Investigate Market Potential For An E Commerce Opportunity

Published Date: 02 Nov 2017

3.1 investigate market potential for an e-Commerce opportunity.

Prego is a restaurant located in Buckingham town with 15 employees and its main sale article is authentic Italian food. Prego has been established in 2002 and since then it increased its customer community to a large extend in the local area. I am going to investigate market potential for an e-commerce opportunity of selling freshly cooked meals and the other restaurant products in the local area, including delivery service.

Market Analysis

type of market

Prego is in a fast-moving consumer goods market, selling products of a low value with a short life time and is a part of the hospitality industry. Prego has large number of potential buyers and many competitors, which creates a competitive market where a single seller or buyer can't affect market prices. (Mankiw 2009)

For example if a Prego will change prices to increase the income, the customers will go to competitors and a single customer can't change a market price, because the amount of goods he's purchasing is small. But the buyer can affect a price of product in a specific shop, if he is purchasing a larger amount of the goods and the seller is willing to give him a quantity discount.

market size

Buckingham and nearby villages have about 20 places to eat and the town has around 12,000 citizens plus many students from a close-by university. Market size can be determined as a number of buyers in the market multiplied by quantity purchased by an average buyer in the market per year multiplied by price of average unit. Number of buyers in the market can be estimated as population of Buckingham plus local villages to a 15,000 people. The relevant age group is between 16 years to 80 years old which could be about 8,000 people. From this group of people, only 5% could be interested in the home delivery of cooked meals, and only a 25% of them could consider to order from Prego, which gives as 100 potential customers. An average price of the unit is a sum of the prices in the take away menu divided by their quantity, which is £8. An average buyer could purchase two items from the menu per week which is 52 weeks * avg unit price £8 * 2 items, this equals to £832 per buyer/year. This gives us the market size of 100 possible customers or £832 * 100 buyers, which is the market size in financial terms.

Growth rate

The products of this type are required to be sold in a large quantities to be profitable and Prego is engaged in selling goods to customers in a B2C relationship, but the chance for sale will occur, only if the customers will visit the establishment. By introducing an e-commerce, the chances are, that customers will purchase products online, which will increase the overall sales. Currently, the Prego has on average 10 take away orders per week, if we assume that there is 350 returning customers for a sit down meal in total, the current quantity of take away customers is about 3%. Customers using current take away service are similar to a potential customers using e-commerce service, only differentiate in a home delivery. Growth rate of take away customers after introducing an e-commerce would grow approximately 500% in a year period. This is based on an assumption, that Prego will gain 50% of market share from 100 possible customers interested in the online ordering.

Distribution channels

The quality of the product is highly dependent on the speed of the delivery to a consumer, from the time of production. Due to this time factor, it is important to use direct distribution and utilise company's own resources. This is achievable because the customers are located in a close proximity to a restaurant and only on a local scale. Because of the small volume of sales, it is not required to hire another employee to carry out distribution, but it will be necessary to obtain a car dedicated to this purpose. Advantage of direct distribution is better understanding of customers through personal contact with them. Prego will continue to offer a take away service, with a discounted price without the delivery charge, for a products purchased online.

Customer strength

The customers' composition is relevant from an age point of view, where customers of the age 16 and older, are able to purchase the goods online. Due to Buckingham university and Stowe school located nearby, the town accommodates a large number of the students, which prefer the home delivery and take away food. Customers' distribution is spread across the Buckingham in the walking and driving distance from the restaurant, which could motivate customers to purchase from known local establishment.

Level of competition

Prego has in the Buckingham direct and indirect competition for the planned e-commerce, but non of the businesses are offering the Italian food for home delivery. Pizza direct is Buckingham based company providing only a pizza delivery service, whereas Prego will be able to offer a full menu including pasta and speciality dishes. Other competitors such as Prezzo and various ethnic restaurants provides only take away service, leaving home delivery market intact. If Prego will introduce and e-commerce with a home delivery, the only direct competitor is Prezzo, which also sells Italian food, but does not provide home delivery and Prezzo as a chain of restaurants won't be motivated to match up the service with a local competitor, because its impact on the market is very small.

Strength and weaknesses

It is important to understand threats and opportunities of an e-commerce and its impact on businesses. Ability of Prego to attract online customers, especially new ones, is dependent on an advertising of the services offered, but Prego is not investing heavily in the advertising due to limited funds. E-commerce brings the opportunity to convert a customer who uses the home delivery, to visit the establishment for a sit down meal, where they can spend more moneys, as it is easier to up-sell drinks or deserts to the customers. The e-commerce could also help Prego to better utilize staff during an off-peak time, when there are no customers in the restaurant, as the online orders can be accepted anytime during an opening hours.

Cost structure

Starting costs of e-commerce are steep, but once the e-commerce is acquired, the operational costs of e-commerce and related expenses are lower. Prego is entering a new market and not starting a new business, so the operational expenses are calculated from current ones with added e-commerce expenses such as web hosting, cost of advertising, marketing and expenses related to the in house delivery operations. Costs of starting an e-commerce are related to a web site development, which has to be outsourced as Prego does not have the workforce, legal fees, purchasing a vehicle for transportation of goods and other expenses which are discussed further later.

(LBC 2012, lesson 8, Market Research, page 5 - 6)

3.2 evaluate current e-Commerce systems in use by organizations.

I have decided to use Magento Go platform for small businesses, as the plan offers lease of web server to host the e-commerce and Magento platform to build the website. Magento platform consist of multiple systems to support e-commerce business.

Payments

To be able to process payments, the payment gateway has to be setup with a gateway provider such as PayPal or Sage Pay. I have opted for PayPal payment system, because it suited most the needs of the proposed e-commerce. Magento Go support PayPal, so the integration of the system is smooth, because it provides an option to process payment on the same website without redirecting elsewhere. Another advantage is the support for PayPal Express Checkout aimed at customers, which already have a PayPal account, to speed up their payment process, which is a plus as they are purchasing goods, such as meal, for immediate use. PayPal has no monthly or setup fees only charges per transaction and this suit well for Prego business model, because Prego is expecting only small amount of transactions per month. PayPal is also able to process payments without the user's need to have a PayPal account, another payment options will be cash payment at the customers' premises or a card payment using PDQ terminal. (LBC 2012, lesson 9, Internet Payment Methods, page 4-5)

Order Processing

The customer is purchasing directly from the manufacturer of the goods, in this case it is a cooked meal from restaurant, which imply that the order has to be processed in real time. After the customer selects the product he wishes to purchase, there are two important factors, time of the delivery and payment method. The customer can place a pre-order for a future date, and pay online or request immediate delivery. Prego has to have a computer which will display the order immediately after it has been submitted by customer and pass the order to the kitchen where the goods are prepared for distribution.

Distribution of goods and services

Distribution of goods is maintained using in-house resources, where employee is responsible for delivering goods either on foot or by moped depending on the distance. Using e-commerce, Prego will be able to offer catering services for parties and functions, but this requires the orders to be placed in advance. These large orders will be distributed using partner company providing catering equipment.

Communication and information sharing

Tracking orders is considered as a standard function in e-commerce to keep customers informed of the progress of their purchase and it is not exception in the micro environment Prego is going to do business in. When the goods are going out for delivery, the staff will send an automated e-mail or text message to a customer to keep them informed of the progress. To create two way communications and to better understand the customers, Magento Go provides features for a quick review of each item and simple rate system to help other customers with their choices.

Security

Prego's e-commerce will let customers to register an account to increase retention as their personal informations will be stored on the server for easier return in the future. Encrypted connection is required and this is secured by SSL certificates. Magento Go is offering private SSL certificate from Geo Trust with extended validation, this validation will notify users visually that the connection is secured and it will increase their trust in the company.

Payment system in use, PayPal, is using its own SSL certificates to secure connection during transactions. Another security issue is the computer terminal located at the restaurant used for dealing with orders. This computer has to be protected against malicious actions using a strong password, but these passwords tend to be complicated and hard to memorise, more usable solution is to use biometric devices, accessible only for staff.

(LBC 2012, lesson 10, Internet Security, page 3)

Marketing and promotion

There is a lot Prego can do offline to promote new e-commerce, such as leaflet campaign via post with a discount coupon redeemable online, to target majority of the market in the local community and advertising in the local newspapers. Social networks such as Facebook or Twitter can help marketing at no added cost, but Prego has a small fan base. Search engine optimization is built in to Magento Go, making it easier for customers to find the website online. As Google is one of the most popular search engine, it is reasonable to invest in to a pay per click advertising for a starting e-commerce, as this will keep the website on top of the web search for specific period of time and can gain valuable customers.

Customer service

Because of the specific type of goods, customers won't be able to return the products, but if the service or a product is not of the satisfactory quality, refunds will be issued. Customers will be able to contact Prego using an online contact form or via phone, to resolve issues or discuss query.

3.3 discuss the financial implications of an e-Commerce solution.

The sole purpose to create an e-commerce is to achieve a profit and if the benefits outweigh the risks and expenses, the business proposal is viable.

Pricing for goods and services

prices of the goods are the same as the restaurant prices for a sit down meal, but to cover delivery expenses, it is necessary to use a minimum order of £15 or more, otherwise the delivery charge of two pounds has to be added to the total bill. The expenses to purchase and produce one average unit of meal is £0.40 and it is estimated to sell 5200 units per year, the amount of £2080 has to be added to the total costs of e-commerce.

Web-hosting

Magento Go platform comes with a web hosting for a £9.99 per month, this package includes limited data traffic, but the advantage is ease of use and saving costs on an IT specialist team, because the e-commerce platform doesn't require extensive technological knowledge to setup and operate. To operate online, Prego has to register its domain for future e-commerce, the costs are very low on average £10 per year. To increase customer's trust in company, it is suitable to invest in to private SSL certificate in this case for £189 per year.

Equipment costs

as a onetime investment Prego has to purchase a moped to accomplish delivery service and benefits of this vehicle are low purchasing and operating costs. Another advantage is, that legislation allows drivers 16 years and older to use the moped which will enable to save on a labour cost for a delivery drivers. The operating costs for moped are calculated as cost of petrol per moped tank, plus insurance of the drivers per year. The pizzas are transported in the delivery boxes with a name of the business and logo as a part of marketing campaign and this will come to £200 per year.

Intermediary services

Payment gateway system in use is PayPal and for this e-commerce it's suitable for following financial reasons. It doesn't require setup or monthly fees, only transaction fees, which proves cost effective, as only small amount of transactions can occur. From 2600 estimated orders per year, I have taken in to account only 390 of them, to be processed via PayPal. PayPal is charging £0.20 per transaction which is 0.20 * 390 equals to £78 and also 2.9% per transaction where average price per transaction is £16, this equals to £0.464 * 390. (1 USD to GBP £0.66 to 14. 03. 2013)

Marketing promotion

The e-commerce is a new business activity for Prego, thats why it is important to advertise more aggressively at the beginning. Google pay per click advertising is offering Prego, the advertiser, to promote business in the popular search engine and pay only for clicks on the advert. It is sufficient to allocate only small funds, such as £100 and this amount is satisfactory to reach around 1000 potential customers online. Leaflet campaign is a good option to target possible customers directly in the Buckingham and together with an ongoing local newspaper ad it will come to £1210 a year.

Web development costs

Due to simple nature of the e-commerce platform, it is required to hire only a web designer to create a unique Magento theme for the online business. Website peopleperhour.com offers to hire specialist for contract work, prices for this task are approximately £288.

Other operating costs

Wages for the three members of the staff responsible for the delivery of the goods are calculated as 12 hours per day which gives as 4032 hours per year times £4 per hour. The labour cost per year will be £16,128 for three employees.

Profit

Profit is calculated as predicted turnover minus expected expenses. The turnover equals to 52 weeks times £8 avg price of unit times 2 units times 50 customers, this equals to £41,600 a year. All the expenses above add up together gives us £22,942. The predicted profit is £18,658. To break-even with the e-commerce, Prego will need almost 7 months to operate under calculated conditions, this is calculated as turnover of £41,600 divided by 12 months, gives us £3466.6 turnover per month. The total expenses of £22,942 are divided by £3466.6 equals to 6.6 months to break-even. Return of investment for proposed e-commerce is calculated as profit divided by the expenses times 100, which gives us £18,658 divided by £22,942 and ROI is 81%.

Costs

Value/year

Goods

£2,080.00

Web-hosting

- Domain name registration

- Magento Go web-hosting

- Geo Trust SSL certificate

£318.00

£10

£119

£189

Equipments

- Moped

- Safety tools

- MOT

- Petrol (£5.55 tank * 182 days)

- Moped insurance

£2,560.00

£600

£100

£50

£1010

£600

Intermediary services

- PayPal fixed transaction fees

- Paypal 2.9% fees

£258.00

£78

£180

Marketing

- Google pay per click

- Local newspapers (£80 * 12 months)

- Leaflet advertising

£1,310.00

£100

£960

£250

Web development

£288.00

Other operating costs

- Labour costs (£4032 hours/year * £4)

£16,128.00

Total costs

£22,942.00

3.4 design an e-Commerce solution

Key activity

Prego's main e-commerce activity is to sell hot and cold meals, drinks and provide catering for parties, including home delivery.

Domain name

The business name, Prego restaurants, is already given, as the business exist on the market for many years, to establish an online presence the business needs a domain name for its e-commerce. The domain name needs to be easy memorable and descriptive name and pregobuckingham.co.uk will do just that. To register a domain name for the upcoming business, I will use a well-known domain registrar, godaddy.com and purchase the desired domain name together with other similar names to avoid the issues when user misspelled the domain name and was transferred to a competitor's site.

Web-hosting

The hosting of Magento Go e-commerce platform is provided by Magento itself and the main reason to choose a web-hosting service is, that Prego is a small restaurant and doesn't have the technological or personnel requirements to host its own website. Another advantage is lowering the technical barrier to setup and update the e-commerce platform, as managing the platform is simple task and will be carried out by administrative department in Prego.

Build a website

Magento Go has a WYSIWYG editor and number of templates, but Prego will use external web designer to design specific template for e-commerce related to Italian food. Another important step after front end design is to create a catalog of the products, the whole menu transferred online with a multiple images of the meals and quick description of each particular dish with a suggestion for a drink and wine suitable for each meal. This second step of creating catalog will be done in-house as it doesn't require extensive technical knowledge, but very good informations about particular meals. This task will be carried out by restaurant manager together with the administrative department and inputs from the kitchen team regarding any dietary guidelines.

Optimization for the search engines

Only a small fraction of customers will remember the domain name of the business, majority will use the search engines to find particular service. Optimization is done using META tags in the code. Magento Go offer simpler solution to create keywords for every particular product in the catalog, this is going to be further extended with a friendly URLs, which will use descriptive names such as names of the particular meals, making search online easier and more successful.

Testing the e-commerce website

To create a professional feel of the website, it is important to check if the images of meals have correct description, the links to other website and internal links are working as they should and that there are no grammatical errors in the text. Throughly test technical aspect of the e-commerce require to pay for the products with multiple services, via PayPal, credit card and test delivery service and mainly, if the final product after it has been delivered is meeting quality requirements.

Promoting website

Prego is member of business associations such as tastecard.co.uk, The Best of Buckingham and tripadvisor.co.uk, where it will promote its new e-commerce. Social networks such as facebook and twitter are powerful marketing tools because they can target customers in a very short time and Prego is extensively using both social networks to update new offers. Use of printed media such as business card is is for Prego reasonable opportunity to use a printed QR, quick response code, as customers carry the business cards with them and can be engaged in the shopping using mobile phones.

Analyse website traffic

Google analytics is a free web service which has to be implemented in to a code of the Prego website, to analyse the online activity of the users, their shopping habits and effectiveness of the marketing campaign. Using this service, Prego will gain valuable information regarding number of visitors and compare them to number of sales to find out the conversion rate and to understand how many visitors actually ordered the product.

Customer feedback

Prego has to have a Contact us page on the website, which contain an email contact and telephone number, to allow customers to make queries and feedbacks. Prego has to collect and evaluate those queries for a certain period of time to be able to implement a FAQ page on the website addressing majority of common queries. Other form of obtaining customer feedback is poll, changed on monthly bases, starting with a favourite meal from the menu. The poll will be a simple HTML form implemented on the side of the webpage.

(LBC 2012, lesson 7, Designing E-Commerce Solutions, page 4 - 9)

Mockup of the website

(Created using Balsamiq Mockups software http://www.balsamiq.com/)

Order processing

Customer has to visit pregobuckingham.co.uk, if customer already has an account on the website, the personal detail such as delivery address, proffered payment option and preferences regarding mail newsletters, are already saved. New customer can purchase the meal without a registration, or can register after the first purchase. Customer will choose desired meal, by clicking on the Buy button, and place the product in the basket and next step is to accomplish check out. Because Prego is storing the personal details of the customer, Prego has to comply with the Data protection act 1998. (LBC 2012, lesson 11, Relevant Legislation - use of Information & Internet, page 6-7)

At the Prego restaurant, the floor team will receive an online order on the computer regularly monitored by the staff, and this order will be passed to the kitchen team, where it will be produced and prepared for dispatching, or pickup in person.

Payment processing

Customer can choose from multiple payment options either paying online via Paypal, credit/debit card or paying cash at the customer's premises or if the customer opted for the take away, there is option to pay for the goods at the restaurant. Online payments are processed via PayPal payment gateway, even if the customer doesn't have an account with the PayPal.

Delivery processing

After the meal has been prepared and packed, it is distributed by Prego employee to the required local address using moped. This person is utilised as the kitchen assistant during the 6 hour shift and is responsible for carrying out the delivery.

Policies

Alcohol can be purchased online only together with a meal, only by person 18 years and older and the payment has to be accomplished by credit/debit card or via PayPal account, to verify the age of the buyer. There is no required minimum value of the order, but the delivery charges of £2 are added for order below £15. Home delivery and take away is available only during opening hours between 11am – 11pm, every day* T&C apply. Large orders of 15 items and above has to be booked at least 24 hours in advance.

Product page

The product page is the most important part of the website, It consist of image gallery offering whole Prego menu, where customers are able to read reviews of other customers, rate the products and read the suggestions for mix match of meals to drinks. By selecting the product, users are able to read the ingredients and calorie count of particular meals.

Management structure

Current management structure of the Prego doesn't have to be expanded, because the scale of proposed e-commerce is small and all the operations will be managed by restaurant manager and in-houses administration department.

Target customers

Target customers are the economically active group of people, starting from age of 16, located in the Buckingham area. Strong group of customers is represented by the students, which prefer take away and home delivery food over home cooked meals.

Suppliers and business partners

Prego suppliers are supporting the e-commerce with the necessary food products and equipment and such service is provided by Waterdene foodservice. When Prego needs to deliver large orders above certain amount, for private parties, Prego will cooperate with the local business partner, catering company called Mange Tout.

Illustrated e-commerce

(Created using Balsamiq Mockups software http://www.balsamiq.com/)

3.5 evaluate the suitability of an e-Commerce solution

Technical feasibility

E-commerce software and hardware for the web-hosting is out of the box solution which doesn't require manpower resources from Prego, because it is hosted on a remote dedicated server of Magento. This service is cheaper solution than to purchase and maintain own web server together with the costs of IT personnel. Another hardware element in the e-commerce, which doesn't require investment, is the computer in the restaurant, currently used as a cash register to take payments, with extended capability of receiving the online orders from customers and passing them to the production – the kitchen team. The administration department handle the developing of the e-commerce catalogue, list of products offered on the website, using intuitive Magento Go platform, which doesn't require coding, only filling up the online forms. The proposed project is technically feasible with minimal upfront cost and high ROI with help of existing equipment and personnel.

Legal feasibility

In order to save the costs of the delivery, Prego employ 16 years old delivery drivers, also working as a kitchen assistants. Employment law doesn't allow 16 and 17 years old to work more than 40 hours per week, even if they agree to it and the hours of work can't be averaged over period of time either. Prego is employing 3 delivery drivers/kitchen assistants and their working hours won't exceed 30 hours per week. Prego allow customers to create the user account on the e-commerce website and this obligate Prego to comply with the Data protection act 1998 to protect users’ data.

Schedule feasibility

The initiating phase includes the developing of the market analysis to understand the business environment of Prego and this process will take up to a week. Planning process includes identifying roles and responsibilities, such as the Administrative department is responsible for creating and maintaining the e-commerce, estimate the resource requirements regarding delivering of the goods and web hosting. The whole process of planning will not exceed two weeks. Executing phase consist of developing the e-commerce website and integrating the designed theme for front end part of the e-commerce, purchasing the required equipment such as delivery boxes and vehicle and hiring new staff to support the e-commerce. Executing phase will take up to a month. Monitoring and controlling involves measuring the on-going activity of the e-commerce considering number of orders, number of registered users and effectiveness of the delivery and comparing it to the predicted results, this monitoring should continue at least for 6 months to gain data. Completion and closure is the time when all activities are completed and the project is formally closed.

Financial Feasibility

The start-up capital involve the cost of purchasing equipment, costs of wages for the two members of staff responsible for delivery for first six months and web-hosting expenses for first 6 months, until the project is self-sustaining. Prego has cash reserve of £20,000 and some of this capital can be used to finance start-up.