My neighbor couldn’t understand why his business failed, taking his life savings with it. “Who’d have thought that nobody would want my Whack-a-Mole Pole?” “I hate to ask this,” I said trying not to sound unsympathetic as I stepped over another hole in his yard “but did it actually work?”
“Well, not exactly, but if I could have sold that first batch of 10,000 poles I would have made enough to improve the design!”
Consumers are always on the lookout for products and services that make life easier in some way, whether that product solves a problem or helps them achieve their goals in a more streamlined manner. Unfortunately, consumers are skeptical of new products and businesses they’ve never heard of, so you need a plan to “establish yourself”.
In this article we’re going to discuss 6 questions you need absolutely need to ask yourself to determine if you really have a good business idea…
WARNING! You might not like the answer!
- Does it solve a real problem?
- Who is your product actually for?
- How well do you understand your market?
- How much will it cost you to sell it?
- How will you finance those costs?
- Can you afford to make changes as you go?
1. DOES YOUR BUSINESS IDEA SOLVE A REAL PROBLEM?
Consumers want a solutions to their problems, even if they don’t recognize they have a problem until they find your solution. That means, during the initial startup process, you have to determine if your product or service would be truly useful enough to consumers that they would be willing to spend money on it.
For example: every year, you and some friends go touring the country on your snowmobiles and inevitably someone complains about their legs either being cramped or numb.
You have an idea for adjustable foot pegs that can slide forward, back and up and down, so the passenger is more comfortable.
Your idea seems viable for now, as it solves a real problem, but who would buy it and how would you find them?
2. WHO WOULD ACTUALLY FIND YOUR BUSINESS IDEA USEFUL?
It’s easy to think that your product would be useful to “everybody.” But most businesses learn there is only one specific group that will make up the vast majority of your customers.
You have to learn as much as possible about this demographic so that you can understand how to market to them and motivate them to buy your product.
Back to our example: Even though “everyone” complains about sore legs on a snowmobile it would be a mistake to assume your product would appeal to everyone.
Let’s say that you spent a couple months asking every snowmobile rider you came in contact with if they thought your idea for the adjustable foot peg was good and surprisingly only owners who frequently take passengers were at all interested. Many simply said they enjoy riding solo and the passengers leg cramps aren’t their problem!
At least now you’ve done some real market research beyond just a few friends who will tell you what you want to hear and you know that it’s actually the snowmobile owners who carry passengers, not just any snowmobile owner who would be your specific customers.
3. HOW MUCH EXACTLY WILL YOUR BUSINESS IDEA COST TO CREATE, MARKET, AND DELIVER?
Before you know if you have the makings of a viable business, you have to know exactly how much capital you will need to bring your product to market.
Continuing with our example: You know you have a great idea, but you don’t know how to price your footpegs, nor how much they will cost to produce, market and deliver.
TO SOLVE THESE ISSUES, YOU NEED TO DEVELOP A FINANCIAL MODEL THAT EXAMINES;
- what materials are used to make the footpegs
- how much they will cost to produce
- how much it will cost to get them to market and in the hands of your customers.
The Financial Model is the numbers part of your Business Plan and is critical to helping you secure funding, loans or investments. Even if you’re self-funding the business you’ll want to know how much money you plan to spend and how much you hope to make.
If you need help with creating a Financial Model we have a great walk-through template for you to checkout free!
4. HOW WILL YOU FUND YOUR BUSINESS?
Once you have your financial models, you will know how much money it will take to get this business off the ground. You may be able to fund your startup yourself with the help of friends and family, or you may have to take out a loan and even find other financial sources like grants or business investors.
No matter how you plan on funding your business, the individuals or groups involved will want to see a solid business plan, financial plan, and marketing plan before signing any deals. Your financial model will help you determine where to look for capital.
Continuing with our Example: In a perfect world, you would have all the money you need to start your business just sitting in your bank account. But assuming that’s not the case you will need to convince someone else to support your business with money.
You basically have 3 options for funding your business:
- Find Investors
- Get a Loan
- Use Your Savings
The best case scenario is one where you have your own savings and can use that to fund your business. If that is the case you’ll need to make sure you have enough money to get through the first 12 months of operations in order to stand the best chance of success (see our previous article on this topic here).
FIND AN INVESTOR
Getting an investor can be much tougher. With an investor you’re basically selling equity in your business, and if you’re just getting started this can be a very risky proposition. Lots of people have business ideas, but relatively few will ever become an established business. It’s not easy finding people willing to gamble on an unknown business, so unless you know the people well you may find professional investors uninterested.
Getting a loan is often the best way for a new business to get started, assuming you have a business model that you’re confident in and enough cash on hand to cover loan payments in case you have a slow month. The advantage of a loan is that you get to keep full control of the business, the downside is you will need to pay interest. But banks can be difficult to work with for new businesses, so be prepared to shop around.
If you need help with creating a business plan we have a great walk-through template for you to checkout free!
5. DO YOU REALLY UNDERSTAND YOUR MARKET?
One of the most important aspects of having a successful business is understanding your market and the demographics that make up that market.
Importantly you need to know exactly how you plan to find the customers who will want your product. If you don’t know your buyers and potential buyers, your business will never reach its potential. Period.
Continuing Our Example: Let’s say your foot pegs aren’t selling like you’d hoped. To find out why, you begin standing in the stores talking directly to customers who you expected would be interested in your pegs.
Much to your surprise, it turns out that female passengers seem to appreciate your foot pegs the most, but you were marketing mostly to the male demographic. When you expand your marketing reach to include female-oriented sale channels, your sales suddenly jump, but you’re still not quite where you need to be to meet your business goals.
6. IN AN EMERGENCY, HOW FAST CAN YOU PIVOT YOUR BUSINESS?
A great many highly successful businesses started out as an idea and evolved into something quite different once they actually opened their doors because they learned to pivot.
No matter how smart you may think you are, when you actually start selling to customers the market is bound to teach you things you never thought of. Every business needs to be prepared to learn and get smarter as time goes on about the products that customers really want, the types of marketing campaigns that are actually effective, and which products end up being most profitable.
This type of learning is called “pivoting”… As long as you remain flexible and can pivot to meet user need, you can still succeed. But you need to be prepared to pivot, sometimes quickly. If you don’t plan on keeping some cash in reserve for “learning” and pivoting, you’ll find that an opportunity to improve might pass you right by.
In our example: one day a customer you’re talking with tells you that they use your adjustable foot pegs on their children’s bicycle.
It turns out you designed the perfect way for kids of all sizes to stand on the back of a bike, no matter how tall they are! With that one piece of information you pivot your business to focus on the previously untapped “adjustable bike pegs for kids” market.
If you’ve kept some funds in reserve, you can rebrand and relaunch in time for the spring bike buying market. Best of all, the bike peg market just happens to be 100xs larger than the snowmobile market.. Well done, you have yourself an established business!