Reference no: EM133375983

Omar Ramesh made his first lamp in his high school industrial arts class. Then, he started making novelty lamps just for the fun of it. He sold a few to friends, charging just enough to cover his costs of materials. Eventually he was able to make a small profit on custom orders he received through referral.

By the time he was in college, studying Business Management, Omar did not have the time to make his own lamps, so he started buying novelty lamps from Asian manufacturers and selling them at arts and crafts fairs around his hometown of Victoria, BC. His fastest selling items were the newest LED smart lamps, even though they were by far the most expensive (and most profitable) items that Omar carried. These new lamps were just starting to come in a variety of shapes and sizes. All used the newest LED bulbs. Some involved fibre optics and others were programmable. Omar understood that, like other new technologies in the past, the price of these items would start to come down and the variety would increase as would the demand. And so, a little light bulb went on over Omar's head and his idea for a specialized lamp store in downtown Victoria was born.

But would the idea work? Omar knew that the first indicator would be the market potential. In other words, how much money was his target market spending on his type of product?

It only took about five minutes of searching the web for Omar to find a government survey of household spending in BC. This showed that the average household expenditure for lamps and lampshades was only $21 per year. From the Statistics Canada website, Omar found that Victoria had just under 150,000 households, which meant the whole city was spending roughly $3.2 million every year on lamps and lampshades ($21×150,000).

Now he had to find out how much of that market potential his business could get: his sales forecast. Omar was able to identify eight small, independent lighting stores in the city of Victoria. These would be his direct competition. His indirect competitors, however, would be all of the furniture and department stores that also sold lamps, including giant retailers like Walmart and Canadian Tire. In total, he could find 30 retailers in Victoria that sold lamps. Including his own store, this would mean 31 competitors sharing the $3.2 million, or an average of $103,000 each. This was a disappointing estimate for Omar's sales forecast. It would not be nearly enough sales to cover costs and expenses for the store he envisioned.

There was one small lighting store in downtown Victoria that was similar in size and style to the one Omar pictured for himself. He paid $25 to a commercial credit reporting agency to buy a profile of the company. The report showed that the store had annual sales of $480,000. Omar was delighted, believing it was a more reasonable forecast of what his own store could do. But then again, this was an established store.

Omar felt frustrated. He knew he should try and get a better estimate of the sales for his business, but didn't know what else to do.

Is Omar's estimate of market potential valid? What would be the difficulty if he wanted to find out the expenditures on LED lamps only?