Assessing Market Risk

A crucial part of strategic marketing planning is the assessment of risk.

Marketing risk can be broken down into five sub-components:

  1.  Product Category Risk – Is your chosen product category large enough to support your business and to provide sufficient earnings?  Many of the businesses pitching on Dragon’s Den are rejected for this very reason.  This risk is high for novel products and low for existing product categories.
  2. Market Existence Risk – Is your target market smaller than planned?  I have a business presentation based on a company supplying three Michelin star catering for private jets; a firm which is yet to make a profit.  It is clear that in setting up the business, the proprietor overestimated the number of potential customers.
  3. Sales Volume Risk – Are sales lower than planned?  This risk is higher if you make assumptions about your customers and competition. It is lower if you carry out appropriately detailed market research.  Beware that you are not entering a ‘fad’ market or product category.  A fad can show massive market and sales growth which can disappear almost overnight.
  4. Forecast Risks – The market grows slower than forecast.  Expected growth fails to appear.  Orders are In excess of production expectations.  The latter risk is currently affecting Tesla who have obtained orders far in excess of their planned production levels.  This has led to a significant drop in tesla’s share price as consumers are not receiving vehicles on time.  Having too many orders can be as bad as having too few especially if you do not receive payment for stock made significantly after it has been produced.
  5. Pricing Risk – Pricing levels in the market are lower than planned.  This obviously affects margins, return on investment and profitability.

If you develop a strong marketing strategy and plan, there is a high probability of delivering your desired market share.  A weak strategy and plan will result in weak market performance.

Marketing risk can be placed under two headings; market risk and profit risk.

There are five market risk criteria:

  1. Target Market Risk –  This is where your strategy only works with some of your target customer segment.  It may not work at all.  This risk is higher for heterogeneous groups and lower for homogenous groups.
  2. Proposition Risk – Your offer doesn’t appeal to some or all of the target customer group.  This is higher if you make the same offer to all customers; lower if a specific offer is made to each customer segment.
  3. SWOT Risks – This risk occurs when you do not leverage your strengths; or you ignore threats; or you don’t improve weaknesses; or you fail to act on opportunities.
  4. Uniqueness Risk – Your strategy fails because you are competing head on with other market suppliers and your offer to consumers is identical to that of your competitors.
  5. Future Risk – Your strategy fails because prior to its launch a major change has occurred in the marketplace.

There are also five criteria in measuring Profit Risk:

  1.  Profit Pool Risk – Profits are lower than planned because of competitors reaction to your strategy.  Often, higher profitability comes at the expense of your competitors and s they react to your strategy.  This risk is higher if your market is mature and static and lower if there is room for market growth.
  2. Profit Sources Risk – Profit is less than planned once again to competitors reacting to your strategy.  This risk is lower if there is growth in the overall profit pool of the market.  It is higher if the source of profits comes from taking customers from your competitors.
  3. Competitor Impact Risk – This occurs where there is a single large competitor in your market and they react to defend their large market share.  This risk is high if your strategy affects that large competitor directly and low if the threat is spread over numerous competitors.
  4. Internal Gross Margin Risk – Profits are reduced because production costs are higher than planned or the costs of providing services are higher than planned.  For example, the Brexit referendum caused a significant drop in the value of the pound compared to the US dollar.  Companies producing goods which rely on raw materials traded in dollars suddenly faced far higher raw material prices yet they were reluctant to pass those cost increases on to consumers.  The result was lower profit margins and less cash for productivity investment.
  5. Other Cost Risks – The costs of promotion, customer service and other ancillary functions are higher than planned and therefore affect profitability.

The risk of not delivering the required level of profit margin is highest when profit margins in the market are shrinking,  your strategy impacts a single powerful competitor and when you make optimistic cost assumptions.

The risk of not obtaining required market share is highest when you treat customers as identical and you do not develop discreet offers to clearly identifiable market segments.

Clearly, if you make plans based solely on assumptions you face higher risk than if you carry out appropriate and robust market research and strategic planning.