The hardest part of any journey is usually the beginning. Where and how do you start? After gaining some business experience, which usually means failing or getting “beaten up” by the marketplace, those with the ability to learn discover that you should start with a clear goal toward which everyone in your organization can aim.
Why are goals so important?
As an ancient Chinese philosopher, Lao Tzu once wrote, “Every thousand mile journey begins with a single step.” If there is no goal, the business may step off in the wrong direction. When that happens, the business is likely to find itself far away from where it wants to be. Therefore, before we go further, it is useful to list some of the important benefits of having a goal. Goals do the following for your business:
- Focus. Provide a common target toward which all your resources (human and financial) can aim.
- Coordinate. Enable company personnel to coordinate their efforts to reach the destination.
- Measure. Allow everyone in the company to (1) dynamically determine their position relative to the goal and (2) take corrective action to get back on course.
What’s missing from the goals of too many companies?
After 45 years of analyzing and creating marketing plans for companies of all sizes, I find that too many companies do not have the goals they need to achieve their potential. I often start by asking company decision makers, “What’s your goal?” Believe or not, the most common answers are, “Sell as much as possible” or “Make as much as possible.” What’s wrong with that? Well, while these goals may sound good, they do not give your personnel (1) a useful target at which to aim or (2) a benchmark against which to measure performance. The lazy ones will leave at closing time (or before) because they sold as much as they could within their comfort zone, and the workaholics will work until they are “burned out” because they can always sell more.
What kind of goals do businesses need to put in place?
To solve these problems, businesses need to make sure that the goals they put in place are measurable and challenging. Measurable goals give everyone in the company a common target toward which they can aim and from which they can measure their progress. Challenging goals keep everyone interested, help to avoid boredom, and motivate people to reach their potential. If too easy, goals will bore and de-motivate people. If too difficult, goals will frustrate and disappoint employees that find it nearly impossible to achieve them.
What are common goal setting methods?
There are many different types of goal setting methods. The figure below describes some of them.
Three are most commonly employed by businesses. They are as follows and represented in the first four boxes in the figure above (one of them has two variations).
- Market Potential Method. Measure the market potential, account for the limiting factors that will keep you from realizing the entire potential, and determine the market penetration you are likely to achieve.
- Historic Method. Look at last year’s sales (or the sales of a similar business if you are just starting out) and apply the rate at which your market is growing.
- Full Time Equivalent (FTE) Method. Count how many full time equivalent people are working in your business. Multiply that number by your breakeven point per person. This gives you a guesstimate of your breakeven point. Add a profit target to determine your measurable goal.
Because it is forward-looking and requires businesses to learn more about what is “going on” in their marketplace, the Market Potential method is the best. However, it is also the most difficult.
Market Potential Method
To employ the market potential method, you typically follow these steps.
- Define your market. Common ways of defining a market are by product, customer type, industry, geography, or some combination of these. Defining your market is not trivial because you can define it broadly or narrowly, and sometimes you will define it based on the numbers that are available. For example, if you are selling Greek yogurt, you can define your market very broadly as the health food market. You can narrow it down to the yogurt market, or you can narrow it further to the Greek yogurt segment, or even further to the non-fat Greek yogurt market. You,may want to define it more broadly if you feel that you can acquire customers from the larger segment, or more narrowly if you want to be super conservative in your estimates or more focused with your marketing.
- Measure the size of the market. Once defined, you measure the size of the market – often in units and dollars. If you are lucky, you can find the number quickly using a search engine. If not so lucky, you may need to estimate the number of people in the market; multiply that figure by the average consumption of the product in a year; and multiply that by the average price.
- Add Adjustments. Since most markets are dynamic, you typically have to apply rates of expansion (or contraction) to the static market potential you determined in step 2. If you plan to go after an additional market, you need to add that. And, if you plan to take business away from competitors (which is usually not easy), you should factor that into your market potential and plan.
- Identify and Quantify the Limiting Factors. There are factors that will inhibit your company’s ability to realize the entire market potential. The three biggest factors are (1) Competition, (2) Limited Resources, and (3) Government regulations. Others include: inexperienced management team, pioneering a new market, or employing an unproven technology or method. Identifying the limiting factors is usuallynot that difficult, but quantifying them is another story. Again, if you are lucky, you can find reliable data via a search engine. If you are not, you may have a more tedious or costly job ahead. If your competitors are large publically-traded companies, getting their sales and market share data will be relatively easy. If they are smaller or privately-held, good luck.
- Determine Market Penetration Goal. You subtract the effect of the limiting factors from the market potential (with adjustments) to determine the market penetration available to you. This becomes a reasonable guestimate of your measurable goal.
Since it looks at past performance, the historic method is not the optimal way to set a measurable goal. However, it is one of the most popular methods because it is easier to implement than the Market Potential method. Employing this method typically involves the following steps.
- Define the market and determine the market potential. As with the market potential method, you still should learn as much as you can about your marketplace by defining your market and determining its potential.
- Past sales. If past sales follow a stable curve, you can use last year’s sales. If past sales do not follow a stable curve, you can draw a smooth curve by doing a regression analysis, or you can use the “quicker and dirtier” method of taking an average of the past several year’s sales.
- Apply growth rate. You multiply the past sales (in step two) by the growth rate of the market you defined. The growth rate is typically found by doing market research. You can often find a reliable source, such as the Wall Street Journal, that has done the research for you. You should site that source in your market plan. The result becomes your measurable goal.
The FTE method is based on knowing (or calculating) the number of “full time equivalent” people that work for your company. For example, if you have 5 full-time people (including yourself) and 2 half-time employees, you have 6 full-time equivalent people. As with the historical method, the FTE method is not forward looking.
- Define the market and determine the market potential. As with both methods above, you still should learn as much as you can about your marketplace by defining your market and determining its potential.
- Determine the number of FTEs in your company. Count the people on your payroll that are full-time. Add to that the full-time equivalent value of the part-time employees.
- Know or (calculate over time) your breakeven point per person. Good managers should know the breakeven point per person since it gives them a good indication of the additional sales required to justify the costs associated with the hiring of an additional person. If you do not know this figure for your company or if you are a start-up, a good “rule of thumb” is to use $100,000 since it is a guesstimate of the breakeven point per person averaged over companies of all sizes. I have used it for years, and it works much better than you might think. Keep your eyes open for revised numbers over time.
- Determine breakeven. You multiply the number of FTEs in step 2 by the breakeven point per person in step 3 to compute an estimate of your breakeven point.
- Profit target. You add your profit target, which could be based on either logic or wishful thinking, and add that to the breakeven point calculated in step 4. The result becomes your measurable goal.
If you want to feel more comfortable about your measurable goal, you can try all three methods and see if they agree. If they do, you will feel more secure about the goal you have set. Whatever method you use, you need to develop a measurable goal and provide supporting logic to sell it to others. The goal will provide a target at which your company can (1) aim and focus its resources and (2) measure its performance.
What happens next?
After you have set your measurable goal, you determine the sales quotas of all the people that will be selling for your company. In the simplest case, you simply divide the company goal by the number of sales people you have. The sum total of sales quotas should at least equal your measurable goal and sales forecast. Most savvy executives set the quotas a little higher. They figure that if they move the carrot out a bit further, nobody will complain if sales are higher than planned. More importantly, the sales needed for the company’s success are more likely to be achieved if the individual sales quotas are set a little higher. This provides some insurance if one (or more) of the sales people fall short of expectations.
Market plan implementation
Once your measurable, challenging goal is in place, you can devise an optimal mix of marketing strategies to hit your target. All throughout the planning horizon (usually a year for most companies), a marketing information system helps you to measure your performance and take any necessary corrective action to keep you on the right path. Usually corrective action involves tweaking the strategies and handling unexpected problems that spring up a long the way.
The first step starts your successful journey
A successful marketing plan starts with the right goal. If you are able develop a measurable and challenging goal that helps you realize your potential, your thousand mile journey will take you to the right place. As Sun Tzu, another ancient Chinese philosopher, once said, “All battles are won before they are fought.” To win the battle, you have to craft a really good plan. And good plans begin with measurable, challenging, and achievable goals. Best of luck.