Before you begin any sort of implementation, it’s important to assess the viability of your business plan. Is there a large enough market for you to take a small slice of the pie? Are there too many competitors for you to be successful?
Determining your target customer and the size of the market you are pursuing is crucial in determining whether you can make enough money to sustain a profitable business. Instead of just guessing, you should try and make a concerted effort to quantify your earning potential as best you can.
Figure Out What Your Ideal Customer is Like
The first step is to write down in great detail what your target customer is like. Here are a few questions to ask yourself about your target market
- What demographic are you targeting? For example, ask yourself what age group, income level, gender, sex, education level, race are the most likely to purchase from your store.
- Is your customer more likely to buy from you during certain times of the year? For example if you run a flower shop, are your customers more likely to make purchases during Valentine’s Day?
- Why would a customer purchase your products? Do you offer a product that is special and appeals to only a small segment of the population?
- Why would a customer buy your product online as opposed to a brick and mortar store?
Figure Out The Size Of Your Market
Now that you have the details of your ideal customer written down, its time to figure out how many of these people who fit your customer profile exist in the world. There are several ways to do this. One way is to check the census data for your targeted customer. For example, if you wanted to sell fishing supplies , you might want to check to see how many people go fishing in a given year. If you can’t find a statistic that applies to your business from the census bureau, try doing searches on Google for the statistics you need. If you still can’t find your desired statistic, try and extrapolate with a similar product or service in order to make a best estimate.
For example, for our wedding linens business, we looked up how many people got married each year who had wedding receptions costing 15k or more. We targeted females in their 20′s with a higher than median income living in the United States.
Figure Out The Average Selling Cost of Your Products
If you are selling physical goods, the best place to determine price is to look at your competitors pricing as a baseline. Depending on how your products compare, add or subtract a percentage to this price depending on what you think you can actually charge in your online store. You can also look on Ebay to determine how much your goods would sell for on the open market. Make a best guess regarding the quantities that would be purchased for any given transaction.
For example, based on our competitors pricing, we made a rough guess that we could sell our hankies for anywhere from 10-15 dollars a piece. Based on an average bridal party size of 4, we believed we could make anywhere between 40-60 dollars per customer. Taking the average, we assumed an average transaction revenue of 50 dollars.
Calculate Your Market Size
Take the market size number that you calculated above and multiply it by your average selling cost. This number is how much you could possibly make if you owned 100% of the market. Assuming that you can grab only a very small percentage of this market, is this number large enough to sustain your business and provide an ample growth path? If the answer is no, it’s time to punt. Otherwise continue reading below.
Check Your Keywords
Assuming your market potential is large enough, you should then check the frequency with which your product search terms appear on the search engines. Pick three to four of your main targeted search terms and use a keyword tool such as keyword tracker or Google’s keyword tool to determine the frequency that people search for your items. Depending on your business, it is very likely that 75% or more of your visits will come directly from search engines which makes this exercise an excellent indicator of overall store traffic.
Take these aggregate numbers that you get from these tools and assume a conservative number for the click through rate and conversion ratio. The click through rate is the frequency with which someone will actually click on your ad or link within a search engine. The conversion ratio is the percentage likelihood of someone buying something once they’ve clicked onto your site. A good conservative rule of thumb is to choose a click through rate of about 1-2% and a conversion ratio of 1-2%.
By multiplying the number of times your keywords come up in search per day by the click through rate and by the conversion ratio, you can approximate how much product that you can sell in a given day. Take this number and multiply it by your average selling price and you now have a decent guess regarding how much money you can make in a given day.
Figure Out Your Costs
Grab your favorite spreadsheet program and write down every possible operating cost that you can think of. Make sure you are conservative in your estimates so that your numbers reflect the worst case scenario that you can think of. Don’t underestimate your marketing costs either. Especially in the beginning, you will be blowing tons of marketing dollars until you settle down on a marketing strategy that works.
To determine your potential marketing costs, take the keywords that you are targeting and use Google’s Adwords keyword tool to determine how much they will cost to make it on the front page of search. Determine how many click throughs you are willing to pay for at a given cost and estimate how much it will cost you monthly to advertise.
Does It All Add Up?
By subtracting your costs from how much you calculated that you can make, you can make a good guess as to what your profit potential will be. Is this number too large or too small? Only you can decide. Regardless, if this number isn’t large enough for you to make a decent living, its time to go back to the drawing board.
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