How to Calculate if You Have a Million-Dollar-Idea (Using Cold Hard Numbers)

Picking up where we left off last week… now that we’ve determined the product’s format (app) and the marketplace for selling the product (Apple’s App Store), the next step of our real time experiment – Testing the Muse in Practice (Part 5) – would be to:

  1. Assign a price for the prospective product;
  2. Determine if the prospective customer can afford this item;
  3. Calculate the “value” of our potential customers; and
  4. Calculate our “total available market” value.

All of the market research we’ve done to-date will feed into these calculations and inform the big question: do you have a million-dollar-idea on your hands?

 

Assessing the Value of our Product, Customers and Overall Market

Product Pricing

This section on pricing could be infinitely longer – so it likely requires a future post just to cover how to determine product value, pricing, and various pricing strategies. However, for our current project, we’ll keep it brief.

Even though the majority of apps are free, “freemium” (offering an in-app up-sell), or $0.99, there are still many that have much higher price tags.

But for the purposes of this post, and more specifically our example, we’re going to keep it really simple (for testing’s sake) and assume a price of $0.99 is fair and accessible to most customers. It’s also possible to test a “free” app – particularly if you’ve considered potential premium features that would lend itself to in-app purchases (and can communicate that value appropriately).

Testing an idea, whether it’s a potential product or service or website, is extremely valuable – regardless of whether or not your intention is to make money.

Even if you do not intend on earning an income from an endeavor and plan to give away tons of value for free, testing will help you determine if there is interest in your idea or positioning of an idea (potentially saving you untold amounts of time and effort).

For me, I’m looking to generate muses that earn an income. So it’s generally necessary [for me] to assign some dollar value to roughly gauge interest, and to get an approximate picture of the “value” of an idea.

 

Putting a Dollar Figure on Your Customers

We have an estimated audience of approximately 1,750,000 (identified during the market research stage – Part 2 and Part 3) and now we have a dollar figure (literally $1) to assign to the product. Since we now have some basic numbers to work with, we’re able to put a dollar figure to our customers (which, in turn, also answers the not-so-obvious question of: Can my prospective customer afford this?)

Because this product assists people who are actively looking to purchase used cars, intuitively the answer is “Heck ya!”

If someone can afford a car (used or otherwise), they can afford to absorb the cost of something that could potentially save them time and money during the car purchasing process – especially if that item is only $0.99!

Nonetheless, how much is a used car buyer (i.e. our prospective customer) worth? This helps evaluate the likelihood of whether they can actually buy our product (*and it can also help with determining pricing, as I’ll show below):

a.)  Firstly, how much is the average purchase price of a used vehicle? A quick Google search produces answers that ranges anywhere from an average of $3,000 to $14,500; the results of searching classified ads expands this range from between a couple hundred to well over $30,000. Obviously this type of a large purchase is based on many variables, from household budget to vehicle type, condition, etc.

Eliminating the extremes from the price spectrum, let’s settle on an approximate average (between $3,000 and $14,500) of $9,000 (base cost).

b.)  The expenses don’t end at purchasing the used car. How much does it cost to maintain a used car each year? In 2013, AAA reported that the average cost of owning a car (maintenance, gas, insurance, etc.) was an estimated $9,120 per year (i.e. approx. $9,000 annual recurring costs).

c.)  Calculating the average lifespan of a used car relies on a ridiculously long list of variables. It’s as exhaustive as the list of variables that influence the original cost of the used car.

But for illustrative purposes (so that you can apply this formula to your own potential product), let’s use the following research to build our assumptions:

  • The average age (lifespan) of a new passenger car in 2013 was 11.4 years;
  • The average lease of a car is a 36-month term (3 years);
  • We’re going to make a leap here, for the sake of this example, and assume that a typical used car has a [remaining] lifespan of: 11.4 years – 3 years = 8.4 years (i.e. approx. 8 year lifespan).

Given that the formula for establishing the total lifetime cost of a product is:

Base cost + (Recurring cost x Lifespan)

Therefore, the average total cost of owning a used car is:

$9,000 base cost + ($9,000 annual recurring cost x 8 years) = $81,000.

Holy smokes! Makes you want to consider buying a bus pass…

You already knew car ownership was expensive – but now you know just how fast costs can add up. Does it make sense to make an informed decision on which used vehicle you’re buying, to help reduce those costs over the life of a vehicle? Absolutely. Are people willing to spend a little money upfront to help inform and guide their decision making? Yes – sales of used car guides (e.g. the Kelley Blue Book and Lemon-Aid series) are clear indicators of this fact.

Now, does spending $1 on an app to help you compare and rank used vehicles, potentially saving you time and money, both upfront and over the life of the vehicle, seem reasonable? You better believe it!

Sidebar:

*Earlier I noted that this could help you determine a price for your product, if you had yet to determine one. Here’s how:

Using this example, it’s clear that a purchase worth thousands of dollars (upwards of almost $80,000 over the course of a decade) could benefit from a supportive, informative decision-making tool – likely worth several times that of a $1 app.

Now, if you were to produce a product that had more value-added, such as a course or video tutorial (e.g. hosted by a knowledgeable mechanic), that may be well worth hundreds of times more than an app, and the customers could clearly afford the price of this tool to help inform their purchase.

This would still need testing, but the numbers help provide prospective and are indicating it could be supported. You can experiment with different price points during “total available market” calculations in the next section.

It’s worth noting that this does not translate into customer willingness [to purchase] – that relies on perceived value of the product, the quality of the product, as well as the reach and quality of advertising. If the product’s no good – no one will buy it, whether it’s $1,999, $0.99, or even if it’s given away for free. The same is true even if the product is best-in-class – if no-one knows that the product exists, it doesn’t sell. Period.

 

Total Available Market

The underlying concept of “total available market”, as detailed below, came courtesy of Noah Kagan of OkDork and AppSumo. Despite running the risk of burying the lead, this golden nugget needed to follow the previously reported research results and calculations – this is a progressive task, so there is method in the madness.

Prepare to be amazed by its simplicity…

The formula for estimating the potential profitability of your idea is:

(Total customers) x (Price of product)

So, do we have a “million-dollar-idea”?

With approximately 1,750,000 customers, and a proposed product price of $0.99, our Total Available Market calculation would look like this: (1,750,000) x ($0.99) = $1,732,500!

“But wait,” you say, “you’re not going to get 100% market penetration”. That’s true. But consider this:

  • This audience is only representative of Facebook statistics.
  • The actual number of potential customers comparing and purchasing used vehicles is significantly larger than 1.75 million, particularly on a global scale.
  • This is only one product offering – there is a range of value-add, up-sells, complimentary products, etc.
  • We’re not limited to a $0.99 product. Increase the price of that app to $1.99, and all of a sudden you’ve doubled your potential profitability, and have a product that could generate upwards of $3.5-million. And you would likely do this, if the product proves positive, and the demand is strong enough.

But here’s where it gets really interesting: 

We’re not limited to an app at all. If there truly is a willing market for this type of product (and we’re in the process of testing that in the actual marketplace), why not extend your offering to a $50 information product, or that high-end video course mentioned earlier? You would only need a fraction of the number of total customers to represent $1-million worth of potential sales. Start playing with the numbers, particularly price (if considering various related products) and the potential results are staggering.

This formula provides a general indication of whether you have a potentially profitable idea. The resulting calculation is only as good as the background research that went into the producing those numbers. But more importantly, your success in realizing those figures is only as probable as your ability to put in the necessary work to create and launch your product.

Nonetheless, this formula is a fantastic way to calculate a baseline estimate to gauge whether or not your idea could potentially generate millions. If your total available market is at or above $1-million, then it’s likely worth advancing to the next stage of testing. It’s simple, it’s quick, and it’s motivating to visualize or daydream about when the numbers come back ridiculously huge.

 

Celebrate and Prepare for Testing!

Whoo-hoo! We’ve got a million-dollar-idea on our hands here folks!

So far, we’ve really only been doing background research – serving as a series of checks and balances to ensure we’re on the right track with our concept, and that there’s value in moving forward.

Now that we have a general picture of our active seeker online, a potential form for the product to take, and a reasonable confirmation that it could potentially be profitable – e.g. there are enough people with enough disposable income to financially support this project – we can proceed with some of the more meaty “pre-development” stages, such as preparing draft marketing material.

For me, the next stage is the most fun, because you get to be as creative as you want – thinking of the product’s form and function, features and benefits, as well as names, websites, logos, images, prototypes, rudimentary branding, etc.

You don’t want to miss the continuation of this series – sign-up below.

My next to-do:

  • Put on my creative hat! Brainstorm the following:
    • App functions and wireframe basic processes/user interface (UI).
    • Define app features and customer benefits.
    • Design app icon and graphics associated with the app UI.
  • Begin the process of outsourcing the graphics, as needed.
  • Name the product, register a cheap domain with 1&1 Internet, and set-up sales webpage(s) on Weebly.
  • Because there is just SO MUCH to cover here – and I want to give you detailed step-by-step instructions, so you can follow along and copy this process for your own projects – I’m going to have to figure out exactly how to carve the next several posts up into comprehensive, but digestible articles.
  • Stop to remember: this is actually fun! There’s no doubt that there’s a lot of work involved in testing your ideas, and potentially starting a business or launching a product, but the excitement and learning process is priceless.

Action you can take:

  • Come along for the ride! Sign-up below to get notification on the next steps (in addition to exclusive content, such as our free Quickstart Guide to Hacking Market Research and more)
  • Let me know what you’re working on! If you’re testing an idea, or are working through this process by following along with my posts, let me know in the comments below.
  • If you’re not – why not start now? Use the Total Available Market formula described in this post and I bet you might have a “million-dollar-idea” just waiting for you to take action on!
  • Please share this real time experiment with your friends and colleagues on Twitter, Facebook, etc. Thanks!

Best Always,

Jonah

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