of the product and the demand for its use. Will the products and services do what they are supposed to do?

What existing product, service, or use can be used as an estimate of the demand for the products and services?

For each application, a number of "models" or "analogs" need to be identified that will be used to estimate the market potential. These analogs should be based on similar uses or market segments. The closer the analogs are to the new product concept, the more reliable and credible the results will be.

What are the sources of market information that you can use to estimate the potential?

For each analog in each application, sources of market and/or population information must be identified. These include: government data, such as the population census and the census of manufacturers; secondary sources such as Predicasts, multi-client studies and Dialog sources; internal information; and specially commissioned studies.

What is the functional potential for each application?

The functional potential represents the total market where the product has both fitness for use and a price range that would be acceptable. This is evaluated for each independent application based on the market analog. The present time frame is usually used for the evaluation. It is understood that the market potential will be realized at an unspecified future time.

How is the opportunity for the firm to be determined?

Usually an estimate of the expected sales adjusted for market share and the rate of penetration is used as the first estimate of the market value. If the information available for the business concept is insufficient for a sales forecast, other estimates can be used.

At a minimum, the functional potential can be used; but, a better measure is usually desired.

What share of each application will our products obtain?

Usually no product is without competition. The competition may come from an incumbent or from new entries. For the calculation of opportunity, the share relates to the functional application previously determined. Fitness for use estimates have already been applied to the potential and, therefore, should not be included here.

Estimates are usually made either from comparative data or from market position. Historically, shares have tended to be stable. The shares from markets with two competitors tend to be 75% and 25%. With three competitors the shares tend to be 65%, 25%, and 10%. One need only forecast the number of competitors and the position to estimate the market share. 1

When will the business be commercialized?

Timing of commercialization is extremely difficult for new concepts. Timing of commercialization is critical for both developing a realistic estimate of stake and for developing a plan.

During the concept identification phase of venture analysis, the earliest feasible commercialization date is usually used. It should be recognized that this time frame is almost always optimistic. More conservative dates are developed later as more information becomes available.

If the timing of the venture is tied to outside issues, such as a specific automotive model year or a government contract date, that date should be given with appropriate citation indicating that the date is relatively fixed.

How fast will the product penetrate the market?

Most products require some period of time to penetrate the market. In some cases the penetration rate is determined by the contractual arrangement, such as in supplying a specific automobile model. In most cases, the penetration is dictated by market forces and production limitation.

The penetration of a new product can be estimated by comparison with other similar products. Analysis of a large number of products has indicated some consistent behavior which can be used as a first order estimate.2 Below are listed the estimated sales or shipments relative to the first year sales potential. These values should be multiplied by the first year sales potential in units or pounds. 3

What is the sales opportunity for the product by application?

For each application, the opportunity should be estimated. This includes applying the estimate of share and penetration to the potential estimates. Notice that each application may be commercialized at different times. Note the date of commercialization for each application.

Opportunity =

Functional Potential

x Expected Share

x Expected Penetration

What is the likelihood of success by application?

The commercialization of new ventures is not without risk. Estimate the likelihood that each application can be commercialized at or within the time frame and at or above the estimated opportunity.

Generally, the estimation is done in parts: (1) the likelihood of developing the product; (2) the likelihood of market acceptance if it is developed; (3) the likelihood of obtaining adequate management support; (4) the likelihood of meeting customers expectations within cost; and (5) the likelihood of the market responding as expected given that the product meets targeted specifications.

These probability estimates are usually considered to be independent. The collective probability is the product of these probabilities. While each of these factors may be likely to take place, the collective probability for new ventures is rarely higher than 50%4.

What is the total risk adjusted opportunity for this business.

The business opportunity is estimated by combining the likelihood of success and the application opportunity and summing together the application opportunity for each appropriate year.

Single measures of business opportunity are usually selected. These typically are the fifth and tenth year after commercialization.

Risk Adjusted Opportunity

= Application Opportunity

X Likelihood of Success