Unsplash – CC0 LicenseFiguring out whether a product is going to be successful or not used to be something entrepreneurs left to the market. They let supply and demand dictate their production schedules.
But in today’s economy, there are more efficient ways of doing things. Many entrepreneurs are figuring out how to evaluate the success of a product before they’ve even launched it.
Hold on, how’s that possible?
It all comes down to a few trusted principles. Once you understand them, you’ll be in a much better position to determine whether investing in a product is a good idea or not.
What are these principles? Let’s take a look.
The Size Of The Market
Imagine you have the best product in the world and you want to sell it to your audience. It sounds like you’re in a good position. But if your customer base is just a few people, then is it worth going to all the effort? Probably not.
Now compare that to a situation where the market is the whole world. There’s a huge scope for improving your situation and earning a profit. You don’t have to remain stuck in the doldrums, scraping together your margins. You have plenty of customers to help you generate enough volume for big returns.
Entrepreneurs, particularly of the B2B variety, have a tendency to value “niche offerings.” They believe that if they cut down the market and target just a few customers, they’ll win. After all, every marketing book talks about the value of targeting a specific audience.
But, of course, this strategy can go too far. Most firms need at least 2,000 people willing to buy their products and 1,000 who actually do it to be sustainable. If there are only 12 people in the world who want what you have to sell, you’re not going to get very far.
The Propensity Of Customers To Buy
The next part of the equation has to do with the propensity of customers to go ahead and buy your product. That is, do they actually want it?
This part of the equation is usually the most controversial. It’s difficult to know exactly who will buy it and how much.
However, once you know when to use conjoint analysis, it becomes easier. That’s because this tool is exceptionally good at forecasting the likelihood that customers will make purchases.
You’ll need to perform various surveys. But if you sell mainly to B2B, collecting the information you need from clients should be quite easy. Most companies are willing to invest a little time in their partners to enable them to offer better services in return.
Once you know the propensity that customers will buy the product, you can get a pretty accurate picture of the total size of the opportunity. That is, what it’s worth to you.
How Much To Charge
The last part of the equation, of course, is figuring out how much to charge. This way, you can put a financial value on the opportunity.
Knowing what to charge for a product, though, is quite challenging. It’s not easy to figure out exactly how much people are willing to pay. And, of course, the price will adjust firms’ propensity to consume.
There are, however, various pricing techniques out there that can yield good results. The Van Westendorp Pricing Model, for instance, is a good example. It involves a simple survey and yields a price range you can experiment with. One end of the range shows you how to maximize profits, while the other shows you how to dominate market share. This way, you can adjust pricing to your business objectives.
Putting It All Together
Once you have the size, propensity to buy, and price all worked out, you’re then in a position to put it all together. Doing this shows you the total size of the opportunity and whether you should take it. It’s a simple price-times-quantity equation and goes as follows:
Size of the market x propensity to buy x price per unit = size of the opportunity.
For instance, if the market is a thousand companies with a 50 percent chance of purchasing, and the price per unit is $10,000, then the market opportunity is:
1,000 x 0.5 x $10,000 = $5 million
The more accurate the parameters you can enter into this equation, the better the results will be. But you have to be quite accurate. Even if an individual parameter is only out by 10 percent, if they’re all 10 percent wrong, that will increase the variance significantly.
