to the final video and a three-part
series in which we're trying to figure
out how to evaluate our market potential
for a business idea that we have if you
recall from the press past two videos
well welcome to the final video in a
three-part series that we've kind of
gone through related to evaluating our
market potential and if you recall from
our past two videos we kind of walk
through a framework for thinking about
our target customer thinking about the
total available market everyone that
possibly has a need or a problem that
our solution can suffice and then
ultimately looking at what are some ways
that we can describe our target market
looking at methods of segmentation to
develop a more narrow grouping of our
customer so that we can tailor our
message to them and ultimately reach
them with our marketing messages that's
also going to help us evaluate how many
people fit those characteristics within
a specific area so in this video we're
actually going to work on some basic
calculations I'm going to show you a
couple of resources that you can find
online and then I'm going to throw in a
couple of new pieces of information
related to those of you who are
evaluating online businesses that will
be a little bit different from the
current process that I'm going to walk
through now the one thing I want to
mention here real quick and I think I've
echoed this in Prior videos is that
estimating the size of a market is not
an exact science so we're never going to
get a hundred percent accurate but we're
trying to get as close what we're trying
to get is a less fuzzy picture of the
revenue and profit potential of an idea
so taking this broader group and looking
at realistically who do we think that we
can acquire and how many of those people
reside in an area and then ultimately
looking at our business model and
projecting our finances based upon that
information versus maybe a overly rosy
picture that's going to cause us to go
down a path
that might not end up the way that we
hope so for starters you can see in
front of you I have a table with five
columns and we're going to be using this
table to estimate the total estimated
sales for our particular business idea
so there's a couple of pieces of
information that we need in order to
gauge or obtain this figure and the
left-hand column you'll see that we have
the number of purchases per month then
we have the average amount or dollar
amount spent per purchase total monthly
spending which is simply a derivative of
numbers or columns a and B and then the
number of customers in the serviceable
area so this particular figure here is
really what we're going to spend the
most time on but I'm also going to walk
through some helpful kind of tips for
estimating purchases per month and
dollar amount purchased and those types
of things so to get us started
let's first kind of make us some
assumptions now we have to make
assumptions when we're evaluating a
business and what we try to do is base
those assumptions on information that
we've obtained from customers on
observable behavior and different things
so they're a little bit more reliable
what we have to make some assumptions we
just try to make sure that they have a
little bit of validity to them so that
you know when we're making decisions
based on those assumptions that the
assumptions are fundamentally flawed
then obviously the decision-making is
going to be flawed as well so in this
example we are gonna try to open up open
up a coffee shop so we need to first
start by estimating the number of
purchases per month from our target
audience now the way that we can have
got this data is by potentially
surveying people who frequent coffee
shops and asking them how many times
they go in a given period of time you
can use any period of time you want it's
just important that you keep all of the
information in the same interval so if
you're asking people the number of times
per month then obviously you're looking
at average spending per month and those
sorts of things if you're going with the
year I find that it's easier to survey
people in smaller
mounts because a year is a very long
period of time and so it's really hard
to estimate the number of times that I
do anything in a year but if you give me
a month it's actually a little bit
easier even a week potentially that
could be even easier so it's up to you
how to splice the information just those
are some of the things that you probably
want to think through so for our example
let's just say that we believe that
someone's gonna come to our coffee shop
let's say one time a month we really
want to be conservative and we know that
very well people might come more that
are more frequent but certainly not
everyone is going to show up with great
frequency and some people might not show
up at all in a given month and so we
want to be conservative so we're gonna
say one time one purchase per month now
in column B here notice that it's the
average amount spent so you can do a
couple of different things what I've
always recommended is there is what we
call the observation method and this is
a really simple method that you would go
to a coffee shop and you would sit there
for an hour or so and just keep tally of
the transactions that take place and the
amounts of those transactions and
compute a basic average and use that as
the average amount spent on a monthly
basis now it's not going to be entirely
accurate because you're certainly not
going to sit there from open to closed
at least I hope that you wouldn't but
you're welcome to try but it will help
you give get a little bit of data and
some insight into the average amount
spent you can also look at the menu
board and you know that in a coffee shop
setting if you buy anything you're gonna
spend probably 5 bucks so you can use
that so let's say that we've determined
that the average amount spent is going
to be $5 and so we're going to go ahead
and we're going to enter that particular
number here which means total monthly
spending per person is in fact $5 pretty
simple example yours will probably be
different but I'm keeping the math
fairly simple since that's obviously not
the point at the point is the process
now in this fourth column here we need
to figure out some information right
there's a lot of unknowns we need to
estimate the number of customers but not
just general customers customers in our
serviceable area so for a physical brick
and mortar retailer where we have
an actual location there's a couple of
things that we can do to figure this out
so I'm going to open up my web browser
here and I'm gonna go to a real estate
website called loop net now loop nut is
a free platform that you can use to find
commercial property whether it's for
lease or to purchase and you enter in
some characteristics such as the type of
property whether it's a flex space or
manufacturing or retail or restaurants
and then you can sort by square footage
and pricing and all those other
different things so when you're getting
to a point where it's pretty helpful for
you to find some type of space this is
really a good starting point just to see
what's available what inventory looks
like and then you can kind of Whittle
the list down based upon the important
criteria that you have for your business
so just to make things easier since the
point of this video is not to like
navigate through loopnet or inform you
how to work it
but we're just going to pick a property
and so we're gonna pick clovis which is
that where I live and we're gonna pick a
property here this is the one on the
West Show so I'm gonna select this
property and it seems to be in a good
location we're not really evaluating the
location just yet we'll cover that in a
future video but we would want to make
sure that this space has our particular
customer and the right complement of
businesses that draw in similar
customers to us but because this isn't
the point of this video we're simply
going to use this as a basis here so
let's say we think that this property is
a good thing for us and so we can scroll
down and look at some of the different
criteria and things like that what's
helpful about loopnet and this
particular property does not have it is
they usually contain a marketing
brochure that has a lot of data now this
particular property though when you go
to the very bottom it gives you
household information it gives you age
distribution and notice on the right
hand side here this is one mile this is
three miles and this is five miles so
when we talk about a serviceable area
we're referring to how far people will
go to get to us now in a coffee shop
setting that varies based upon the
availability of competition based upon
the availability of other businesses and
a number of different factors so we
might estimate that really in our area
because there's several different coffee
shop
it's gonna be really hard to attract
someone a mile out so we're going with
one mile and we can scroll down here and
notice this radius again you can sort by
Drivetime or miles in any way you want
to splice the data so one mile out would
be this inner red circle and then three
miles and then five miles and so you get
a visual representation of how far
you're expecting people to drive and
then you can realize maybe that's not
realistic or so now at the very bottom
this is where it gets really helpful is
because it gives us population data so
if we agree that our serviceable area is
a mile from our location
notice that the serviceable area in this
left-hand column under one mile gives us
all kinds of helpful population data and
this can be very very useful so we can
use this information to help estimate
the number of customers that might come
to our business there's a couple of
things I want you to keep in mind the
first thing is we rarely get data in the
form that we want it presented and that
just makes sense right because people
are looking at problems that are
different than ours and are evaluating
businesses that are different than ours
so a lot of times we have to kind of
manipulate the data in order to get it
to where it's feasible or practical or
usable for us so notice under 2010
population we have twenty thousand one
hundred or twenty thousand six hundred
and sixty-seven and then twenty twenty
four population we have twenty seven
thousand seven hundred fifty-five now we
can use either of these personally I
would kind of split the difference and
use an average which would be twenty
four thousand two hundred and eleven but
you can certainly use either sets of
population data I'm gonna take an
average just because obviously it's
several years from 2010 but we're not
quite towards 2020 for either so I want
to base my decision-making on that so
that's a helpful piece of information
because that's the number of people in
our serviceable area that twenty four
thousand two hundred eleven that
essentially is our market but we know
that not everyone within that market is
going to have a desire to come to our
business and so we're going to go back
here and in the prior video what I
suggested that we do is we have to
develop
our customer profile so what are the
common characteristics that a person
who's going to go to our business
purchase our products or services what
are the commonalities they share some
businesses there are some very there's
multiple commonalities some there are a
few and so for this purpose we're gonna
say that we believe that our target
customer is someone who trends a little
bit younger we're going to be attracting
the kind of high school and college
crowd that's looking for a place to
study and then we're also gonna go after
young professionals who are looking for
a place to get work done and maybe don't
want to work in an office setting or
maybe want to split time between an
office and a coffee shop because that
tends to be more relaxing so we need to
figure out the number of people that fit
those characteristics so for that we're
actually gonna move over to what we call
the Census Bureau's American FactFinder
now you can find this website by just
doing a quick Google search Census
Bureau American FactFinder it's usually
the first result that pops up notice
here in this text box text box you can
enter in your state county city hometown
or zip I went ahead and entered the zip
code from the location where we found
this business which is nine three six
one two now from here we can select
multiple population results we can use
this information we can use the prior
information that we've got it's
completely up to you I'm going to use
the prior data that we had that was
published by the property management
company for the property that we found
which is that twenty four thousand two
hundred eleven now what we want to do is
because we think that our customer fits
a certain age demographic on the left
hand side of your screen you're gonna
see an option for age so I'm gonna
select that option and it's going to
give us some really helpful information
like the median age and all those other
different things but we really want to
know how many people fit certain age
categories so under the 2017 American
Community Survey we're gonna click on
the first link here age and sex and
that's going to open up this really
archaic looking table and I apology
obviously information or data isn't
really presented in a very just visually
appealing way but we can use it to help
estimate our target customer at least
the number of people that fall into our
customer so on the left-hand side here
this shows total population and it has
the percentages within each age range
that represent that population so under
five years is approximately 7.3 percent
five to nine years is approximately 7.9
so on and so forth so if we're appealing
to a high school age demographic as well
as college and potentially young
professionals we can say that we're
appealing to the 15 to 19 year category
the 20 to 24 category the 25 to 29 and
let's say let's keep it at those two
categories actually that probably makes
the most sense so if we added up the
percentages in each of those categories
six point six ten point two and seven
point seven we would get twenty four
point five percent that is the
population that falls into that age
range now this isn't a hundred percent
accurate so if you're doing of your
thinking through this at home and
thinking well the total population in
this particular data set is thirty five
six twenty five our population is twenty
four to eleven there are some problems
with that remember that we're just
trying to get close for trying to get a
ballpark figure here for the purpose of
estimating whether or not this is an
idea worth pursuing if it's not then
we're not going to go on to the next
step but if it has a little bit of
feasibility we might do more analysis
and more rigorous analysis to see if it
passes the test so armed with this
information we're going to go back and
we're going to update our customer
profile so here's the information or
pieces of information that we know right
now so we know that we have
approximately twenty four thousand two
hundred and eleven customers in our
serviceable area now we also know that
twenty four and a half percent of them
fit our age demographic so we're going
to multiply this twenty four thousand
two hundred eleven by 0.2 four five we
need to
Verte it into a decimal otherwise our
math is going to be we're gonna get a
very very good estimate of customers
that's not going to be very helpful for
us at least long term and we multiply
those two numbers together and the end
result of that is going to be five
thousand nine hundred and thirty-four so
this actually represents the number of
customers in our serviceable arian so
we're gonna update this box here to say
five thousand nine hundred and
thirty-four and then we're gonna
multiply our total monthly spending by
our number of customers in the
serviceable area and that's going to get
us twenty nine thousand six hundred and
seventy one dollars in a given month now
we can extrapolate that out to determine
how much we would earn in a quarter and
then a year and then several years which
we can certainly do but this is
estimated sales for a given month so now
what we can do with this information is
we can take this and we can work
backwards and we can estimate well what
are my cost of goods what are the what's
the cost of the beans to serve this
number of customers how many
transactions is that in a given period
of time right we can compute that pretty
easily what do I fix cost what's my rent
expense how much does it cost for labor
marketing those types of things and we
can better estimate how much profit we
might earn in a given period of time I'm
much more accurate than simply just
trying to pick a number that sounds
really really good now there are a
couple of things that I want to leave
you with before we finish up and then
we'll talk about our online folks you
guys evaluating online businesses the
first thing is this this end result this
twenty nine thousand six hundred and
seventy-one is only valuable or as
valuable as the inputs as the
assumptions that we have so if we're not
making accurate assumptions related to
the purchase price the number of
purchases per month and we don't have a
really good and detailed customer
profile then we're probably not going to
get a very good number for estimated
sales maybe one that's really too low
maybe one that's actually too high so
that is one thing the other thing that I
would encourage you to do is one data
point isn't really valuable what you
want is
multiple data points that kind of point
to the same thing so in this instance
what I might do if I was considering
starting a coffee shop is I might go
back to this observational method that
we stock talked about before and I might
count the number of transactions that
took place within a period of time and
then I might multiply that by my average
amount of money that's spent and they
might extrapolate that out for how many
hours the coffee shop is open in a given
day and then estimate the number of days
they're open in a month and I might just
use do that as a quick kind of you know
observational bottom down approach or
bottom up approach to see if this
$30,000 figure is accurate if it's close
then that shows us that we're probably
on the right track another thing that
you can do that might be helpful is you
always want to try and ask and if you
know someone or are comfortable
approaching business owners and getting
some information from them they might be
willing to provide some pretty basic
financial information now I wouldn't
think that they're gonna print out their
financial statements and hand them to
you right I certainly wouldn't but if
you ask them questions they might be
willing to give you a little bit of
information that you can use to help
build out kind of your financial process
and estimate the market potential for
the idea those are all things that are
helpful now for our online folks one of
the things you're probably wondering is
well I don't have a physical location so
this really isn't all that helpful and
for the most part you're exactly right
but we have to make a substitution and
what we would do is instead of the
number of customers in a serviceable
area we're actually going to look at
keywords and so we're gonna find the
number of people that are searching for
keywords so instead of building your
customer profile based upon demographic
information and psychographic
information and those things you're
gonna build your customer profile based
upon what you think people would search
for and so you'll make a comprehensive
list of the five if you were sitting at
your computer and if you were searching
for a similar product or service
what would the person enter into the
google text box
what would they search for and try to
come up with a couple variations of
common things that people
would search for and then go into the
Google Keyword planner tool or whatever
tool that you prefer to use and find out
how many times those are being searched
for and then think about how many
competitors there are for those
particular keywords and you can find
this information online as well and
determine if there are ten competitors
and those are searched for 50,000 times
then every competitor right is getting
that equal percentage or equal amount of
searches so if I enter the market how
many searches would I get and what would
that translate so it's a very similar
process but you're going to be using
more online resources versus doing
observational methods because
transactions can take place anywhere and
we're obviously at a disadvantage to try
to observe the transactions as they're
taking place but if we could figure out
the number of searches the number of
competitors for those search results and
then you divide the two and you're gonna
get the number of searches for business
and that can be a really good estimation
for potentially what the ceiling would
be for you now this doesn't mean you're
gonna acquire that many searches day one
but this could be over time assuming
that your marketing and trying to
acquire customers that you could
potentially work towards and then you
can use that number as a basis for
figuring out well if there are 500
searches in a given month and I think I
can you know send those people to my
website how many people would actually
convert right so let's say my conversion
rate I think I'm gonna get 10% so that
means I'm getting 50 transactions which
could be good could be bad and then I'm
taking that 50 transactions and I'm
multiplying it by how much you spent per
month which let's say is $15 and so
we're kind of going through the process
a little bit differently but we can
still use some sound assumptions and a
standard process as a way to get to that
estimate
sailes so hopefully that information is
helpful if you're evaluating an online
business to try to encode include some
type of framework for being able to
evaluate it in a very systematic way