How to Calculate Market Potential for a Startup

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.

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. B-Plans 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.

[Editor’s note: This is a guest post by Adam Hoeksema, the Founder of ExecutivePlan which helps entrepreneurs write powerful business plan executive summaries. Adam is also the author of how to create financial projections – a guide for startups.]