Market Size and Top Down vs. Bottom Up (post #6)
The last few posts have been about competition. We also needed to take a close look at market size. Below are the two basic ways that we considered in evaluating market size.
Top down: based on finding the total market and then estimating what your share of that market is. Top down tends to be a more optimistic approach.
Bottom Up: based on thinking about the current sales of similar products and estimating how much of those sales you can capture. It’s a more conservative approach. This is the best way to do it but it takes more time and effort.
As a startup, it seemed like picking either Higher Learning Technologies (HLT) or Pocket Prep would be the best companies on our competitor list to analyze.
However, as a starting point, it is estimated that the test prep market in the United States is around $8 billion annually https://www.technavio.com/report/test-preparation-market-in-the-us-industry-analysis. A top down analysis would be something like if we just had 10% of this market, that would result in $8,000,000 of revenue per year. We wanted to stay away from this type of analysis because who’s to say whether getting that 10% is reasonable.
The tools and techniques we considered to estimate the market size that they had captured were
·Look at their Facebook and Instagram pages. How many followers/page likes?
·Look at a few of their apps on the iOS app store. Consider rating and number of reviews.
·Alexa.com: look at the amount of traffic the competitor’s websites get
·Use Google Adwords Keyword Planner. It shows you the volumes and related terms of searches on Google.
·Search Twitter
·Search Reddit
·Look at their website. Sometimes there will be sales numbers just based on wanting to promote their product.
·Try to find any news articles about them. Sometimes this can give hints as to sales numbers or daily active users.
Higher Learning Technologies:
Has 10,400 Facebook Page Likes https://www.facebook.com/HigherLearningTechnologies/
Instagram 85 posts and 239 followers https://www.instagram.com/higherlearningtechnologies/
Reddit cannot find much except that they are hiring for a senior rails engineer.
For Google Adwords Keyword Planner, we picked the ASVAB (military entrance exam) and the NCLEX (nursing exam). We were interested in this exam anyway, and it was an app that both HLT and Pocket Prep had. Here are some of the keywords we looked at:
ASVAB 10,000 – 100,000 monthly searches
ASVAB prep 1,000 – 10,000 monthly searches
ASVAB tutor 1,000 – 10,000 monthly searches
ASVAB mobile app (no results). It would make sense that if someone was looking for apps, they would go to the app store.
ASVAB book 1,000 – 10,000 monthly searches
NCLEX 10,000 – 100,000 monthly searches
NCLEX prep 1,000 – 10,000 monthly searches
NCLEX tutor 100 – 1,000 monthly searches
NCLEX book 1,000 – 10,000 monthly searches
iOS App Store Reviews:
NCLEX RN 16,400 app store reviews and a 4.8 rating.
ASVAB 3,500 app store reviews and 4.8 rating
Their website https://builtbyhlt.com/about#stats states that they have 50,000 daily active users, which is really a more useful number to try to project what they are making. Their purchase price is a one time fee, averaging around $10 per user. Most people will not use the app for the whole year because it does not take the whole year to study for the exam. I was going to roughly estimate that the average user studied for three months. This would mean that every three months there was a new 50,000 daily active users. So that would get us to 200,000 daily active users per year. If the average price was $10, then their revenue was somewhere around $2 million per year before iOS or Android took their 30%, which would lower the revenue number to $1.4 million. It had taken them about six years to get to this point.
Pocket Prep:
The HLT website had given us more information than anything else. So I started with that. Unfortunately they don’t tell us exactly the number of daily active users, but they do state that they have over 100 exams covered in the App Store, and they were founded around the same time as HLT. https://www.pocketprep.com/exams/
App Store Reviews:
ASVAB 375 reviews and 4.7 rating.
NCLEX RN 800 reviews and 4.6 rating
This makes me think that their revenue is quite a bit lower than HLT. However, the TEAS exam has over 9,000 reviews with a 4.7 rating, the EMT exam has over 10,000 reviews and a 4.7 rating, and their MSW app has over 5,000 reviews. These numbers are in line or even somewhat larger than what HLT usually had.
Pocket Prep has 186,000 people who like their Facebook page https://www.facebook.com/search/top/?q=pocket%20prep%20&epa=SEARCH_BOX
Pocket Prep has 24 posts and 740 followers on Instagram.
This is far from an exact science, but I was willing to estimate that the annual revenues of these two companies were fairly similar.
These companies are bigger than us, but there really were not any smaller apps that we could use for comparison sake. Obviously they had a lot of content. At a more granular level, we would estimate that on average they were getting $14,000 in revenue per exam annually ($1,400,000/100 exams). I was not convinced that they had chosen the correct business model, but that will have to be covered in another post. It did not look like they did much marketing to get these customers. Some app store marketing. That was about it. Competitively, their app store rating and number of reviews would likely be a challenge in the beginning. I felt that a reasonable estimate was that given this business model we could generate $10,000 per year per exam.