Assess a New Market By Working Backwards
I like spinach. A lot. So one of my gardening goals is to grow enough of the stuff to keep me and my family in Popeye Heaven during the entire growing season. But how much is enough?
That question will determine the square footage of garden soil I devote to spinach. So how do I figure it out?
By working backwards from my demand.
If you’ve ever cooked spinach, you know the definition of the word "meager." You start with a bowl of fresh, crisp leaves. You add a little olive oil and garlic to a pot big enough to accommodate all those leaves – you know, the size a toddler can hide in. And after two minutes on the heat, you’ve got a lump of cooked spinach the size of a cockroach. Delicious, but meager.
So a side of spinach for four requires at least two large bowls of fresh leaves.
Two large bowls of fresh leaves requires about 8 plants. The variety we grow needs to be 12" apart, so for each meal I harvest 4 square feet. Each plant grows back twice, with smart harvesting, for a total of three harvests. If I want to cook spinach three nights a week for a 6-week long growing season, I need roughly 24 square feet of spinach plants.
But – if I wanted to be more efficient, and just turn the spinach into salad greens, I would need only 0.5 square feet per meal. I could get by for the whole season with just 3 square feet of spinach.
And if I got more ambitious, and cooked spinach main dishes like casseroles and tofu florentine and such-like, I’d probably end up taking a back-hoe to the asphalt and putting the entire driveway under topsoil.
What does this have to do with AdWords?
One of the most common questions I get is, "How much traffic do I need to succeed in a market?"
People have heard rules of thumb: "3000 searches a month for the top 10 keywords; 25k searches total; 7117 searches in leap year Februaries when Jupiter is in Aries" etc.
But there’s a simple way to figure out the answer. The right answer for you.
Think spinach. From the ground to the plate. From the search to the sale.
Assess Your Search to Sale Efficiency Ratio
Start by writing down your profit needs. How much money do you need to make each month?
Next, factor in your cost of goods sold, if any. How much do you need to sell in order to make that profit?
How many sales do you need to make to hit your sales target?
4. Sales conversion rate
Next, how many visitors do you need to your website in order to make that many sales? In other words, what percentage of visitors become buyers? When you’re getting started, you don’t know this number. So to assess a market, choose a conservative number. Can you make this work with a 0.5% conversion rate?
5. Click through rate (CTR)
Now that you know how many visitors a month your business needs, simply divide that number by your CTR to determine the number of searches that will support your venture.
Again, at the beginning of your market research, you won’t have this number. So choose a conservative CTR. Can you make this work with a 0.6% CTR?
A Simple Example
Let’s say I have this idea for a spinach gardener’s gift set: big bowl, seeds, watering can, spinach shears, and How to Grow Spinach DVD. Can I make this work online?
1. What profit do I need to make this worthwhile?
I want to make $2400/month in profit.
I want to sell the gift set for $75, and my cost of goods is $35. So my profit per unit is $40. I need to sell 60 units per month to reach my goal.
3. Average order size
I’ve already answered this one, since my example is so simple. If you have more than one product, or different services, you’ll have to go into a little more detail.
4. Sales conversion rate
I think that people searching for "growing spinach" and "spinach gardening" and related keywords will convert at 1.5%, minimum. So in order to make 60 sales, I need 4000 visitors per month (60 / 0.015 = 4000).
I can get a 2% CTR with these keywords. So in order to generate 4000 clicks, I need a total search volume of 200,000 per month.
Winning at AdWords = Most Efficient Search to Sales Process
At every point along the way, there are opportunities to improve the efficiency. Add Upsells, cross-sells and follow-up sales to increase profit per sale. Test landing page variations to increase sales conversion (or opt-in rate, if you have a multi-step sales process). Test ad variations. Find additional traffic sources, from new keywords to placements on the content network.
And you should definitely test and improve continually once you’ve chosen a market.
But following this simple process when you first assess a market will help you avoid going into a business that will never work.
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BONUS BOP QUOTES (for reading this far):
Efficiency is intelligent laziness.
– David Dunham
I’m not really a career person. I’m a gardener, basically.
– George Harrison
A garden is never so good as it will be next year.
– Thomas Cooper
I don’t like spinach, and I’m glad I don’t, because if I liked it I’d eat it, and I just hate it.
– Clarence Darrow
A fruit is a vegetable with looks and money.
– PJ O’Rourke
You can never have enough garlic. With enough garlic, you can eat The New York Times.
– Morley Safer
I think it’s wrong that only one company makes the game Monopoly.
– Steven Wright