One of the most crucial aspects of running an online business (or an offline business that markets online) is market research. You need to know whether a market is profitable before you put time, energy, and resources into a project. People who skip this step often find themselves frustrated and it’s easy to see why. Putting hours into something that will never pay is obviously a terrible idea.
People Who Can Benefit From Understanding How Online Markets Work
- Professionals (doctors, lawyers, real estate agents, chiropractors, massage therapists, dentists, orthodontists, funeral specialists, etc) who already have sites or are thinking about setting sites up
- Casual internet marketers
- Professional marketers
- Bloggers
- E-commerce site operators
- People who are just getting started with internet marketing
How To Calculate The Profit Potential Of A Market
By looking at individual keyword phrases (the words and phrases people search for in Google) we can get a lot of insight into how money is flowing through a market. The Google Adwords Keyword Tool is extremely useful for this. Let’s take a look at an example keyword phrase so that we can further illustrate.
Example #1 – Provo Dentist (as a dentist)
For our first example, let’s take a look at the phrase ‘provo dentist’. If we look at the term in the the Adwords tool, we can see that the monthly search volume is 720. This means that 720 people are searching for this term each month in Google (approximately):
If we set the tool to show ‘Estimated Avg. CPC’ (which I did) we can determine that there is a dentist somewhere (or a marketing company) in Provo who is willing to pay $3.80 per click to buy traffic from Google. If we multiply the amount of searches by the CPC (the amount these people are willing to pay to buy a click from Google), we can determine that the top advertiser is willing to spend $2736 per month to buy traffic. They probably don’t spend this much because some people will click on the listings of other advertisers, but the point is that at least this much money is changing hands. This means that we can safely assume that the market size of the online ‘provo dentist’ market is at least $2736 per month, and that’s if the dentists are breaking even. If they are making a profit (likely), the actual market size will be higher than this.
It’s extremely difficult to get 100% of the traffic for any keyword phrase in fact you would need multiple web properties to come close. If your site ranks #1 in Google, you can plan on getting around 40% of the available traffic. That means that in order to get an accurate representation of your true profit potential in a given market, you are going to need to discount, using only 40% of the original number. This would mean that we would end up with a potential of $1094 per month, assuming that we could get our site to #1 in Google. This would of course be free traffic and we could increase our share of the market by also buying some of that traffic but that’s a different story altogether.
Another factor that’s still in play is that there are other keyword phrases that are used to search for dentists in Provo. The above screen-shot shows us that. There are also people who don’t live in Provo who would probably drive to Provo to go to a dentist that they liked. Springville is five minutes away from Provo, Orem is five minutes away from Provo, Mapleton is 10 minutes away from Provo, etc.
To get a true representation of the size of a market, you would need to add up the potential for all keyword phrases that could be used to search for your service. In this case, we would need to calculate and add up the potential for the following keyword phrases: provo dentist, provo dentists, dentist in provo, dentists in provo, springville dentist, springville dentists, dentist in springville, dentists in springville, orem dentist, orem dentists, dentists in orem, dentist in orem, etc. There are probably a lot of other cities that are nearby that would work well – you would have to do the research yourself to find them.
Example #2 – Provo Dentist (as a marketer)
For our first example, we assumed that we were an actual dentist who could take on clients from the traffic. If we look at the same keywords (and the same numbers) from the viewpoint of a marketer, things will come out differently:
We are still seeing the same numbers, but now we know that we aren’t going to make all of the profits – the dentists will also need to make some of the profit or the money will obviously quit flowing.
$2736 will still be available – that calculation doesn’t change. What does change is the percentage of the profit that we can make. We will still only be able to get 40% of the traffic if we end up at #1 in Google so we’re knocked down to $1094, just like before. From there we need to discount further. There are a few ways that we can do things.
If we wanted to establish an actual relationship with a dentist in Provo, we could probably do a 50/50 split of the profits which would mean that we could make about $547 per month if we got ranked #1 for ‘provo dentist’.
In order to make this work, we would of course have to talk to dentists and find one who was willing to partner with us in this way. For those of you who aren’t comfortable with that, you would have to choose another alternative like Google Adsense.
There are certainly dentists in Provo who advertise via Google Adsense, so how can we determine our profit if we decide to put these ads on our pages? We simply discount further based on how we expect our traffic to act. Here’s how the numbers will work out (approximately of course):
- There is still $2736 on the table
- However, we can still only get 40% of the traffic (knocks us down to $1094)
- We won’t get the full CPC because Google will take a cut and we won’t always get clicks on the highest paying ad. We can only expect to get 25% of the CPC number we see in the Adwords tool. This knocks us down to $273.50.
- Also we can’t get every visitor to click on an ad. In fact, we can only plan on getting 5% (in some cases you can get more clicks but we want to be conservative in our estimate) of our visitors to click an ad. This takes us all the way down to $13.68 per month.
We would still need to compensate for the fact that there are a lot of different keyword phrases that we could use as a marketer. The Springville and Orem keyword sets would still be on the table and as a marketer, geographical location really doesn’t matter. We could target keywords for any location because Google Adsense will have advertisers in most cities. We would need to make up for our small piece of the earnings pie by putting a lot of keywords together and getting traffic with all of them.
Uses Of This Skill Set
We of course can use these skills in a number of ways. A dentist could use these numbers to determine the relative value of a marketing company that’s offering their services. Any other service professional could of course do the same. On top of that, if a service professional was willing to pick up a new set of skills they could take care of their own marketing and pocket all of the money that would be available (in this case that’s $1094 per month – not a fortune but this would of course compound as the client came for additional work and referred friends). After a few years it’s likely that income would build nicely. Remember that our numbers are also very conservative here. We are assuming that the advertisers who are willing to buy the traffic are only breaking even. If they make a profit, there’s more profit to be made.
Marketers can of course use this type of market analysis to determine the profit potential of any keyword phrase or market that they want to enter. This saves them the time and hassle of creating web properties that don’t have little potential. Keep in mind that this methodology can be used for any keyword phrase or for any combination of keyword phrases. Marketers could also use this skill to sell ad space to the dentist (or of course any other service provider). By showing them the profit potential of the keywords, it could be easier to sell an ad. By cutting out Google you could get a larger share of profits. A dentist who can see that they have the potential to make over $1000 per month from a ranking would definitely be willing to spend $200 per month to buy ad space.
Questions About The Method?
If you have any questions about this method of market analysis, please let me know in the comments. I want to help each of you to understand this process as much as I possibly can.
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