In order for a business to be in business they must have a product or service. This sounds easy on the surface. But if that was indeed the case then the success rate of start-up businesses would be through the roof. On the contrary, the success rate of start-up businesses is horrible.
Many business experts will blame the failure of a start-up business on lack of funding, no marketing, or lack of organization. The fact of the matter is start-up businesses, for the most part, go out of business because they offer products and services that are not in demand. Or there is no market for the products or services they offered.
The Market Explained
If you have ever watched the TV show Shark Tank, then you know that one of the most common questions that the potential investors ask is, “Who is your market?” The reason why they ask this question is because a company can have the greatest product or service in the world, but if no one wants their product or service, then the company will not make any money.
The market refers to the potential customers for a product. A couple of common questions that you will hear investors ask are:
- Who is in the market (looking or searching) for your product or service?
- Who is your target market (ideal customer)?
- Who is your ideal customer (market)?
All of these questions all refer to potential customers of a product or service. These questions are the most important questions that entrepreneurs or businesses seeking money must answer in order the secure financing. If entrepreneurs or businesses seeking money cannot answer “the market” question satisfactorily, then investors will not invest. This means that entrepreneurs and businesses must have market data to support the fact that there is a market for their products and services.
This market data can be in the form of market surveys, product surveys, customer surveys, or actual sales. The data could be sales data from other companies that sell similar products or services.
An Explanation Of Products And Services That Are Needed Or Not Needed
Why is this important? Well basically it all boils down to sales. If a company has products or services that are needed, then the chance of customers not buying on a consistent basis is not likely. On the other hand, if a company offers products and services that are not needed, then the chance of customers not buying is more likely.
Products or Services That Are Needed = Customers more likely to buy consistently
Products or Services That Are Not Needed = Customers less likely to buy consistently
Important Note: Buying consistently is referring to customer buying trends when they are in bad financial situation. For instance the recession and unemployment situation in the USA has forced people to budget and prioritize spending. As a result, people are more likely to buy more products and services that they need versus products and services that they do not need. This situation can really adversely affect businesses that offer products or services that are not really needed.
Think about this. When you are going through financial problems what do you cut out of your budget first? You immediately eliminate products or services that you can live without. These products and services that you have just eliminated are products and services that you do not really need. Then you set aside money for the products and services that you absolutely have to have. These are products and services are products and services that are needed.
Obviously, companies that offer products and services that are needed have a bit of an advantage over companies that offer products and services that are not necessary. Why? Because companies that offer products and services that are needed do not have to do a lot of selling. They do not have to convince people to buy their products. Companies that offer products and services that are not really needed they have to really convince people to buy their products or services.
With that said, a company that offers products and services that are needed is not necessarily going to be successful. By the same token, a company that offers products and services that are not needed is not necessarily going to be unsuccessful.
Here are some examples of products and services that are not really needed:
- Fast Food
- Entertainment (Movies, Amusement Parks, Bowling, or Night Clubs)
Here are some example of products and services that are needed:
- Baby Diapers
High Demand For Products and Services That Are Not Really Needed
One thing that you should recognize is just because a product is not necessarily needed does not mean that these products are not in high demand. I have seen firsthand the demand for cigarettes. It is amazing how crazy people can get when you do not have the cigarettes. Not to mention, cigarettes have been directly linked to cancer.
It seems kind of strange but there are a lot of companies that are extremely successful despite the fact that most of the products or service can ultimately harm the overall well-being of their customers. Many people will try to argue that these companies are evil for offering these products or services, but their customers share some of the blame. Many customers recognize the harmful effects of using these products and services yet still choose to use them. I once had a representative of a large cigarette company tell me, “We produce products for people who choose to use them.” Frankly, he is correct in his assertion, because if people did not want to buy his products, then they would not be in business.
Unfortunately, there are several profitable companies that may have a negative social or health impact on its customers. As mentioned before the cigarette or tobacco industry is very profitable, but cigarettes can be linked to cancer. The gaming industry or gambling is very profitable yet many people who gamble may lose the rent money among other things. The soft drink industry is extremely profitable but some of the ingredients used in creating soda has been linked to diabetes.
Understand that I am not passing judgment on any of these companies or the investors who own their stock. And if as a stock investor you do not want to be associated with any of these companies, then that is your perogative. The fact of the matter is that these companies are very profitable as a result of customers choosing to use their product or services.
Products That Are Not Needed Can Become Products That Are Needed
The world and technology is constantly changing. Products and services that were needed in the 1940’s are not needed today. Additional, products and services that were not needed in the 1940’s are needed now. I remember in the early 90’s when having an internet connection was a luxury, but now it is pretty much a necessity now.
There are companies like Apple who try to position their products as products that people need. Needless to say many companies have been successful at positioning their products as something that people need. Many people who are business have an iPhone or some type of phone with Smartphone capabilities. These same people would have a nervous breakdown if their phone was missing.
As a stock market investor you be on the lookout for companies that offers products or services that are on the cusp of transitioning from not needed to needed. These types of companies are game changers or leaders in the marketplace.
Important Note: Recognize that, for the most part, products or services move from not needed to needed because of the customer psyche. That fact is most products or services are not a matter of life and death. You can really live without an iPhone, but your mind is telling you that you have to have it. This is mainly the result of positioning, marketing, and promotions.
The Best Case Scenario
If you come across a company that offers products or services that are needed and wanted, then that is definitely a company that should be on your radar for potential stock investments.
In the case of each of the products and services that we mentioned earlier, there are several companies that can provide them. And this is where the power of branding, marketing, and promotion come into play.
When people sign up to receive electricity service to their house they normally will sign up to receive electricity from a recognized brand or company. I cannot speak on other states, but in Texas there are several electricity services that people can use, but many people choose to go with the popular or more recognized company. This happens even when that company charges higher rates.
When people buy toothpaste they prefer to buy the national brands like Crest or Colgate. With mouthwash it is Scope or Listerine. If people are buying baby diapers they will choose between Huggies or Pampers. Where do you by your gas for your car? You normally go to the major players like Exxon, Shell, or Chevron.
Why do people prefer recognized brands or companies at higher prices?
Well some of these companies have spent several years and billions of dollars to market and brand their products and services as high quality. As a result of endless marketing and branding, many consumers begin to associate these companies along with their products as the best or high quality.
Another thing that happens is something that marketers call brand loyalty. This is where a customer will always use a certain brand no matter what. When you hear people say things like:
“I only use Dawn dishwashing liquid.”
“I only use gas from Exxon.”
“I only use Scope mouthwash.”
These people are brand loyal. Think about all the products and services that you use. Do you normally buy the same brand over and over?
If a company has enough people that are loyal to their product or service brands, then that company will probably be around for a long time.
All good companies have a product or service that is wanted and/or needed. As a stock investor you must identify these companies. Also remember that a company who offers a product or service that is wanted and needed is an ideal investment.
Stay tuned for "The Best Companies To Invest In - Part 2".