Can your product succeed online?

Posted: March 2, 2010 in Uncategorized

I spent some time recently helping companies determine if their ideas would succeed online. I’ve written this blog to document some of it. Hopefully it helps someone out.

Many web businesses start with a fantastic idea. We just know it’s going to work. I use the word ‘we’ because I’ve been there (more than once). We come up with a product then many reasons why the market will love our idea. We may be right that customers would buy our product, if and that’s a big IF we could find a way of telling our market about it.

Often the internet gets used as a magic bullet by people who have not tried to slug it out online. Using the net we can put our product in-front of millions of people right?

In my experience this is not a given. But what I do know is there are ways of testing how large the market is and how commercially viable it may be.

In terms of risk it is unlikely we will fail to build the software/site. It’s more likely we will fail to market the product successfully. So before you start spending money to develop your product or service here are some very simple tips on how to determine how it will fare online.

There are many ways to reach customers online but the most common are:
1. Search Engine Optimisation (SEO) – Get listed in search engines where millions of people are searching for your product
2. Search Engine Marketing (SEM) – Use Google Adwords or similar to advertise your product (paid)

If customers exist for your product or service they will be searching for it in Google. Therefore researching the potential for these two methods of marketing is invaluable.

Most people planning an online business are not aware that selling products and services online is fairly predictable. It’s a funnel which has very predictable points. So you can calculate the end result of months of hard but successful work in a couple of minutes, de-risking your venture.

There are many factors which influence how well customers will flow down this pipe but let’s ignore that and assume you have succeeded in building a great site, have a good product and excellent SEO. Thise following exercise will demonstrate a simple way to determine how successfully you will sell your product online.

In this following example I’ve come up with a great idea. I’m going to sell NZ Bio Oil to a worldwide market I estimate to be a million customers per month. It’s a nice little niche which means I can be targeted in my marketing and I’m making a 30% margin. Sounds like a great idea right?

Step 1. Determining Search Volume

The first step is to determine the size of your online audience. You can do this by using Google Adwords. This tool is targeted at people using Google advertising and shows how many people are searching for specific terms. It also shows how many people are advertising for each keyword, which is a good indication of how difficult and expensive it’s going to be to target these people.

adwords.google.com/select/KeywordToolExternal

Adwords Screen Shot

Open Adwords then enter the exact phrase your customers will search for. You will see a list which includes the Local and Global Search Volumes. The Advertiser Competition bar shows you how many other companies are using Google to compete for your market. This is significant because it will drive the price of advertising up and also means these other companies will be competing against you in the search engine ranks. If you use the Show/hide columns you can also include the Estimated CPC column.

The Estimated CPC figure shows the amount of money you will pay every time someone clicks on a Google advertisement shown in a search for these keywords. Like the Advertiser Competition bar this gives you another view of how expensive this is going to get.

You will generally find a high volume keyword dominates the market but will have high competition. Best practice is to find several smaller keywords which are very specific to your product and use those instead.

So now you know the traffic volume either locally or globally. I now know that 327,000 people are searching for our example product per month. However we are not likely to get in the first page of Google for the broad search term of “Bio Oil” so lets plan around the more specific phrase “Bio Oil 200ml” which yields 27,000 visits monthly.

Step 2. The difficulty of getting on page 1 of Google.

Fighting your way on to page one of Google is not an easy thing. However that is a subject for another article completely. But take my word for it, if you’re not on page one you’re not going to get in the click stream. I’ve been on page two for keywords with massive volume and got at best a couple of clicks a day.

For the purposes of evaluating the market let’s assume the SEO works and you do get to the first page. When this happens you can conservatively assume you will get 10% of the clicks we saw in Adwords.

Step 3. Do the maths for the conversion pipe

So for our fictitious idea of selling NZ Bio Oil to a worldwide market we can work our way through the numbers like this….

Total search market 327,000 unique browsers (ub)
The keyword we think we can successfully target is 27,000 ub per month
If you’re on page one of Google you may get 10% of this traffic which is 2700 visitors
If your web site is well optimized you will convert around 2% of these visits which is 54 paid customers

Note : You may convert a larger number but at this early stage I wouldn’t bet on it. Better to be safe than sorry when considering investing a lot in this business.

Average purchase will be one product ($40) with a 30% margin ($12) 54 times a month = $648 Margin Per Month

Hmmmm $648 a month doesn’t sound too flash to me. As you can see the idea which sounded pretty good didn’t really pan out.

Paid Advertising

The second easy way to reach customers is Google Adwords. You select the keywords you want to target then your adverts are displayed beside the search results we talked about above. The advantage of this approach is you are instantly targeting the keywords from above with no time spent on SEO.

The process is an auction, with companies bidding on the keywords they want. However you only pay when someone clicks on your advertisement.

There are two major downsides. The first is that most keywords are so expensive you will never make money advertising like this. The second downside is that compared to the search results very few people click on these adverts. There are around five advertisements displayed on each search. Together they get around 3% of the clicks.

Also the costs, which are shown in Adwords, are often a lot lower than reality so it’s worth running a few adverts to find the real costs.

Lets run the figures for our Bio Oil example. With a much lower number of people clicking on our advertisement we will have to target the broad keyword “Bio Oil”. Otherwise we simply won’t get enough clicks. In some markets you can advertise using many smaller volume keywords to reduce the cost but we will focus on the main keywords in this example.

Each person who clicks on my advertisement is going to cost $1.35

At a 2% on-site conversion I need 50 visits before I sell something. So it will cost $67.50 to sell one item with a $12 margin. So every time we sell a product we lose $55.50.

It may seem hard to believe but I have seen companies spend a lot of money on Adwords without doing this calculation.

In Summary

So it looks like my idea for selling Bio Oil is a flop. I won’t invest the $15k on a shop and $25k on SEO. I will in fact go back to the drawing board and find something which does work. I might have to run a few ideas through the pipe but when I find one that looks good I have the confidence to take it to the next stage.

Understanding these simple tools allows you to test ideas and will save time and money. I find it also sways my thinking towards marketing based ideas or at very least product ideas which have a unique marketing avenue. These are the ideas you want.

When your research has identified there is a viable market for your product you can test the theory by doing a market test then proceed to invest in the technology with the confidence you have taken as much risk out as possible.

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Comments
  1. Sabrina says:

    Awesome, blog just what I was looking for 🙂 Thanks Joel

  2. Good practical advice – going to put this into action right now! Thanks 🙂

  3. […] Step 1. Will your product work online (checking there is an audience and estimating revenue) […]

  4. Saj says:

    Thank you very much for this insight Joel.
    In fact the timing couldn’t have been better.

    We are in the process of getting together a business model and looks like these are the key components we need to consider.

    Thank you very much for sharing this info.

    Regards
    Saj

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