Know Your Niche & Costs — Market Viability
For years, I have provided business planning services to companies like First Republic Bank, Goldman Sachs, and the Nelson Mandela Foundation. Frequently, I see them try to assess a potential new market. Here’s the step-by-step guide I use to help them determine the financial viability of their ideas.
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If your organization has a compelling product or service that you’re looking to sell, leaping into a new market can be exciting. However, without proper assessment of the new situation, it could end in disaster.
First, you’ll need to confirm that your offering provides special value so that you can determine whether your customers will be willing and able to pay. If new customers will pay you more than your costs, you can understand market demand, market size, and the viability of your idea. In Part 1 of this Market Viability series, we’ll cover how to conduct a market sizing analysis, starting with understanding your unique value and potential profits:
Know Your Niche
To be attractive in a new market, you must provide unique value in solving a problem. New customers need to know how you’re different from competitors and the results they can expect by choosing you. Focus on one core value to ensure an edge before entering a new market. Here are some examples:
Services — Do you offer a premium service? (e.g. Living Goods: home agents bring health & nutrition products directly to the doors of customers in Africa to prevent childhood disease, removing the need for customer travel).
Features — Is your service uniquely packaged? Better in some specific way? (e.g. d.light a1 Solar Lantern: excels as the most durable & smallest solar solution on the market, creating a high quality product with a competitive advantage).
Distribution Channels — Are you offering a service digitally vs. in-person that makes it easier to use? (e.g. Sproxil mobile app: convenient digital app helps customers in Africa verify if medicines are counterfeit, removing time and hurdles needed to check with a doctor).
Pricing Model — Do you have an attractive pricing model? Lower prices are hard to sustain, but can you offer pay-as-you-go or subscription services that are not readily available in your industry? (e.g. Nizam Energy: offers customers a pay-as-you-go model in Pakistan for their solar home systems, reducing excessive costs and long contracts).
Branding/Social Responsibility — Does your product give the customer positive PR or help them contribute to creating social good? (e.g. TOMS Shoes “Buy One, Give One” Model: makes buyers feel they’re making a positive impact with their purchase).
If you do not have a clear value, pause before trying to expand into this new market and seek customer feedback to find a niche. You’ll want to identify customers willing to pay for your specialty if you’re going to have any chance at making a profit.
Calculate Potential Profits
If your product’s value is appealing to the new market, next you’ll need to determine if you can make money from it. Viable products will earn a profit: the surplus from revenues minus costs. Though heavily dependent on your industry, a profit of 25% is generally sufficient. To understand potential profit, first calculate your total costs using these guidelines:
Start up costs — Pre-launch costs before you generate any revenue, such as marketing/PR, research & development, branding, initial labor. (Note: some start up costs may move to operating costs over time).
Operating costs — Ongoing expenses to run the business.
- Operating expenses — Labor, cost of goods/products/services, supplies.
- General & Administrative expenses — Rent, utilities, equipment.
Opportunity costs — The loss of potential revenue from an existing business unit (e.g. If you have to reassign staff from an existing market to staff the new one).
For example, if your new market will service 20 new customers using a one-time $36,000 startup cost, plus a monthly $5,000 operating cost, plus you lose a monthly $2,000 in revenue from your existing market due to staff reassignments (opportunity cost); then the total cost in Year 1 for all 20 customers is $120,000; while total cost per customer is $6,000:
YEAR 1:
- TOTAL COST FOR 20 CUSTOMERS = $120,000 ($36,000 + $5,000 x 12 months + $2,000 x 12 months)
- TOTAL COST PER CUSTOMER = $6,000 ($120,000 ÷ 20 customers)
To achieve a sufficient 25% profit from those 20 customers, you will need to generate revenue of $8,000 ($6,000 ÷ [1–25%]) per customer in Year 1. In summary, confirm each customer will pay a minimum: $6,000, and ideally $8,000 per year to ensure a profit and that the market is viable.
Before entering a new market, put in the time to refine your value and understand your potential profits. You will benefit long-term by knowing your product’s specialty and how your business’ costs influence expansion.
In part 2 of this series we will look at how to measure your results.
Kaego Ogbechie Rust is CEO at Foresight Advisors — working with foundations, investment firms, non-profits, and for-profit ventures — offering comprehensive support across vision & strategy, investing & financing, and operational planning during critical periods of your growth.
If you’re looking for help, contact kaego@foresightadvisors.com or visit www.foresightadvisors.com.
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