By: Michael Brown
“How do I know if my idea will make money?
Is my idea profitable?
How much is my idea worth?
What are the pitfalls to avoid before commercializing an idea?
How do I estimate my ideas value?”
So you want to know if your idea is profitable or not? The fact that you are asking this question right now puts you ahead of the game in comparison with many people. In this article, I give you some tools and resources to start defining the numbers associated with your idea.
In the blog post Is Your Idea Good? my colleague James Bryant helps you ask the right questions to determine the quality of your idea to others (a key component of value). In this post I want to help you put actual numbers on that idea and consider what first-year sales could look like.
Let’s Get Started!
What I am about to show you is a simplified version of the Fourt-Woodlock equation, but first we need to understand some definitions.
1. Final Decision Makers (FDM) – These are all the people that could possibly benefit from your innovation. If your idea is for a new kind of piano, then you FDM could be piano players or piano stores depending on if you want to sell directly or through a distributor.
2. Trial Rate (TR) – This is a percentage that tells you three things 1. what percent of your FDM you can make aware of your idea through marketing 2. What percent of the people reached would be willing to purchase your idea 3. What percent of people are able to purchase i.e. have the disposable income. Common trial rates for general population (all households in the USA) FDM’s range from .004% – 10.58% based on disruptiveness of the innovation and the marketing capacity. a weighted average of these percentages is about 2.6%, this could be a good starting point for first round calculations.
3. Repeat Rate (RR) – This is the percentage of first time buyers that will buy again in the first year.
4. First Purchase Revenue (FPR) – This is the unit price multiplied by the number of units bought the first time.
5. Repeat Purchase Revenue (RPR) – The amount spent per unit for a repeat purchase i.e. if the price has dropped this is where you consider that.
6. Number of Repeat Purchases (NRP) – Simple enough this is how many times someone will buy again in the first year.
7. Trial Sales (TS) – TS is the amount of revenue from first purchase first time buyers.
8. Repeat Sales (RS) – RS is the amount of money made from all of the repeat sales in the first year.
9. First Year Sales (FYS) – Finally! What we have been working towards. FYS is TS+RS i.e. all of your sales for the first year.
Keep in mind that TR has three distinct parts and if you want to be more precise you will want to break it down like this:
TR = %Willing to buy x %Able to buy x %Aware through marketing
Example: TR for a major innovation in XX industry = (maybe 75% are willing to switch from current product or supplier because of the huge benefit of XX innovation) x (lets say it is very expensive so only 5% are able to buy) x (and we will pretend it is a niche industry so we can easily make 95% aware) = .75 x .05 x .95 = .0356 or 3.56% Trial Rate.
Phew! Now that we have all of the messy details let’s do the fun part. Here is the equation you will want to use to calculate you FYS.
TS = (FDM x TR x FPR)
RS = (FDM x TR x RR x NRP x RPR)
FYS = TS+RS
(If you hate equations it’s ok! Just download my spreadsheet here: Custom Fourt Woodlock Calculator and enter in your numbers to find out your FYS).
If you have any questions or suggestions about how to do this better I would love to hear about it. Email me at email@example.com with the title of this blog in the subject.