Understanding Your Online Market and Competitors – It’s easier than you might expect!
In an online business, it’s possible to estimate the potential size of your customer base through a few handy tools provided by the major search engines. Large amounts of search traffic, or overall search volumes increasing over time may indicate that your market is healthy and growing in popularity within that particular geographical area. Let’s take a look at some helpful tools from Google:
1. Google Trends
Free to access with a Google account, you can head over to www.google.com/trends and sign in to view search trends by keyword over the past several years. Narrow down your search by your chosen location and keywords, and you’ll be able to see the overall trends in search popularity, any seasonal variations that you need to keep in mind, and other related searches worth looking into.
Keep in mind the charts presented by Google do not convey absolute search volumes, but rather a relative percentage of search queries over the time you specify. You may want to look for:
- Overall rising search query volumes over the past few years
- Any seasonal variations that may represent slow or boom times for your business
- Other similar keyword search queries for follow up research
2. Google Keyword Planner
Located within the Google AdWords interface (also free with a Google account), Keyword Planner is an excellent starting point to analyse search traffic and potential competition. We dive further into using Keyword Planner in Chapter 3.8, but for now we will be using this tool to assess whether we have a suitable market, and how much competition is out there already.
Google AdWords is the advertising interface used to manage and display your paid search ads to the browsing public who are searching for specific keywords on Google. These paid advertisements are identified by a small yellow box saying “Ad”, and are usually at the top of the page and in the right-hand column of your Google search results.
Keyword Planner is a helpful tool to analyse which keywords are receiving traffic, have competition, and are ultimately worth your time and money (or not) to advertise with. Open Google AdWords, and under Tools select Keyword Planner.
Click on “Search for new keyword and ad group ideas”. The following page will allow you to enter a keyword, and define your chosen geographic location; go ahead and start with a broad keyword and your city or country as the location. Click “Get Ideas” and you’ll see a great deal of data displayed on the following page.
At the top of the screen you will see overall estimates for search volume trends. Below this you will see a list of suggested groups of keywords, each with a number of related keywords suggested to target similar search queries. On each of the rows you will also see valuable information about these categories of keywords: Average Monthly Searches, Competition (how many advertisers are targeting these keywords), and Suggested Bid.
What are we looking for here? We want to see large enough amounts of monthly searches to prove that we have an interested and motivated (people actively searching) potential customer base. We also want to know if we can compete for a share of these customers, or if the market is already saturated and as a result expensive to advertise to with AdWords.
How Many Monthly Searches are Enough?
The answer: it depends on your business. Here’s an example scenario:
- An estimated 30,000 people search for your chosen keyword in a month.
- You advertise to these people and manage to attract 15% of these searches to click on your online ad, resulting in 4,500 visits to your website.
- You estimate that 2% of visits to your site will make a purchase, resulting in 90 sales for the month.
While you may have some variation in the above numbers and estimates, you now have an estimation of the volume of business that this keyword may realistically bring you. Would you be happy with a business that sells 90 orders per month, or are you aiming for much more than this?
Of course, expectations will vary greatly depending on the business and model chosen. A high-margin niche business may well be happy with 90 orders per month, but a company with larger aspirations may find this ceiling too limiting for the investment required.
Analysing Customer Acquisition Cost (CAC)
To follow on from the above example, we can now look at what it might cost us to acquire each customer and the resulting profit (or loss) from this activity on Google AdWords.
- Let’s say it costs you $1 per click (CPC) to attract a potential customer to your site.
- You expect to convert 2% of your visitors into paying customers, resulting in a CAC of $50.
- You are selling a product that retails at $159, of which your margin is 50%, giving you a gross profit of $79.50 per product sold.
- After CPC advertising costs, every new paying customer will result in a profit of $29.50 (note we have not included other operating costs such as payment processing, web hosting fees, etc.).
This is a simplistic example, but it does highlight how expensive it can be to attract customers and convert them into a profitable equation. Key variables in the above example are obviously the CPC, and your site’s ability to convert new customers at the highest possible percentage. It does pay to be conservative in your estimates at this stage.
Hopefully, you’ve chosen a product that your customers buy again and again, meaning their second purchase and beyond will become more profitable to you.
Use these kinds of exercises to analyse the amount of search traffic for your keywords, and how much you’ll likely pay to attract each paying customer. Try to leave yourself some margin for error, and choose a market that you can see is a reasonable size, with low to moderate competition.
What is an Average Percentage Conversion Rate for Online Businesses?
A key metric to CAC is the percentage of people who browse versus those who buy, which is usually called your conversion rate. This varies by industry, and by traffic source; your email subscribers who love you and have purchased before will naturally convert at a higher rate compared to first-time visitors who are just discovering you, and wondering if you can be trusted with their credit card details.
In many industries a conversion rate of 1-2% of traffic seems to be the norm; however some niche sites with highly targeted advertising may find conversion rates up to 5%, as their prospects are well qualified before they even enter the site. When forecasting it is always better to err on the side of caution, and leave room for tweaking your model as you learn what works and what doesn’t.