Chapter 2 How To Determine Market Viability and Conduct Product Research
Chapter 2 How To Determine Market Viability and Conduct Product Research
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Tulip mania swept the Netherlands in 1636-1637, bringing the peak price of a single tulip bulb up to 10x an individual’s annual salary. But then the market crashed. And all who were involved in the tulip trade carried financial losses.
Humanity may have learned its lesson about overpaying for flower bulbs. But our nature didn’t change that much since the mid-17th century: we still want to make as much money as quickly as possible.
Loads of people try to capitalize on the hottest trend of the day — be it a crypto coin or a trending cosmetics ingredient. And loads of them fail.
It is tempting to launch a business right away when you have a new product idea. But don’t rush into it. Take a step back and pose these questions:
Is this market viable?
Is this product viable?
How do you determine the above? You’ll have to do some product research and market viability analysis.
What is Market and Product Viability?
Technically, you can start an online store and sell whatever products you wish — within reason. But that doesn’t mean they’re the best products for your profit. We’re going to talk a lot about determining what the market wants and how a product can fill it, so first, let’s define some important terms.
1. What is market viability?
Market viability refers to the business potential of a specific market. A market viability analysis will help you determine whether starting a business in that particular market makes sense financially.
To evaluate market viability, you need to consider these three factors:
Market size: Is the market large enough to accommodate new sellers? Is there room for growth?
Target audience: Do potential customers have a discretionary income? Can they afford to buy your product?
Competition: Who are the most important retailers in this market? What are their strengths and weaknesses? How can you compete with them?
Your goal is to weed out markets that are too small, too competitive or made up of customers that can’t or won’t pay your prices.
2. What is product viability?
Product viability refers to the business potential of a specific product — that is, how relevant and interesting the product will be to target buyer personas.
When evaluating products, analyze these factors:
Demand: Is there enough interest in this product for you to build an entire business around it or add it to your product mix?
Profit margin: Can you sell this product at a price point that is both competitive and allows you to generate a return on sale (ROS)?
Stay away from products with too little demand or too low a profit margin.
Why it’s Important to Conduct a Product and Market Viability Analysis
When you consider different ecommerce niches and potential product ideas, you want to specifically evaluate the viability, profitability and customer requirements for each option.
You need to make sure that both the market and the product are viable before you start a business. Why? Because doing your homework allows you to reduce the risk of losing money on:
Deadstock: Products need to be designed, sourced or manufactured. All of that requires a significant upfront investment unless you are dropshipping.
Inventory management: It’s not enough to just acquire inventory, you then need to manage it.
Marketing: You can be the best marketer in the world but if your business isn’t commercially viable, you won’t be able to sell your products. Thus, you may end up wasting money on campaigns that don’t produce results.
There are also a bunch of smaller expenses that you need to consider as well, such as:
Ecommerce platform (e.g., BigCommerce, Shopify, Magento).
If you add them all up, they could add up to a significant amount of money, especially over an extended period.
The more capital your new venture requires, the higher the risk that you are taking on. You need to either bet your life savings on your business idea or take out a business loan to cover the startup costs. Either way, failure means losing that money — which can wreck your finances.
Entrepreneurship requires caution. While you can’t fully eliminate the risks, you can significantly reduce them by analyzing the commercial viability of your idea.
What Are the Things to Consider in a Product Viability Analysis?
Let’s get into the nitty-gritty of product viability analysis. Here’s how to evaluate a product for business potential.
1. Do market research.
Start with online market research to scoop your market depth and competitiveness. The easiest way to do so is by doing a SWOT analysis.
Conduct a SWOT Analysis
SWOT (Strengths, Weaknesses, Opportunities and Threats) is a popular competitive analysis framework that helps you accurately evaluate your business, gauge the threats and capitalize on opportunities.
Here’s how to perform a SWOT analysis for ecommerce:
Identify the strengths of your business. These might include a robust supply chain, a profitable product, competitive pricing, great customer service, effective SEO strategy, PPC strategy or social media strategy, etc. Find out in what areas you outperform your competitors.
Analyze the weaknesses. Conversely, these might include a fragile supply chain, an unprofitable product, poor customer service, lack of connections with influencers in your niche, etc. Where do you fall short of your competitors?
Identify business opportunities. Would your business benefit from finding better suppliers on sites like Alibaba or eBay? Maybe you could do better with Amazon FBA? Or by selling private label products? Look for ways to increase your profit margins, improve product quality and lower product prices. Don’t be afraid to get creative here.
List the threats to your business. What emerging technologies might affect your market? Which competitors are you worried about the most? Are there any new entrants threatening your market share? You need to stay vigilant. Remember what the former Intel CEO Andy Grove said: “Only the paranoid survive”.
These four areas of analysis can be divided into two:
Internal (strengths and weaknesses).
External (opportunities and threats).
This can help avoid mixing up strengths (internal) with opportunities (external) and weaknesses (internal) with threats (external).
What’s most important when it comes to SWOT analysis is that you are brutally honest with yourself. Your company isn’t perfect. It has its strengths and weaknesses. It’s also vulnerable to various threats. That’s okay. What matters is that you accurately assess the situation and adjust your strategy accordingly.
Overall market trends
Once you are done with SWOT analysis, analyze what’s happening on the market:
Is it shrinking, stable or growing?
What are the new trends?
Who are the biggest players?
Statista is a great website to get some numbers. Type in the name of your industry and see what data is available.
Niche market trends and demand
Found a promising market? Zoom to a particular niche to determine potential products.
You can use Google Trends for this. Simply type in the keyword and pick a time frame. You will then see a chart that represents the search volume (interest) in that keyword over that time period. Or you can use Jungle Scout to do similar types of Amazon product research.
For example, if you use the keyword “olive oil”, you will find that the interest in it has been stable for the last five years.
This suggests that olive oil is a great long-term commercial viability example.
In fact, when the interest in a product is so high and so stable over an extended period of time, you might even be able to build an entire business around it.
For example, although Olive Oil Lovers sells a variety of different products, olive oil is their “signature” offering.
While you want to prioritize products that have a stable interest, you can also keep an eye on what’s trending right now.
For example, usually, the interest in hand sanitizer is extremely low, but when the Covid-19 pandemic hit in March 2020, it went through the roof:
Source: Google Trends
People who seized the opportunity to cash in on this sudden surge in demand probably made a good profit within a short time.
While it is okay to chase trends, you shouldn’t build your entire business around them. You want to have viable products as your foundation and rely on trending ones to supplement your income.
2. Complete a competitive market analysis.
To understand if you can succeed in a new market, you need to know who you are up against.
Here’s a quick way to do competitive analysis:
Identify your competition. Who are the established players in your niche? Who are the most promising newcomers? What are their best-sellers?
Examine your competitors’ websites. Pay attention to their homepages, product listings, product images, product descriptions and copy among other things. Make notes of “their way” of doing online business.
Analyze the competitors’ sales funnels. Understand how others connect with customers at different stages of their customer journey.
Break down their marketing strategy. Check out their social media profile. Use Adbeat to learn more about their paid advertising strategy and Ahrefs to figure out their SEO strategy.
Reverse-engineer their business model. Are they dropshipping or are they carrying inventory? One easy way to identify dropshippers is by running a reverse image search with their product images since these can lead you to the product page on AliExpress. And if they are carrying inventory, you want to know everything you can about how they handle sourcing, product development, warehousing, etc. These details might take some effort to uncover, but they can help you determine which business model may work better for you.
This extensive competitive analysis has three objectives:
Learn what works. You shouldn’t outright copy what your competitors are doing, but you can learn from top sellers about what makes a winning product.
Improve on what doesn’t work. You want to capitalize on your competitors’ weaknesses. Say, if you realize that your competitors don’t offer BOPIS, you can outcompete them by offering a better shipping experience.
Finding optimization opportunities. When you understand the logistics behind your competitors’ businesses, you can find ways to optimize the repetitive processes in ways that give you a competitive advantage. Perhaps you can outcompete them on shipping time by partnering with a third-party logistics firm?
The more you know about your competitors, the easier it will be for you to gain and maintain a competitive edge.
3. Determine your target audience.
Don’t commit to a product idea before you get to know your target audience. Specifically, analyze them by:
Demographics: factual information about an individual (e.g. age, gender, ethnicity, occupation, job title, etc.).
Psychographics: psychological traits such as values, beliefs, desires, etc.
Using this data, create a set of buyer personas — fictional characters that represent a typical member of your target audience.
After you identify who your ideal customers are, you’ll need to figure out if they make sense as customers.
Here’s what you should pay attention to:
Attitude towards the problem that your product solves. Is the problem bothersome enough to warrant paying for a new solution?
Financial situation. Are they willing to spend as much as your product costs to remedy the said problem?
Purchase history. Do they have a track record of buying similar products in the past?
The ideal buyer is someone who knows they have a problem, can afford a solution you propose and have a history of using similar products
4. Figure out winning product criteria.
Finally, before you decide to pursue your business idea, you’d want to “right-size” your product to the target market demands. How do you evaluate a product for sale?
Consider doing the following product viability assessment:
Consider product weight and size
You can build a thriving business by selling large, heavy products. Burrow — an online furniture vendor — is doing just great.
However, selling bulky products makes logistics more complicated. This is especially true when it comes to shipping. According to the Walker Sands “Future of Retail 2019” report, free and fast shipping has been the number one driver of more online purchases for six years in a row.
It goes without saying that shipping large items for free and fast can be challenging. That’s why it may be better to go with a product that is light, small and inexpensive to move through your supply chain.
Consider product fragility
Another issue that you want to avoid is product breakage. Damaged goods stand for money lost. And also harm your brand image. An unhappy customer might take their frustration to social media.
Unless you have past shipping experience and a reliable logistics partner, avoid dealing with fragile products.
Determine your product pricing
You want to find a sweet spot right between being competitive and still making a healthy profit.
Positioning is important here. If you present your product as a commodity, you will find it difficult to charge a lot for it. However, if you present it as a one-of-a-kind item that resonates with the values of your potential customers, you will be able to command much higher prices.
Understand your options for markup
How much can you charge on top of the price that you paid for it? Note that brand markup must be high enough to cover the business expenses and generate enough profit to make it worth your while.
You want to avoid products where profit margins aren’t satisfactory.
Consider the amount of SKUs
An SKU (stock-keeping unit number) is a unique string of letters and numbers that represents a product in a seller’s inventory. The more SKUs you have, the more complex the logistics of your business. You need to keep track of them all, make sure that you send the right product to each customer, etc.
Thus, you may want to start with a smaller inventory and add more products as your business expands.
Keep seasonality in mind
Does the demand for this product remain stable throughout the entire year or go up and down as the seasons change?
Again, you can do well with seasonal goods. For example, Black Diamond Equipment sells climbing, skiing and snowboarding gear. Obviously, the interest in the latter two goes up in winter. But they are also selling gear for round-year hikes and other sports.
But as a new business owner, you may want to avoid complete reliance on seasonal products.
It’s difficult to create an effective business strategy when you have to rely on that seasonal spike in sales to fund the company for the entire year. Respectively, running a business can prove to be more stressful than you have expected.
But as a new business owner, you may want to avoid complete reliance on seasonal products.
It’s difficult to create an effective business strategy when you have to rely on that seasonal spike in sales to fund the company for the entire year. Respectively, running a business can prove to be more stressful than you have expected.
Is your product perishable?
Perishable products present the risk of expiring before you have an opportunity to sell them.
Or worse, they might go bad en route to the customer, which can mean a world of trouble for your brand.
Unless you can strategize a solid cold chain logistics strategy, it’s best to stick to products with longer shelf lives.
Consider product lifespan
You also want to consider the lifespan of your product. How long can the customer expect to use it?
You may want to give preference to products that people buy on a regular basis (e.g. hygiene products, makeup, etc.) because that can be a source of repeat business.
That being said, you can also do well with products that last a lifetime, which can be a selling point in itself. For example, Saddleback Leather sells durable leather products that come with a 100-year warranty.
Wrapping Up
Entrepreneurial risk-taking is often lauded. Indeed, starting a business requires a leap of faith.
However, it’s also important to acknowledge that there’s an inherent survivorship bias in the success stories we hear.
People who took a risk and lost it all tend to keep their failures to themselves. We only hear about those who have succeeded. This can lead us to underestimate the risk involved in starting a new ecommerce business. Don’t make that mistake.
You now know how to evaluate products for viability using different market research and customer research assessments.
Start your own business only when you’ve done your research and are confident you will succeed.
Product Market Viability FAQs
1. What is product research?
Product research is the process of determining the demand for a particular product and your chances of selling it for a profit. In other words, product research helps you figure out whether a product idea is viable.
2. What is product viability?
Product viability indicates whether or not a particular product has commercial potential in terms of sufficient demand, ongoing interest and readiness to pay for a similar solution.
3. How do you start product research?
Start your research on Google Trends. Check the interest in a product over the last five years. Is it sporadic or stable? Is it seasonal or does it remain the same year-round? Is it on the decline or is it growing? You want to find a product with a stable, growing, year-round interest.
4. How do you know if a product is viable?
You can quickly figure out whether a particular product is viable by looking at the competition. Are there any ecommerce companies that are already selling that product or similar ones? If these businesses have been around for a while and are successful, the chances are that the product is viable.
5. What is viability in business?
Viability in the business context refers to the commercial potential of a market, company or your own product. In other words, it’s a term denoting the success chances of commercializing a certain idea.
6. How can you determine the market viability of a product or service?
You need to take a look at the market size, the target audience and the competition. Is the market large enough? Are people in your target audience willing and capable of paying for your product or service? What other solutions are currently on the market and can you outcompete these companies?
7. How do you determine market viability?
Start by determining the market size. Is it large enough? Then take a look at your target audience. Are your potential customers willing and able to pay for your product? Finally, analyze the competition. What are their strengths and weaknesses? Can you outcompete them?
8. What can happen if I don’t do a product viability analysis?
You might end up losing a significant amount of money by trying to sell products that no one wants. This includes manufacturing costs, warehousing costs, marketing costs, etc.
9. Do I conduct a product viability analysis for each new product?
Yes. When you want to add a new product to your catalog, you need to determine whether there’s enough demand for it and whether you can sell it at a profit. You can do the former by looking at the companies that are selling similar products and the latter by working out the logistics to see if the profit margin is high enough.
