NEWS RELEASE June 2023
AWE Market Research Should Use the Cost Accounting Format
The Air, Water, Energy product and services market is really an aggregation of 1 million niches each with an average of 10 sub niches. There are variations in the value proposition in each sub-niche. In our Insights last week, we analyzed the Flowserve-Velan acquisition. It created the world’s second largest valve company but with only a 1% market share. The EBITDA is only 11% compared to IDEX, which has less than 0.1% market share but 30% EBITDA. This is not to underestimate the importance of market share but to show that share in a specific niche is the relevant statistic.
If the market is an aggregation of niches, then the market research and forecasting should reflect this reality. Ideally the Flowserve news release instead of citing the 2nd largest industry ranking should have stated that the acquisition creates the opportunity to gain 20% market share and 30% EBITDA in 400 new niches and 4000 sub-niches.
All would agree that maximum profits come from understanding and tracking each cost niche. Where cost of inventory fluctuates highly developed factors such as FIFO are utilized. Machine operators are involved in periodic meetings with management to review labor costs for each step. The extensive tracking of cost data is the basis for reliable future niche projections.
The value of this approach for sales is understood. The Mcilvaine Company is routinely hired by companies or management consultants to provide millions of statistics on past and future markets in narrow areas. Based on 50 years of experience in AWE, Mcilvaine can create better guesstimates than others. But this is not at an accuracy level that would make the cost accountant comfortable.
The good news is that the same quality level for sales statistics is now available in the Mcilvaine Most Profitable Market program. We have published a number of news releases on the program and the organized gathering of the facts followed by application of the relevant factors.
The relevant statistics in each niche are illustrated in the following niche template.
The template approach can be used to provide the level of detail typically found in cost accounting and one which provides the foundation of business strategy.
An example can be created from the coverage of cleanroom filters in California for a company with multiple products.
The market involves the local salesman, regional manager, product manager, and large accounts manager. Here is the assignment in number of days to be spent in the next 12 months by the local salesman.
This budget provides a specific guide for the salesman and is accompanied by the related order values in $ millions. The value propositions in each sub-niche are also provided. With this level of detail, the local salesman is empowered to recommend target changes and provide new facts and factors as he acquires them.
He needs to generate the equivalent of 100 sub niches in sales volume. But he is only contributing 5 to 50% of the sub niche sales effort. So, in actual practice he needs to be contributing to hundreds of sub niches.
Sales promotional expenses including advertising and exhibiting can be determined the same way. The template allows $ 100,000 of promotional expense per niche. California represents 3% of the market or $30 million. So, the promotional budget would be $ 1.5 million.
The advertising and exhibition investment should ensure the validation of the value propositions for the sub-niches. The California market will benefit from some combination of local, national, and international promotion. It is likely that $1 million would be allocated to national and international promotion and only $500,000 to strictly local promotion. The marketing department will have the benefit from this regional analysis as well as versions based on industry and product. In addition, management will be looking to rearrange sub-niches into more profitable niches. Packaging filters with monitoring systems which will determine filter performance and automatically order replacements when needed would be a way to increase EBITDA and revenues. So, hybrid niches using unique sub niche combinations will need to be appropriately promoted.
With this approach sales and marketing will have the numbers on which to base small decisions as well as general strategy
It is all part of the Most Profitable Market program available from the Mcilvaine Company. Details are found at www.mcilvainecompany.com