Tamaño de mercado

Market Size

Frost & Sullivan

Market size is a measurement of the total volume of a given market. When determining market size, it is very important to define the measurement as precisely as possible.

A statement like, "The market for recorders is over $100 million per year," leaves a lot to be desired. What is wrong with that statement? Just like engineering, when monitoring or measuring a dynamic variable, the measurement must be well defined and all external variables considered. For example, if you were testing a jet engine for its vibrational characteristics, you would not just document the vibration level of the engine during operation. In a test of this nature you might also like to note the status of other parameters such as:

• Engine speed
• Fuel mixture
• Wind speed
• Wind temperature
• Time
• Oil temperature
• Weather conditions
• Altitude

It is obvious that fluctuations in these measurement variables could influence the engine's vibrational dynamics. For the same reason, when a market manager confidently states that the market for recording equipment is $100 million, we should request documentation on how this measurement was taken and determine the status of all other relevant parameters to gauge their impact on the forecast. For example:

What is the time period?

• One year (usually assumed)
• Six months
• One month

What was the date?

• 1986?
• 1989?
• 1991?

What geographic regions does the market cover?

• U.S.
• World
• Europe/Japan
• Nepal

What is the size based on?

• Production
• Consumption

How was the market estimate generated?

• Secondary data sources
• Competitor interviews
• End-user surveys
• Experience

What is the unit of measurement?

• Currency
• Units
• Volume

What groups are included in your product definition?

• Video recorders
• X/Y chart recorders
• Floppy disks
• Hard disks
• Film recorders
• Tape recorders
• Cassette tape recorders

Methods of Measurement

We cannot exaggerate the importance of making accurate measurements of market size. Virtually all companies make a rough estimate of that parameter and let it go at that. Some of the larger companies in broader product segments have a dedicated market engineering staff that accurately tracks the size of various market segments within market segments of the particular industry. Consider them lucky. However, less-significant product segments that the research community tends to ignore must rely on experienced "old boy" guesswork or (worse yet) on government statistics.

There are many methods by which you can calculate market size. These methods can be categorized into two subgroups - the wrong methods and the right methods.

How Not to Determine Market Size

• Based on customer demands extrapolated from a small sample size
• Based on potential
• Based on current rates of production or production capacity
• Based on government statistics
• Based on a competitor's guess or your boss's guess

Each of these five methodologies will most likely give you an incorrect measurement. Market size measurements based on customer demand and market potential tend to be on the high side because both methods extrapolate for all customers from a small sample what an ideal customer should buy.

Production is also a poor indication of customer demand because production and actual sales are rarely perfectly coordinated. Government statistics are calculated with very poor methodology and little regard for accuracy; be careful if you base anything on those numbers.

Typically, market size estimates are based on rumor and expert opinion. For example, we were talking to the chief executive officer (CEO) of a large manufacturer of industrial equipment. He asked us to tell him the market size for his product line. We told him we did not know, but he insisted that he had read an article of ours that discussed the numbers. We finally gave him an estimate, which he later used in an interview with the Wall Street Journal. For the next two years, that was the market size the entire industry used as a benchmark.

How to Measure Market Size

There are three ways to measure market size, two of which are based on competition and one of which is based on customers.

• Competitive sales (bottom-up approach)
• Competitive sales (top-down approach)
• End-user purchases

Of the top-down and bottom-up methods, the bottom-up approach is far more time-consuming but is more accurate. In essence, it uses a series of interviews with all suppliers to determine quantities sold by each company in the period. These are added together to give the total market size.

The top-down approach, which is used most often by research firms, is based on a series of competitive interviews where each competitor is asked for an estimate of the market size. These estimates are sometimes weighted and then averaged for the market size calculation.

The last way of calculating market size is based on end-user purchases during the period. If there are few end-users, this is an accurate measurement. However, as the end-user base increases, the cost rises and the accuracy of the measurement falls. A smaller sample will have to be taken and extrapolated to approximate the entire user population.

What Does Market Size Really Tell You?

Market size is one of the fundamental measurements that must be taken on the market. It is the standard measurement ruler against which all of a company's activities should be measured.

For example, expenses for an R&D project should be related to market size. The same is true for sales force and marketing expenses. On one hand, you do not want to over-invest based on market size. On the other hand, you do not want to under-invest in large, fast-moving markets.

Case Study: Measurement Instrumentation

This client was a 25-year-old manufacturing company founded by three engineers who were then fresh out of engineering school. Over the years, the firm evolved into a three-division company, as shown in Figure 1:

Figure 1 - Market Size: Case Study Company Structure

Division	Sales (%)	Salespeople (#)	R&D Expense ($ Million)
Pressure Sensors	34	24	12
Humidity Inst.	36	25	15
Navigational Inst.	30	20	14

Note: All figures are rounded. Source: Frost & Sullivan

The owners came to us frustrated with the low growth of their company. New products were not selling fast enough, and the only way they could see to encourage growth of the company was through acquisition. This represented a problem, however, as one of the three partners was 100 percent opposed to acquisition, another wanted the firm to "stick to its knitting," and the third wanted to start development projects into newer and exciting markets such as office automation and telecommunications.

The fundamental problem they had was that none of them really knew where their relative strengths and weaknesses lay. They had no marketing department per se, although they did have sales managers and a literature development group. Each division had its own sales support structure, and was of roughly equal size based on contribution to total sales.

We started on a quick market engineering overview of the company to determine where it was positioned in the market. As each division was in a radically different product area, we had to develop three distinct overviews.

The first and perhaps the most important parameter that we determined was the firm's size in each of the markets in which its divisions competed. Of course, knowing the market size and volume of sales of each of the divisions, we could immediately calculate market share, as shown in Figure 2:

Figure 2 - Market Size: Market Share Calculations

Division	Sales ($ Million)	Market Size ($ Million)	Market Share (%)
Pressure Sensors	40	600	6.6
Humidity Inst.	43	50	86.0
Navigational Inst.	36	110	32.7

Note: All figures are rounded. Source: Frost & Sullivan

This certainly was an eye-opener. It immediately showed us that the firm was looking for greener pastures while completely overlooking the green grass in its own backyard. It was quite obvious that the growth we were looking for would most likely be found in the pressure sensor market.

As we previously indicated, each of the company's three divisions was run by one of three partners. Unfortunately, the non-aggressive partner was responsible for the pressure sensor market.

A few simple calculations illustrated the immense potential that lay in the pressure sensor market, as shown in Chart 1 and Chart 2.

This analysis brought us to the conclusion that if the company had as many salespeople per market size in the pressure sensor market as it did in the humidity market, there would be 12 times as many salespeople to address that market. Moreover, R&D spending would be increased by $200 million as well, if it were in proportion to the humidity market.

The Response

• The company stopped its investigations into acquisitions and product development outside its areas of expertise.
• The company formed a management committee to oversee all product lines rather than segmenting the firm into three discrete divisions. The division strategy made no sense based on market size.
• The company began increasing the number of salespeople in the pressure sensor market. The company decided to increase the sales force by 10 percent per year for three years and to observe the level of sales per salesperson to determine if they remained stable.
• The firm allocated additional funds for product development to grow the pressure sensor market in line with the two other segments the company addressed.

The Result

• The company grew by an average of 11 percent per year over the next three years, approximately 6 percent higher than over the previous three-year period.
• Sales from the pressure instrument division now account for 51 percent of company sales, and this figure is projected to increase to 75 percent over the next seven years.
• Management harmony has increased considerably as management now chooses to base its decisions on market figures instead of personalities.

Read more »

Un pibe de 15 años que se volvió multimillonario

Meet Raphie: The 15 Year-Old Developer Who Built ShareBrowse

Forbes

There are moments in your life when you meet someone half your age who who has accomplished twice as much. I had that experience when I metRaphie Palefsky-Smith at theAngelHACK finals in San Francisco a few weeks ago.

Raphie is a 15 year old high school student attending Georgiana Bruce Kirby High School in Santa Cruz. At AngelHACK, Raphie won third place and a huge trophy for building a project called ShareBrowse (which is currently down).

Have you ever had to explain to your grandparents how to use gmail over the phone? How about Facebook? Twitter? Youtube? If so, ShareBrowse would have been an enormous asset. The concept behind ShareBrowse is simple: a zero-install Internet helper in your browser; all you need to do is share a link from one party to the other and both sides are able to see the same site and the other user’s mouse. While the concept is already embedded in other products, ShareBrowse spans individual applications and has a very clean interface.

After Raphie blew away the crowd and judges (one of them offered him an internship at Facebook, another at Google), I had the opportunity to connect with him and chat about his project, how he learned to hack at the tender age of 15, and which companies excite him right now.

Alex Taub (AT): When did you start hacking?
Raphie Palefsky-Smith (RPS): At the beginning of last school year. I’ve always been interested in tech — my dad’s in IT, and the computer gene kinda rubbed off on me. However, I wasn’t actually technical; I spent a lot of time online and worked with my school’s IT team, but I didn’t code. Last summer my friend showed me a blog post about theTeens in Tech Incubator program, and I thought it’d be a great experience — tech and business together! That was my first foray into the startup world. I started reading TechCrunch and going to meetups.

A lot of tension great between my two co-founders (of Codulous) and me. Looking back, I had unreasonable expectations for them — after all, I didn’t know anything at all about programming. So when school resumed I decided I’d learn to code myself and take matters into my own hands. I did an Independent Study in JavaScript, and to my surprise, I really enjoyed programming. From then on I’ve become progressively more technical.

AT: What have you built before?
RPS: I’m very much the tons-of-little projects type. It usually goes something like this: I find a cool API/library/technique and quickly hack something together. In the process of researching for that project, I find something new and embark on a new project. So none of these are at all complete, but a pretty broad list would be: a web interface for Spotify (nodejs), Solitaire Encryption (java), various Titanium apps, Arduino projects like game controllers, command-line Blackjack, a game/signboard app for a Launchpad MIDI controller, an Epsilon-greedy AB-testing framework, a little bit of Flash Augmented Reality stuff, and a couple quizzing apps for AP Chem. This summer I’ve been interning at a company called Offerslot, and I’ve been working a lot with geodata and Google Maps. They had me learn Ruby and it’s my favorite language yet.

AT: What made you build Sharebrowse?
RPS: I was planning to go to AngelHACK weeks in advance, but I’m a terrible procrastinator and delayed buying my ticket. When I finally got around to it, they were sold out! I resigned myself to going to the Reddit meetup in Golden Gate Park. However, on Friday I dropped by Firebase for their office hours (they do that every Friday). I’m a big fan of Firebase; I got my account the day they launched and immediately used it in several projects. Anyway, I had the pleasure of meeting James Tamplin, and we talked for a while before he asked if I enjoyed hackathons. I said I did, and as chance would have it, he had an extra ticket to AngelHACK! This was the day before the event, so I got on the Caltrain and began wracking my brain for ideas. I specifically wanted to do something with Firebase. It’s not that I felt obligated to make something with their API, I just thought it’d be nice to have their support (plus, I was already a big big fan of the service. After they add more security features, I’m using it for *everything*).

Since their speciality is syncing data, I tried to come up with ideas that might really benefit from that. Eventually I settled upon syncing two browsers. The tech support angle didn’t immediately jump out at me, initially I thought it’d just be really cool. The best practical application I could think of was demoing a website or avoiding the need to send a bunch of links. It wasn’t until about 30 minutes before the first demo round (with the help of Andrew from Firebase) that I settled on helping granny as the main use case — it was by far the easiest one to pitch, as almost everyone’s had that problem. Ironically, I really haven’t — my parents are all pretty good at tech — but I knew it resonated with quite a few people.

AT: Where do you want to go to college? Or do you want to go at all?
RPS: I absolutely positively want to go to college. I’m gunning for Stanford, but I’d also love to go to CMU, MIT, or Cal. Maybe even an Ivy. I know a lot of startup people don’t really fit into the educational system (which I totally resonate with – it’s broken in a lot of ways), but for me it works pretty well.

AT: What do you want to do when you get older?
RPS: I definitely want to code for a living after college. Hopefully as a technical cofounder of some exciting startup.

AT: Which companies are you excited about?
RPS: Oh god, I’m excited about a bunch. Pretty much anything I read about on Hacker News piques my interest. The companies I’m most into *at this very moment* are Code School (awesome platform for learning), and a couple of online design sites — Easel.io, Accelsor, and Divshot. That’s a huge pain point for me. I love the html and js side of the web, but when it comes to CSS, I can design as well as John McCain can pick a running-mate. I’ve never been a visual person. At all. So the prospect of drag ‘n’ drop mercifully quick design is very welcome. BTW, ShareBrowse was designed by two lovely gents — Ben Reyes contributed to the first version, and Marc Laugharn did the final version.

On that note, there are some other people I definitely need to thank. Here’s the whole list (in no particular order; everyone was amazing): Daniel Brusilovsky, Andrew Amis, Ben Reyes, Marc Laugharn, the whole teams at AngelHACK, Firebase, Tokbox, Nodejitsu, and Offerslot, my parents, the webetalk IRC gents, and Carter Hinsley. ShareBrowse would never have been finished without people to bug about iframe permissions and socket.io.

AT: What are all your friends playing in school?
RPS: Not many coders at my school, but a ton of gamers. Starcraft, TF2, and League of Legends mainly. I host a Minecraft / Ventrilo server in my living room (some other members of the gaming league do the vast majority of the admin work, I just have fast internet).

Read more »

5 cosas para mejorar su identidad digital

5 Key Things Needed To Improve Your Digital Identity

Having a solid digital identity is more important now than ever. The first thing anyone will do when they hear your name is Google search you. Would you like to rely entirely upon an algorithm? I didn’t think so. This is twenty-first century due diligence. Your online presence requires cultivation and work: make sure it is not only up-to-date, but also accurate and tasteful.

Here are five tips to improve whatever you are currently doing:

1. Get a Twitter account and make it legitimate.

• Switch your Twitter account to @firstname+lastname or @initials — none of this number garbage.
• Add a short bio to your profile: a brief, high level overview. Long bios are tough on the eyes and people may think you don’t really do anything). See mine here:@ajt.
• Start following people and subjects that are relevant to your industry (or in the industry you want to be in). Remember, Twitter is an interest network, not a social network.
• Be active! Tweet daily news articles that you find interesting. Reply to people who share interesting things. Be part of the conversation!

2. Create an About Me page.

• Go to about.me and set up a page; the ideal formula is about.me/(your first name)+(your last name). So, for instance, about.me/alexander+taub.
• Link up all your social media accounts and add a short bio about yourself.
• Add a photo of yourself and a background.
• Add the link to your signature on every email you send (you can access this in your email settings; for instance, Gmail users can change their signature here.)

3. Acquire domain names.

• Pick up or buy the following websites: YourFullName.tumblr.com (get it on tumblr.com), FullName.com, AlternativeFullName.com
• Buy them for two or five years: you will get a better deal.
• This will help control what people see when they search your name.

4. Work on your blog.

• Start thinking about blog post ideas. You have a perspective that is unique; what have you seen or experienced that is worth sharing, and might be valuable to others?
• Make a draft every time you have an idea but also spend time thinking of a theme. Examples of themes include lessons learned, tips on x, y, and z, how you are unique/different, etc.
• Decide how frequently you want to blog: once a day, week, month. Stick to it.
• Consistency is absolutely important, but some people only want to write when there’s something to write about. That’s fine, but the option exists to use substantive “filler content” (i.e. share quotes, links, etc.) so there aren’t huge gaps in content on your blog.

5. Go to events (not really digital, but very important as physical and digital overlap)

• For New Yorkers: Sign up for Charlie O’Donnell’smailing list, General Assembly, Startup Digest NYC, andGary’s Guide to know what events are coming up.
• Share the events with your friends/followers — be someone “in the know.”

These tips should help you become visible and take control of your online identity. I’ve been working on this for a few years now and try to follow my own advice. If you Google search “Alex Taub,” “Alex Taub Dwolla,” “Alex Taub Aviary,” “Alex TaubTech,” or some other variation, my information covers the first page. Not some other Alex Taub. If I’m not logged into Google my LinkedIn comes up first, then my blog, then my Twitter handle, then a celebrity producer named Alex Taub (Producer of Television shows like Early Edition, Drop Dead Diva), then my About.Me.

Owning my digital identity didn’t happen overnight. If you look at all my social media, I have a consistent brand across the sites (same bio of “Biz Dev, Entrepreneur, and Dwolla. Previously at Aviary. Forbes Contributor”). This matters because I want people to be able to connect with me if they need to get in touch; I want people to know who I am and what I do. By having a consistent, visible digital identity, I’m putting myself in a position for good things to happen. I recommend you do so as well.

Forbes

Read more »

Cómo estimar tamaño de mercado

How to estimate market size

As an entrepreneur, your time is a very valuable asset. It takes as much time and effort to build a business whether you’re attacking a small market or a big one. But the rewards for success in a big market are much greater, so it makes sense to attack big markets.

For the same reason,VCs are often very focused on market size. But there is is a lot of confusion about how to estimate market size. While you might play in a big industry, it is the Total Addressable Market size (TAM) that is really important.

TAM is really a pretty simple concept – it is what your revenue would be if you had 100% market share in your business. This is often radically different from what an analyst report estimates as market size as their view of the “market” can be quite different from what your product can address. Here is an excellent analysis from VigLink of their TAM:

Viglink allows publishers to put commerce links into their content with a universal affiliate code, and then tracks sales that originate from those links and pays out the affiliate fee. As you can see above, they have done a really nice job of starting with an enormous “market size” ($600bn+ ecommerce market) and broken it down into what is addressable by them, the network payout piece of commissions coming from affiliate orginated ecommerce transactions, which is still a $1b+ opportunity.

I’d urge other entrepreneurs to conduct similarly realistic analysis when they present market size estimates.

LSVP

Read more »

Una startup que combina con la novicia rebelde...

Quilters And Sewers: The Key To Startup Craftsy's Unfettered Growth

Jewelry Making and Cake Decorating.
Quilting, Gardening and Spinning and Weaving.
Knitting and Sewing some beautiful strings.
These are a few of my favorite things.

- A new take on “My Favorite Things,” Sound Of Music 

Craftsy, an online education platform, offers interactive classes in all the categories in my Sound Of Music mashup above plus more. Since the site launched in July 2011, they’ve already managed to attract over 500,000 class enrollments (paying an average of $26.50 per class) and are projected to hit over 750,000 class enrollments by the end of 2012. Craftsy’s most popular class is a quilting course, which has almost 100,000 students. The site is currently on track to become larger than the University ofPhoenix, which is considered to be one of the largest online educators.

Craftsy has one major advantage over other online educators: demographics. Almost all of its users are women and 80% of their users are over the age of 40. Most users live in the suburbs or rural areas, with over 50% of users spending more than ten hours a week crafting. The makeup of their userbase is not that of a standard Silicon Valley or New York startup.

This makes sense, considering that the Craftsy team works out of Denver, an off-the-beaten-track tech hub in the U.S. The team has built their business through very traditional marketing and advertising in trades and other decidedly low-tech venues like sewing conferences. And most important, they are going after an underserved but very large market. For instance, there are 21M quilters in the U.S. who spend approximately $3.6 billion annually, and there are 26M sewists (yes, a real word) and they spend $2.7 billion in total annually. Craftsy is the first site of its kind, and the first platform to bring these old-school, localized industries online.

I had the opportunity to connect with the founders of Craftsy, two former eBay execs, John Levisay andJosh Scott, to ask them a few questions.

Alex Taub (AT): Where do you see your business going in the next 12 months? What are emerging classes?
Craftsy Founders (CF): We are producing 15 new 4-6 hour classes per month, and will continue to ramp up production in order to produce more than 250 new classes in 2013.  Many of these new classes will expand our offerings in existing course categories, including quilting, knitting, crocheting, sewing, cake decorating, jewelry making, and cooking. We will also add classes in a number of new categories over the course of the next 12 months.

AT: Any plans to take the classes offline?
CF: Many of our instructors offer terrific offline classes, in addition to the classes they teach online via Craftsy. We will continue to work with them to promote their offline class offerings. We will also continue to have a significant presence at local trade shows and conferences in the categories we cover, like the International Quilt Festival.

AT: Why has Craftsy been so successful with the female demographic? Any plans to expand to classes geared towards men?
CF: Our core demographic has been traditionally underserved by technology companies, which ordinarily skew towards men. Our audience is affluent, well-educated, and technology savvy, and we look forward to continuing to focus on meeting their educational needs.  Our current courses are geared towards women, but we are considering creating classes which are more male-focused in the future.

AT: Where do you think the future of education is going?
CF: We think the future of education centers around accessibility. High-quality educational experiences have, for too long, been exclusively available to those with money, time, and a specific geographic location.  We look forward to continuing to create superior educational content that’s easily accessible to more people, at more times, in more places.

AT: What’s the most interesting thing about Craftsy that hasn’t been spoken about publicly?
CF: Craftsy members are not only passionate about their crafts, they are also passionate about giving. We are kicking off a holiday charity event this week where we are asking Craftsy members to knit hats for homeless children. Last year, when our community was much smaller, we collected over 3,000 handmade hats.

AT: Where do you see yourselves compared to other education startups?
CF: Craftsy stands apart from other education start-ups in two fundamental ways:

1. For students, Craftsy offers:

• Access to an interactive learning experience. Craftsy’s unique platform captures the magic of a live class experience, and discussions and interaction are seamlessly woven into the learning experience. If you have a question while watching a video lesson, simply click the “ask a question” button on the screen. Your video will pause and the question you ask (which can include a photo if helpful) will be associated with that exact time point in the play of the video. You will receive an email notification when the instructor or classmates respond to your question; typically you will receive multiple responses within 24 hours.  This integrated Q & A creates a virtuous loop of contextually-relevant interaction that makes the content more robust over time. When other students view that same time point in the video lesson, they will see your question appear contextually on their screen, and will see the ongoing threaded discussion in response to your question, so their experience will be enhanced as well.
• Access to the world’s best instructors. Craftsy aims to democratize access to distinguished teachers who are well-respected and lauded in their fields. Within each of our categories, we seek out and work with the best instructors from around the world. Our instructional design team collaborates with each instructor to design a compelling class that will deliver a great learning experience. We bring the instructor into our studios and our full-time, professional production team films the class in a several day, multi-camera, HD shoot. Our editing team then creates an in-depth lesson out of the raw footage, adding motion graphics and other supporting material where helpful.  The result is a high-quality, effective class experience.  The focus on consistent quality enables students to trust the experience they will receive from Craftsy, and save the time they would otherwise spend digging through inconsistent online offerings.
• Classes that are available for students to enjoy on their own schedule and in the comfort of their own homes. Craftsy classes are available anytime, and students can access courses as many times as they want, for as long as they want since access never expires.
• In addition to the aforementioned benefits, the Craftsy online education platform enables students to easily take and review notes while watching a class, show the projects they create as a result of what they have learned, loop over important sections until they are mastered, access closed captioning of the video lessons, and search the text of the videos and discussions to easily access and review relevant moments.

2. For instructors, Craftsy offers:

• Scalability: Craftsy classes attract thousands of students, far more than an instructor could ever manage to interact with in a live classroom setting. The Craftsy platform makes it easy to teach and interact with a large student base.
• Ease: Craftsy instructors are experts in their domain, but not necessarily experts in technology development, video production, or online marketing, so we handle all of that for them. All Craftsy instructors need to do is what they do best, teach a great class. The Craftsy team handles the rest, including production of the online courses.
• Income: Craftsy is a significant source of income for our instructors, with several earning over $100K per year.

Read more »

Como puede un emprendimiento evaluar el tamaño de mercado

How can a startup company best evaluate market size and find the market data?

Often times investors wants to know market and industry potential and stats of the startup product, how can startups best find and present these informatin?

In this blog post, my aim is to solve two common problems for startups.

1.      What is your total market potential?

2.      How much of that market can/will you capture?

Although it may be impossible to answer these questions accurately, you can use a data-driven, bottom up, and logical approach to help answer these questions in a way that will satisfy potential investors and bankers.
Calculating Market Potential – Example
I want to start by giving you a few tips and tools that you can use to help calculate your total market potential, and then I want to show you a real example of how I calculated the market potential for a product I created for this blog.

1.      Industry Reports – Depending on your market, it may be that a market research firm has already done this work for you.  Don’t make things hard on yourself, if you sell dog food try Googling “Size of Dog Food Industry.”  When I did this I found www.petfoodindustry.com which told me that by 2015 the global pet food industry should reach $56.4 billion.  I am certain that their extensive report will break down the industry by type of pet, so you would be able to find the market potential for the dog food industry.

2.      Competing Websites – This does not work for every industry, but for many industries I think this will be a good data point to use when determining the market potential.  Go to www.compete.com and search for your competitors websites.  If their websites are getting significant traffic you should be able to see an estimate of their traffic.  If you know that your competitor has 100,000 website visitors per month, at least you know that the market potential for your website is at least 100,000.

3.      Google Adwords Keyword Tool - Finally, I would suggest that you use the Google Adwords Keyword Tool to determine how many searches related to your market take place on Google each month.  The data that Google provides through this keyword tool gives marketers no excuse for building a product or service that no one wants, because Google users are telling you exactly what they want through search data.

Now let me show you exactly how I determined the market potential for a product that I released on my blog called the Executive Summary Toolkit.

First, there are no industry reports that show what total market is for business plan executive summary resources, and there are not any other websites that compete specifically for executive summary related keywords only.  There are a number of business plan websites that compete with me.  Based on the Compete.com data on Bplans.com they receive over 160,000 visits per month.  This gives some idea of the scale of the potential market.  Bplans is the leader in business plan software, templates, examples, and advice, so this number helps me know that my market is probably not 10 million visitors per month, but it is also more than a couple thousand visitors per month.

Determine Market Potential with Google Keyword Tool

Now armed with info from Compete.com on my major competitors, I use the Google Adwords Keyword Tool to find out how many searches occur every month related to executive summaries.

So I used the keyword tool and typed in “executive summary” this gave me the monthly search traffic for that keyword, along with search traffic for dozens of related keyword phrases.  I picked the top 14 relevant keyword phrases, and then added a 15th line item for “All Other Relevant Keyword Phrases”  I listed those keyword phrases and their corresponding monthly traffic estimates.

I added all of this traffic together and came up with a total of 724,620.  Now this is NOT your market potential yet.  There are a number of considerations to include first.

1.      This is only Google search data.  Google dominates the search engine market in many geographic locations, but there is still a healthy 33% or more that do not use Google as a search engine.  So I would simply multiply that Total Search Traffic Number by 1.33.  In my example, that gives us 963,744 as the new total search traffic number.

2.      Now I want to propose for this specific situation that at least one half of these searches are the same person searching more than once, and gradually refining their search terms.  So a user may start with a general search for “Executive Summary”, but what they really want is an “Executive Summary Example Template.”  So your market potential is actually smaller than that total number because each search does not equate to exactly one person searching.  Make sense?  SO… now I am going to cut that Total Monthly Searches number in half, which brings it down to 481,872.

3.      Lastly, I want to point out that there could be potential customers that are not searching for your product or service.  Some businesses are primarily social, so you might generate a majority of your website traffic through Twitter, Facebook, and Google+.  Check out your competitors, are they active in social media?  For me, I know that historically, 25% of my website visitors come from sources other than search engines.  So for the purpose of this example, I am going to multiply 481,872 by 1.25.  Now we end with a market potential of 602,340.

4.      The last consideration is how many of these potential visitors will actually pay for something?  Again this is going to vary by industry, pricing, product quality, etc.  Unless you have some historic data you are going to have to guess here.  I would suggest a LOW number. I know that approximately 1.25% of my website visitors will purchase an Executive Summary Toolkit.  If that is a characteristic of the market as a whole, then I can take 1.25% times 602,340 which gives me 7,529 potential buyers.  If I multiply that by the purchase price of the executive summary toolkit which is $4 and multiply by 12 months I end up with a total annual market potential of – $361,400.

I think we have come up with a data-driven market potential for my executive summary toolkit product, but unfortunately I can not expect to capture the entire market.  Some of you might be working in industries that have a total market potential of hundreds of millions or even billions of dollars, so now the question is how do you project the market share that you can capture?

How to Calculate Potential Market Share

I am going to continue with my example, and ultimately come up with, what I hope is a realistic financial projection for my Executive Summary Toolkit.  In order to do this I am going to take a few steps back and start with our total potential visitors which amounted to 602,340 per month.  We can break this big number down with click through rate data.  As you know, there are 10 search results displayed on the front page of Google, but every searcher does not click on all 10 search results.  Thankfully, Slingshot SEO put together a great report that outlined the click through rate for a search result in each of the top 10 positions on Google.  See the table on the right.

So based on your search position the potential market share that you can capture changes.  For most search phrases your website will not show up more than once in the top 1o results, so the maximum click through rate you should expect is 18.2% if you were in the top search position.

As a startup, it takes time to get your website to rank for the keywords that you want to rank well for, so in the first 6 to 12 months of business your traffic may come entirely from sources other than search engines.

Once you start to rank in the top 10 results for some of your keywords, you can better calculate your market potential by simply applying the click through rate percentages to each keyword phrase.  For example we can look at a few of the keyword phrases that I rank well for in Google:

·        Executive Summary Example – Rank 7 – Total Searches 49,500 – CTR for Rank 7 = 1.9%

·        Executive Summary Format – Rank 9 – Total Searches 6,600 – CTR for Rank 9 = 1.5%

·        Example of Executive Summary – Rank 8 – Total Searches 1,000 – CTR for Rank 8 = 1.7%

With some simple math you can determine how many visits you should receive from each keyword phrase.  Rather than bore you by doing this for every single one of my keyword phrases, I am going to simply utilize the data that Google Webmaster Tools provides me.  For the last month Google Webmaster Tools tells me that my website has showed up in search results 250,000 times, and I have received 12,000 clicks.

Now that I have an estimate for how many people will actually visit my website, I can apply my 1.25% sales conversion rate to my 12,000 visitors per month.  This gives me 150 purchasers per month times $4 sales price times 12 months and I end up with $7,200.  Finally this equates to 1.9% of the total market potential that we calculated above.

After going through this entire process you can now say confidently that your startup plans to capture X percentage of the total market.  Rather than simply pulling a number out of thin air, you can truly use a bottom-up, data-driven approach that will put you ahead of your peers when you present your startup to potential investors or bankers.


Quora

Read more »