So now you have your idea and you have identified that a certain type of individual or company needs it. The next step is to determine if there is a viable market for your product. How do you find out if your product will actually sell?
How many people have this need?
In order to test your idea and to really be sure that there is a market for it, you will need to try to determine how many people or companies could potentially buy.
One great place to start this process is to set up a Google Adwords account (http://adwords.google.com) and utilise the Google Keyword Planner to get an idea of how many people are searching online for a solution that your product can solve.
Since you are setting up an online business you will need to determine how many people ONLINE are going to be potentially looking for you.
Google Terms
Before you set up a Google account, you will need to familiarise yourself with some of the most common Google terms:
Keyword (or search term): The words people use when searching for something. Google keeps a record of every keyword and groups of keywords people use. You can find out what these are and how many people have searched using any keyword you can think of.
Click through rate (CTR): The number of people who click on an advertisement on Google. This number is always a percentage of the number of people who had the opportunity to see the ad (impressions)
Impressions: The total number of people whose Google search matched the keywords and who therefore had the opportunity to see any advertisement that appeared on the Google search engine results page (SERP).
Cost per click (CPC): The cost that Google charges every advertiser for each time their ad is clicked on.
Traffic: Traffic in Google terms is the number of people searching on a particular keyword or group of keywords. You use this number to determine the total number of potential buyers or interested parties.
How to use Google to determine your market size
Start by writing down all the search terms you think someone might type into Google if they were looking for your product. If your product is an online French course then you would type into the Google Keyword Planner search terms like:
- Learn French online
- Online French courses
- Learn French at home
- Easy French lessons online
- Learn French fast
- DIY French lessons
- Best Online French Lessons
Use the keyword planner to suggest more terms, as you won’t know them all.
Once you have all the relevant search terms (there could be hundreds), then copy and paste them or upload them and choose the option to get traffic forecasts.
Select a country or multiple countries. For this exercise I chose USA and Australia. The results are shown below in the table below where you can see that the number of searches per month varies between about 1 million and 1.5 million in the two countries I have chosen.
That’s a very decent market size and so naturally, the competition in that market will be strong with many advertisers looking for customers searching the “online French courses” keyword alone.
The ideal number of searches
You would probably like someone to tell you a particular number of search results that you should be looking for to determine if a market is viable. However, the actual number of searches you are looking for depends on whether you are looking globally or locally, whether your product will be downloaded or has to be shipped. While 15,000 searches per month in your region for a product you have to physically ship may not be too bad, for a global downloadable product that’s never going to be enough, unless you are aiming to dominate a specific niche (1).
The higher the number of searches per month on your given keywords, the better and more lucrative the market is likely to be. But suffice to say, do your research using Google’s Keyword Tool (free) or Long Tail Pro or Market Samurai (both of these have a cost) and thoroughly research the competition.
If you find there are no advertisers but millions of search results then you are very unlikely to make any money there (unless you have discovered something incredibly and undeniably unique). If there are no advertisers, that is usually because the particular keyword isn’t lucrative. Also with so many search results you are very unlikely to be able to get your page to the *top of the search results.
*See paid search versus organic search covered later.
Other avenues for quantifying your market are industry magazines and websites and you will usually find that government websites have useful statistics.
Using Google to quantify sales potential
When looking at Google results to determine a market size you could conservatively look at an expectation of around 1-2% CTR (remember the click through rate is the number of people searching who would potentially click on your ad, should you have an ad directed at that specific keyword). While much higher CTRs are possible and common, my advice is to plan your business around this generally accepted average and then work on ways to increase it once you understand the levers.
Once a potential customer gets to your site, you can expect around a 3% conversion rate. Conversion rates are generally higher for niche products and lower for products with lots of competition and poorly designed websites and landing pages (take note!). We will cover this later in the blog post on building your website.
To determine if this market can make you any money do a sum something like this (These numbers are low to make the sums easy, but you would ideally want much higher numbers of searches than this):
Let’s say there are 5,000 searches for your primary keyword each month and you can expect 2% of those people to visit your site, and 3% (of that 2%) to purchase. The total potential sales in one month based on these numbers, therefore is 3 sales per month. In this scenario you are paying for 100 clicks (2% of 5,000) and so you need to know what the potential cost per click (CPC) is for that keyword. If the cost per click is say, $0.70 then that is a potential cost of $70 to get those 3 sales.
| Number of Searches/month | 5,000 |
| Average CTR | 2% |
| Total Clicks to your website | 5,000 x 0.02 = 100 |
| Number of visitors converts to sale | 3% |
| Total sales per month | 100 x 0.03 = 3 |
| Google cost per click | $0.70 |
| Cost of clicks per month | $0.70 x 100 = $70 |
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Cost of Google advertising per sale: |
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| Total Cost per sale | $70 ÷ 3 = $23.33 |
From this exercise you can see that, while advertising on Google has a direct association with the number of sales you can expect, it also has a comparable cost. You will need to know this if you are considering using Google as a source of traffic to your website.
In Google’s keyword planner you can change the amount you are prepared to pay per click and your daily budget. Do this a few times and watch what that does to the number of clicks Google expects you would get.
Needless to say you need to make sure you have an appropriate margin in your product to make this market size a viable option.
Naturally you wouldn’t build an online business based on only one keyword. So that’s where google keyword analysis comes in again. Keep going back there to find more keywords and test them with their various CPCs. Some popular keywords can cost many dollars per click!
In summary, use lots of different methods and tools to determine the potential size of your market. If you have a product that would be purchased by men aged between 35 and 50 then make sure you know how many men there are in your geography that fit into that category.
Below is another, and very common method used to work out potential market size. Note that this method doesn’t relate to the number of people searching for a particular solution online. However I have added it in here because you really should know your total potential overall market size. Once you have this, you can work out what percentage of that total market is buying and searching for your kind of product online.
Estimate the total market size
You can estimate the total size of a market by using the generally accepted method outlined below. It is important that you do this for business and marketing planning and also for budgeting purposes. Also, if you intend to look for an investor or a partner at some point, he or she will need to know what the market potential is for your product or service. When determining if your new business idea has potential, you also will need to know the total potential market size.
First, determine who will be your customer. For this exercise we will use plumbers.
So using your available government statistics and the plumbers association you can determine how many plumbers there are in your target market. Let’s say there are 5,000 licensed plumbers in your target area and your product will cost them $200 to purchase and they will only need to buy it once.
It would be unlikely that all plumbers will need, want or be able to afford your product. You would need to do some research to determine just what percentage of plumbers are likely to purchase your product. (We cover a good online research technique in this post under “SURVEYS”). Let’s say that after some market research you determine that 60% of all the plumbers surveyed said they were likely to purchase this product.
We call that the penetration rate. The penetration rate therefore is 60%.
To work out the market size you need to multiply the number of plumbers by the penetration rate.
Total number of potential customers x penetration rate = market size
5,000 x 60% = 3,000 plumbers
Estimate the total value of that market
You now need to work out what that total market is worth, in dollars.
Earlier we said that each of these fictional products cost $200 for the plumber to purchase.
Market size x sale value = market value
3,000 x $200 = $600,000
So the total potential market size for this new plumbing product in the target market chosen is 3,000 units at a total value of $600k.
Next you would check the Google searches for this product or for the problem that this product solves and from here you can estimate total expected sales.
Note that these formulas are provided for you so that you can start to estimate whether your idea can potentially provide an income stream.
Individual products and markets are affected by many outside forces such as competition and price and many internal forces such as quality and customer service.
(1) A niche market is very specific subset of a larger market focused on a specific product or need. For example offering online French courses for children would be considered to be a niche market.