Show Me the Numbers
It’s time for a reality check
Once you’ve identified your market, figured out the range of possible customers you might pursue, how to reach them and how to sell to them, it’s time to find out if your plans match up with reality. As we’ve already discussed, you can discover this, at least to a certain extent, via market research. Consider hiring a market research expert to help you through this important validation phase. Or get someone with market research experience to serve as a mentor or adviser to your team.
Establishing market size
If you’re counting on venture capitalists to finance your business, be aware that some potential funders won’t be interested until you reach a certain market scale. Sometimes the total market is impossible to guess (IBM first predicted it would sell about two computers), but once again good market research will help you get a realistic idea of the actual size of the market you’re hoping to reach.
According to marketing expert Jeff Dobkin, you can’t establish the market size simply by quoting the total revenue of the industry. “To me,” says Dobkin, “establishing market size isn’t the amount of money spent. For example, to say the motorcycle industry is a four billion dollar industry doesn’t tell me very much. This figure is meaningless to small businesses—and it’s especially harmful to say, ‘This market does four billion a year, if we can just get a 1% share…’ As far as I know, no effective marketing plan correctly takes the industry figure and figures a percentage of what they will receive in revenue. When I look at a market I need to know how easy or difficult it is to introduce a product or service to that industry. I need to see how entrenched the competition is, what the entrance barriers are, etc.”1
Market research on the cheap
Dobkin reveals an inexpensive way to effectively gauge market size: visit your local library. “When trying to figure out market size,” says Dobkin, “the first place I check is the magazine directories such as Bacon’s Magazine Directory, Burrelle’s Media Directory, Oxbridge Communications Directory of Periodicals, and SRDS Magazine Media Source, to name a few. You can find out in a few minutes just how many different magazines serve this market. The number of magazines is a good indication of market size. Remember, the advertising revenue supports the magazines and the industry buyers support the advertisers.”
“Note how expensive the ad space is in the magazines. A good way to see the comparative figures for magazines is to look in Oxbridge Communications Magazine Directory—they give you a CPM or Cost Per Thousand for each magazine. This shows you the cost to reach a thousand people with a full-page black and white ad in that magazine. It makes comparing magazine advertising costs much easier. Hmm…thanks, Oxbridge!”
“Next check the circulation of each magazine: how large is their circulation? This is probably the single best method of assessing market size. There will be some pretty consistent figures showing how many copies are distributed to industry personnel. If you really want to see just where all those magazines are being sent, call the publisher and ask for a ‘media kit.’ This free package is how the publishers themselves market their own magazines to advertisers. In the package will be a copy of an independent audit showing who qualifies to receive the magazine, how they are qualified, and shows the circulation breakdown of exactly where all the copies are sent.”2
What does it cost you to get a customer?
Knowing precisely how much it costs you to get a customer in comparison to how much you expect that customer to spend is crucial to your company’s survival. If you spend $40 to get a customer who goes on to spend $15, you’re in trouble. How, then, can you know with certainty how much your customers spend? And how much, therefore, you should spend to get them? As usual, market research.
Tom Bergman, an associate professor of management at the University of Central Oklahoma, suggests: “What you need to know is how many [repeat customers] you have among all the anonymous customers who bought from you in the past twelve months. Here is how you can find out: ask them. No, you do not have to ask all of your customers. You can ask just a few, and you get a surprisingly good idea of the makeup of your customer base. You can ask as many questions as you like, but I suggest that you ask at least the following two:
- During the past year, approximately how many purchases have you or any members of your family made from this company?
- On average, what did you spend on each purchase you or your family members made from this company?
When you have this information about customer behavior, you can develop a promotional plan that recognizes these limits. Every promotional tactic you adopt that is designed to bring in new customers ought to be analyzed carefully to determine what that tactic will cost you for each new customer it brought in.”3
Refining dot.com metrics
From New Venture Creation, 2004, by Timmons and Spinelli, page 91.
Tapping a new market
The company is Silver Lake Research, a fifteen-person biotech firm based in Monrovia, California. They developed Watersafe, an at-home tap water testing kit sold in 3,000 retail stores nationwide. The science behind the product was brand new, but even more revolutionary than the product itself was how the company took a specialty store product and transformed it into a lowest-common-denominator supermarket product.
The technical challenges that Silver Lake had to tackle to bring about the identity shift bordered on the existential. For starters, US geography dictates that a mass-market product be multi-functional. “A person in Manhattan might worry about lead in their water, while a person in Omaha worries about agricultural pesticides,” explains Tom Round, Silver Lake’s vice-president. “We designed our product so it would have equal appeal in urban and rural areas.” At the same time, Watersafe had to be fast-acting, because consumers demand quick results. It had to be compact enough to fit in the tight shelf space reserved for impulse buys at the supermarket. And it had to be simple and easy to use.
Watersafe met all those requirements. It can detect seven types of contaminants, from chlorine to traces of bacteria like E. coli. Yet the box it comes in is unintimidatingly small—about the size of a DVD. All the tests can be conducted in ten minutes, and all render their results in an obvious, color-coded way reminiscent of a standard at-home pregnancy test.
Silver Lake plans to take advantage of the growing mainstream acceptance of what was once a niche trend: consumer interest in the purity of consumables.