Assessing Market Profitability (Don’t Dive into an Empty Pool)

In the movie Field of Dreams (how many times people searched for keywords related to your business), the Ray Kinsella character builds a baseball diamond in his Iowa cornfield based on a voice that mysteriously repeats, “If you build it, he will come.” That philosophy made for a great movie, but I don’t recommend it as a customer-acquisition strategy. If you build it, you’re probably end up with a garage full of it unless you take the time to figure out whether anybody’s going to want it enough to pay for it.

Ken McCarthy, creator of The System Seminar for Online Marketing (thesystemseminar.org), once asked during a lecture, “If you were an Olympic diver, what would be the most important skill you could possess?” The answers varied the ability to hold a triple gainer, strong core alignment, powerful legs, and so on but Ken kept shaking his head no to each try. Finally, when we were getting really frustrated, he shared his answer: “The ability to tell if there’s enough water in the pool before diving.”

In other words, find out if there’s a market before you commit large amounts of time and money to creating a business or a product (or to learning fancy marketing tricks to attract buyers). As Perry Marshall points out, amateur marketers create a product and then look for people to sell it to while professional marketers find customers and then look for something to sell them. Whether you are starting a new venture online, or you have an existing business that you’re looking to expand online through Adwords, don’t spend any time writing ads or creating Web sites or sourcing products or setting up factories or hiring employees or printing letterhead until you’ve looked into the pool and determined that you can dive without hitting the concrete floor at 60 miles per hour.

In the old days of business, that sort of market research was a drag. Laborintensive, expensive, imprecise, and slow. But if you want to sell online through paid search, you can save yourself months of agony and thousands of dollars in less time than it takes to fly from Bath, New York to Bath, England.

Determining market size by spying on searches

Would you like to know how many times people searched for keywords related to your business last month? How about which keywords were the most popular? And suppose you could do it in about 20 seconds are you willing to spend the time before setting up your AdWords campaigns? The number of searches is a critical number if you plan to make AdWords a significant part of your business acquisition strategy. Think Yellow Pages again if no one is looking for the listing Unicycles, then a unicycle shop that relies on the Yellow Pages is going to have trouble paying the rent. Of course, many items and services are sold that aren’t searched for just not with AdWords. For example, lots of people buy CDs with guided meditations. But very few people searched for them (about four a day), so you could reasonably expect one sale every one to two months from AdWords traffic if your ad and Web site were very good.

Estimating profitability by snooping on your competitors’ keyword bids

Most smart businesses will spend money on customer acquisition until they reach the break-even point. If you know that every time a Google user visits your Web page, you make 35 cents (on average, not for every single visitor), and you have the ability to sell additional products and services to that customer in the future, you probably would be willing to pay 35 cents to get the Google user to visit. That is, you’re willing to break even on the first sale to gain a valuable business asset: a customer with whom you can build a relationship.

If you are selling a product that promises customers will save or make money by using it, you can usually charge more for it than if the product does not promise financial reward. It’s hard to translate money into happiness. It’s easy to compare the price of the product (say, a $750 Adwords telephone consultation with me) with the thousands of dollars you’ll save on your AdWords campaigns. That’s why marketing consultants make more than life coaches. Keep this distinction in mind as you explore your markets. If the average bid is under a dime, you can assume that very few people have figured out how to sell high-ticket or high-margin products or services. For example, about 75,000 people search for home remedies each month, yet the average bid hovers around 10 cents. Home remedy seekers are do-ityourselfers, looking for cheap and ingenious tips rather than expensive do-itfor- me solutions. Compare that to starting a business, which goes for over two dollars a click. This comparison points out an important distinction between markets: the “buying dollars for dimes” market versus everything else.

In some markets, bid prices bear little relation to the value of a visitor. Big companies (which I define as any organization where the person in charge of AdWords campaigns isn’t using a personal credit card to pay) tend to overbid. Some businesses are so good at earning money from visitors that they can afford to lose money to acquire a customer. But in general, the average bid price for a keyword gives you a good idea how much a click is worth, on average, to your competitors.

Google doesn’t share its bid prices publicly, but you can estimate them using the Traffic Estimator tool in your AdWords control panel. The tool is erratic in its ability to predict your actual bid prices, but as long as you’re using it to compare markets in a very preliminary “Is this worth my time?” sort of way, you needn’t worry about pinpoint accuracy.