In this video, Jonathan will simplify determining if your market supports your big business goals.
Hey! In this video I’m going to describe exactly how to determine if your market is big enough to support your business to the size that you want to build it. As an example, you might look at the business I have or the market I serve, which is the DFW Metroplex, the Dallas–Fort Worth area, and say, “Man, that’s a giant market, that’s why he’s able to build a bigger business,” and there would be some truth to that. But, at the same time, we only serve a little bitty piece of that area, and we don’t go outside of our service market.
Just because I’m in a big market doesn’t mean that equals a big business. I could be in a big market and have a really tiny business, which most do. Or, I could be in a smaller market and have a giant business that’s way bigger than everybody else. A few companies accomplish that. It’s not totally about the market. However, it is about the market to some degree.
I’m going to be a little longer with this video because I’m going to give you detailed instructions on how to figure out, or at least point you in the right direction, to figure out if your market can get you where you want to go. Then I’m going to tell you what to do if your market is not big enough. There are three things that you can do to help solve that problem.
The number one thing that you need to do is you need to start by figuring out how big your market is. I’m just going to use a residential example for this video, and if it doesn’t completely apply to you, you can use the framework that I’m describing to solve the problem for yourself. At least this video will give you some ideas.
First, you need to figure out how big your market is. As an example, and I’ll tell you in a minute how to do that, but as an example, let’s say your market is 100,000 homes. That’s not really your market, and when I say your market, I’m going to go with your service area. You might have a bigger market, but for whatever reason, there’s no scenario where you would ever serve that entire market, you’re just serving a service area within it. That is your market, as you’ve defined it at this moment in time.
You need to figure out how big that is, so you could look and find out that that’s 100,000 homes. The reality is that even the 100,000 homes within your service market is not your real market. There’s a sub market inside that market that is really your ideal market. First, you have to figure that out.
Here’s how I believe you do it. If you have clients now, you start to get a feel for what the value of the home is that your better clients live in. For example, maybe in your market there are homes that range in value anywhere from $50,000 to $1,000,000. Within that market, you’re going to have served all different types of clients, and you will have come to some conclusion that my best clients live in these areas, these neighborhoods. If you look, you can do some searching to find out property values, and if you look at the value of those homes, you will eventually arrive at a conclusion such as, the better clients, the clients that I want to build my business around, live in homes of $200,000 to $700,000.
There’s some number, because on the low end the client doesn’t hire services like you, or one out of every 40 on a street hires a service like you. Then on the high end, that client is way more demanding and picky and they may just not be the client you want for a variety of reasons, or you might want to build your entire business around that client. Again, another example would be, you look at your market, and the home values range from 50,000 to 1,000,000, and your business is best suited to serve clients that have home values over and above 700,000. There are different business models.
Given your business model, given the kind of client that resonates with you, what is the typical value of the home that they live in?
Back to my example, there’s 100,000 homes in your area. You conclude your ideal clients live in homes of $250,000 to $700,000. Through some searching and research you conclude that that means there’s about 30,000 homes that could be your ideal client. That’s your market.
Even though you might drive past some other homes, they may not be your market, because you don’t necessarily advertise to those areas. Or, if you ultimately win business in those neighborhoods, you don’t stay in those neighborhoods because you can’t build any density because you never get more than one or two accounts in those neighborhoods.
Step one is to figure out the value, and there’s different ways to go about this. I’m just giving you one scenario. Step one is two figure out the average value of a home that is owned by an ideal client. Then you do some googling. You can look at census data. For example, you can determine, within your county or within your city, how many homes reside within that area.
As you break the data down even further, such as how many homes of this value reside within a certain service area, that data is going to be a bit more difficult to find on Google. It might be out there, every area of the country is different. You may have to go spend a little bit of money with a company, like an InfoUSA, or a brokerage house of some kind, to do some of that data research for you.
However, one thing you’ll find is that some of the mailing lists where you can buy data, you can go do Google searches, and you can put in, “I want to buy a list of data for homes that are between this range,” and the result will come back and say, “There are 22,000 homes on this list. Would you like to buy all 22,000?” Where I’m going with this is there are some tools online where you can buy mailing lists, and the tool itself will let you put in a filter to describe the data you want to buy, and it will come back and say, “Here’s what the count is, would you like to buy it? Or would you like to segment that list even further?” My point is, using the tool to buy the list, you could go as far as researching, getting your answer, and not even buy the data. There are some creative ways you can go about figuring out how many homes are of that value inside your market.
That’s step one. You figure out your ideal client, the value of the home.
Step two, you do some googling and you look at the census data, figure out how many homes are in the area.
Step three is you try some more googling to figure out if you can find a listing of how many homes are in that neighborhood based on that valuation. If not, then you can go to brokers to buy a list, you can go to marketing firms that, again, want to sell you a list or do direct mail for you. You’ll find that, in your market, if you do a little digging, there are people that know that data because they’re in the business of doing marketing and they have to know that data, and they’re selling their services to you. That data, if you can’t find it on Google, can be found in your marketplace. You might have to spend a little bit of money, but it won’t be a lot.
Now you have a real picture of how many homes are in your market. Let’s say it’s 50,000. Now you have to make a guess, can you sell 1% of the market? 4% of the market? 10% of the market? If you could sell 10% of the market and you have 40,000 homes in your market, then your top end opportunity is you could have 4,000 clients at any one time.
There’s so many different directions I could go with this, I’m just going to keep it simple. Your mind might be running about, “Well, what if I lose clients and what if once I lose them, do they count against the 10%?” I don’t know where your mind might be going with this, but just keep it simple and stick with me to understand this concept, and that is if you think the 10,000 is the top end, then your … Excuse me, 10% is the top end, therefore 4,000 clients is your top end. If you think it’s 1%, the best you can achieve is 1% of the market, then that means your best case with my 40,000 home example is 400 homes. At least you start to get a feel.
In my opinion, with really high quality, really high customer service, you’re going to be … you can absolutely penetrate, without question, 1, 2, 3, 4, 5% of the market over the years. For sure. I believe that without question. But, you’re going to need to be unique. You’re going to need really good service. You’re going to need really good quality, and you can’t be the most expensive, but you can be towards the top of the market in pricing. You might be the most expensive on certain services, but you can’t be dramatically more expensive than everybody else in your marketplace and deeply penetrate into the market, meaning that you own a very significant portion of the market.
We’re just going to assume that you could definitely capture 2-5% of the market relatively easily by just being really good, and of course learning how to do marketing. Now, you might be able to try and penetrate 10+% of the market. That’s going to be a little more difficult. One, if you’re in a big market, you just have to build a really big company. The more you want to penetrate deeper into the market, the more money you have to spend. I’m going to come back to that in a moment, but the more you have to spend.
For example, what you might find is that over the first number of years of doing a lot of marketing, whether it be web marketing, print marketing, that your average sale is $100, $150 per sale. Maybe that’s what you’ve figured out that it costs, on average, through marketing, to bring in a new client. That allowed you to penetrate to some percentage. Every market’s different, but let’s say that gets you to a 3% penetration inside your market. It’s impossible for me to say, “You could do 5% no problem, or 3%, or 10%.” Every market’s a little different. There’s a little bit of guessing here, and you’ll figure it out over the years and refine it.
Let’s say that you could penetrate 3% of your market and you could do that at about $150 cost per sale. Now, what you might find is to go deeper inside the market, to bring in more clients, to own more of the market, however you want to say that, it’s going to become more expensive, because the majority of the market has already heard your message. If you want to attract the portion of the market that has not paid attention and not bought, based on all the marketing you’ve already done to them, you’ve got to continue to step up your marketing game. Maybe your incentives need to become greater. Maybe you need to give them more. Maybe they need to get more touches, meaning you need to market to them more and more, and they need to see you more frequently; you need to show up more often. That’s going to increase your conversion cost.
Now, maybe, to get the next percentage of gain in the marketplace, you’re going to need to have a cost per sale of $300 a client. Again, numbers are not accurate, they’re examples, but you can see how this would work. There’s going to be a cost per sale in the beginning, and then to get to that next layer, your cost per sale is going to go up. And then, to get deeper in the market your cost per sale is going to go up again.
There will come a point to go really deep in the market where you have to say, “Okay, is it worth spending more money to go deeper in this market to get more market share, or am I better off taking my pile of cash and expanding my service market or opening up a branch office in another service market, and skimming the easy sales off that market?” These are considerations, and all of these considerations are … Well, you think about them in terms that determine, “Okay, what’s my potential? How big could my company get, given my market size?”
Now, let’s say that in your market your determine that you only have 10,000 homes. That’s your best case. You have 10,000 potential buyers. Even within the 10,000 homes, something I didn’t say, let’s go back to my example. You have concluded who the 10,000 ideal homes are, telling you how big your market is based on home value. Well, then there’s another number within that number, and that number is the percentage of buyers at that home value.
Let me explain that slightly better. Just because you’ve determined that somebody that lives in a $250,000 to $750,000 house is potentially a good client. That doesn’t mean that 100% of that market buys lawn care, or pest control, or fertilization and weed control. No, within that market, there might be 40% of that market being actual buyers, meaning 60% does it themselves. That’s another number to consider. You can’t necessarily know that in the beginning, but that’s true in every market.
Back to my example, there’s 10,000 homes, and that’s one of the reasons why when I say your market penetration or your percentage of market share, that’s probably a better way to say it, market share is going to be 1, 2, 3, 5, 10%. That’s why it’s not going to be 60%, because there’s a very significant portion of that market that isn’t, even though they’re in an ideal sized home, ideal dollar value home, they are not an ideal client in that they are not a buyer of what you have to sell.
Let’s rewind and let’s just go back to the 10,000 to keep this simple. I was illustrating that … The reason I said the 5,000 was just to give an example of, even if your universe is 10,000, your potential is 10,000, you’ll never capture all of that. It’s impossible because within that group there’s a percentage that are not even buyers. Going back to the 10,000. If you were to gain 3% market share, your theory is that’s what you can get or earn, then you’re looking at 300 clients as your top end of your market.
3%, I think, generally, sounds a little low to me. You can do better. But let’s say it’s 3%, that’s only 300 clients. Now, you’ve determined that my best case is only 300 clients in my market, so what do you do? Well, there’s three things you can do. One is, you can expand your market. It might be that you arbitrarily shrunk your market to create route density inside your business. You could first focus on owning as much of the confined market as you can, and once you’ve saturated that market, you then expand, but you wait to expand until you’ve saturated it.
The way you know that you’ve started to saturate the market is because you’re actually spending marketing dollars and your cost per conversion is increasing. It used to $100 per sale, now it’s up to $175. In other words, what worked easily in the past isn’t working so well. You’re starting to achieve a level of saturation where you could keep going, without question, but it’s getting more expensive. That is a time when it might make sense to expand the market a little bit bigger.
That’s one, you expand the market. That broadens the size of the market, obviously, which means you could sell more clients back into that market. You have a bigger potential market share, to grow your business. Maybe you go from a market universe or market opportunity of 300 clients to now 600.
Another option, number two, would be that you, instead of expanding client count, you expand revenue per client. Let’s say your market possibilities are 300 clients, an average client spends 3,000 a year with you, you can do the math to figure out, I think that’s about a $900,000 a year business. You want to get to $2,000,000, that means you need to turn that $3,000 a year client into a $6,000 a year client, on average.
How do you achieve that? This is an alternative to expanding the market. You expand your service offering. In the past, you were mowing, fertilization, weed control, services of that sort. Now you get into pest control and other service types. That broadens your service offering, which allows you to sell more back into the clients to grow the client value, which, at the end of the day, allows you to achieve the bigger revenue company that you want.
That’s number two. Number three is you look at your little market of 300, and you’re early in your business, and you say, “You know what, this just isn’t good enough for me.” You literally pack up the business and you move elsewhere. That’s not the answer anybody wants to here, but that is the reality for some individuals in certain markets. I do a lot of traveling, and on vacations we’ll travel to places that are not necessarily heavily populated. In the mountains, or maybe we go to Arkansas to hike and do things like that.
You’ll end up in some of these areas, and if I happen to have been born in those areas, my universe or my potential market would have been very small. The homes are way spread out, there’s not nearly as many homes, it’s rural areas. I can’t build a great business in that market. There is no magic, you can’t just magically build it. If you’re a savvy business person, you look at that and you say, “I want to build a big business, this market cannot support it, and I am going to relocate my business to an area that could.”
If I was in some rural area of Arkansas, I’d relocate to Little Rock, or something of the sort. If I’m in a rural area of wherever, California, I’m going to locate to a bigger city. You get the idea. Moving is your third option, and if your business just won’t support it … Maybe even your area has lots of homes, but it’s a low income area, and 5% of people, 10% of people in that market buy the services you have to sell. That’s not a great market. You’re going to have to market to a whole lot of homes to find the 10 that are buyers.
It’s better to be in a market that you’re marketing to a group where 50% or 60% of the market is a buyer, because you have to market to far fewer homes to find those buyers inside the market. These are the things you want to consider, to figure out if your market will support you, and then those are the three things you do to position yourself so that there’s a big enough market that you can get enough market share to build the business of your dreams. The business that will give you and your family what you want. It’s really as simple as that. Takes a little bit of thinking, but it’s not that difficult.