Tools Used In This Recipe
When evaluating the market opportunity for your startup idea it's critical in your market validation research to understand how potential customers are currently solving the problem your startup would address. Customer discovery interviews are an important part of this process, but once you've validated the market need the next question is "How big is the market?" Whether it be gift ideas for a loved one, reputable contractors for home improvement projects, or tips for getting better sleep, the first place many people turn when looking for a solution to a problem is a web search. In this Recipe we'll use the Google Ads Keyword Planner to identify search terms that are relevant for your startup and assess how frequently those terms are searched for. We'll also use the big range feature of Google Ads Keyword Planner to assess how competitive the market is and estimate Customer Acquisition Cost.
Start by logging in to the Google Ads Keyword Planner (you'll first need to set up a free Google account if you don't already have one). Once you are authenticated you'll see two options, one to discover keywords and another to get search volume for terms.
These two options have very similar functionality. The Get search volume and forecasts option is designed for people who are looking to plan a search engine marketing campaign for a specific set of keywords. For this Recipe we'll start with the option to Discover new keywords, so click that link. The next screen gives two options; start with a few keywords and have the tool suggest additional ones, or enter a website and the Google Ads Keyword Planner will suggest keywords based on its contents.
We'll go through both options in this Recipe. First we'll start by entering a few keywords for a hypothetical startup that sells custom gift baskets online. Enter a few keywords that you think people would use to find your site (to separate them press enter or a comma followed by a space after each keyword) and click Get Results.
The results screen includes a header section with a few options. The list of keywords you entered is at the top, along with a few options for modifying your search. You can change the country, search language, and date range (some terms are searched more often at specific times of the year). The header might also include some buttons to quickly add additional search terms. But the main focus of the results screen is the table of data about the keywords you selected. For each keyword Google will show you the average monthly searches (as a range), whether the searches are trending up or down, and the year-over-year change. The rest of the columns relate to the Google Adwords activity for that term. The Competition column uses a Low/Medium/High categorization to describe how competitive the keyword is for paid search ads. There are also columns that show the bid range for Adwords placement for that keyword. What this represents is the low and high ranges that others have bid to be the first search result for that keyword.
How can this information help your startup? Higher ranges in the Avg. monthly searches column mean more interest in the solution you are envisioning, which is a strong measure of market validation. But you can also use the results to start estimating some key metrics for your startup.
Customer Acquisition Cost (CAC) is a critical metric for startups. It represents the amount of money you need to spend to obtain each new customer. For products sold online, paid advertising is a major factor in CAC. CAC is also important because it affects your profit margin. So for the gift baskets row in the image above, if you wanted to rank first for that search term in Google you'd have to bid up to $6.50, meaning that for every click through to your site you would pay $6.50. Given that only a percentage of visitors will actually make a purchase, we typically express CAC using the cost per 100 clicks, $650. So if 5% of visitors make a purchase your Customer Acquisition Cost would be $650 * 0.05 = $32.50. In order for your startup to be viable at a 5% conversion rate you would need to make more than $32.50 in profit per gift basket sold. Otherwise your product and marketing cost would be the same as your revenue.
A few ways you can affect Customer Acquisition Cost:
- Bid for the second or third position, which typically has a lower cost. Users tend to click the first result for a search, but you can lower your Customer Acquisition Cost although you'll likely see fewer click throughs on your Adword.
- Bid on husband gift basket or wife gift basket keywords. While the search volume for these is significantly lower, the bid range is also lower. So while you might have fewer sales, your profit per sale would be higher. If your startup's gift baskets are tailored to a specific gender you might find your conversion rate to be higher but focusing on keywords that more closely match your product.
- Increase your conversion rate. We won't cover techniques in this Recipe but many analytics packages have robust tools to measure conversion rate and even to run experiments to see where your potential customers fail to make a purchase.
- Improve your website's SEO score for the relevant keyword. While Google still places high-ranking sites for each search below the paid Adwords placements, if you were to rank in the top non-paid result for gift baskets all of your clickthroughs would be free to you, making your Customer Acquisition Cost zero for those sales.
In the results screen above you'll also notice two suggested keywords - hampers and christmas hampers. Hamper is a term used in the U.K. instead of gift baskets, and as you can see the search traffic is fairly high but the bid price is lower thank for gift baskets. For this hypothetical startup, hampers represents a potentially useful keyword that we wouldn't have discovered without the Google Ads Keyword Planner.
If you are struggling to find keywords, another way to generate a list is to start with a website. Click the X in the upper left (or use the back button) to navigate back to the Keyword Planner home screen, then click Discover new keywords. Now click the tab named Start with a website, and enter the domain name for one of your competitors.
Click Get results. The results screen will have the same columns it did when we entered our own keywords, but in this cast the keyword ideas returned will be those where Google recorded a search that resulted in a user navigating to the site you searched for. You can use these keywords as a start for your own planning.
For a free tool, the Google Ads Keyword Planner is a very valuable resource. You can use it both to validate market demand before you even start product development, and you can even use it to help forecast your marketing costs and calculate the price you would need to change to be profitable. Because bids and search volume can change over time, it's worth revisiting this tool after you launch your product so you can stay on top of changes in your market.
The contents of this Recipe are © Innovation Works, Inc. and are licensed under CC-BY-SA 4.0 . Contact us with questions or feedback, or to learn more about our structured program in Entrepreneurism based on Startup Recipes.