Do you have an idea for a business? Are you clear about how it will make money? Read Denyse Whillier’s latest business blog called ‘Is your business idea viable?’
In previous articles we’ve looked at why you’d like to set up your own business and given some thought to the different types of business model there are. Now it’s time to get down to the nitty gritty and look at whether your idea is actually viable or not! Sadly, not all great ideas translate into great businesses. Even if you’ve thought of a fantastic product or service, you’ll need the right business model, pricing, funding, marketing and people to make it work. And of course, enough customers willing to pay for your service or product.
So how do you know if your idea is worth pursuing? Here are a few pointers to make sure you’re onto a winner before diving straight in.
Is there a market for it?
The first step towards determining whether your business idea is viable is to carry out extensive market research. This will enable you to establish if there is a market for your business, and whether this market is big enough to make the venture a success. Many great ideas have been scuppered by a lack of research so you should not overlook this stage. Not only do you need to work out whether there is sufficient demand for your offering, you must also determine what marketing, pricing and business model will work for your target market.
To do this, you need to find out as much information as possible about your potential customers: How many are there? What type of people are they? Where do they shop right now? How do they behave and what drives their purchasing decisions? If they are consumers, how much do they typically earn and how much disposable income do they have? How often would they buy your product or service?
You can carry out a lot of this research yourself at little or no cost.
Market research falls into two main categories: primary (which you conduct yourself) and secondary (analysing data published by secondary sources). The research can be quantitative (based on numbers and statistics) or qualitative (based on attitudes and opinions). Ideally, you want a mixture of all of these sources to gain a reliable picture of the market.
Your primary research could include focus groups to gauge prospective customers’ attitude towards your offering; surveys; or sizing up the competition. Depending on the type of business you’ve got in mind, you could simply arrange to meet potential customers (those who fit your ideal customer profile) for a coffee and get their views. Look at your rivals’ use of technology, customer service, prices, marketing and business models and try to find out what your potential customers think of these things – this will help you to identify what your point of difference is.
Often you can access valuable secondary data free of charge. Much of it is available online: trade and industry associations often publish data such as sales figures, economic trends, and other statistics and reports. Look at industry specific magazines and publications too.
Remember, the goal is to arm yourself with as much information as possible about the state, size and needs of your market. Do enough research to ensure the results aren’t one-sided, and consider all feedback. It’s better not to ask family and friends to take part in your market research, unless they can bring relevant expertise to bear, as they’re unlikely to be impartial. Be prepared to adapt your idea according to what your customers want, not what you think as the best solution.
Ask yourself: Is your idea original or are you building on an existing concept? If it’s the latter, is there really room for another similar business in the market, and is your idea sufficiently distinct and compelling to lure business away from your competitors? You need clear unique selling points (USPs). Similarly, if no-one else is doing it, is there a reason for this?
A great way of evaluating the viability of your idea is to conduct a SWOT analysis. This is a strategic planning tool that involves analysing the Strengths (what gives your company an edge over competitors); Weaknesses (in what areas would your company be at a disadvantage); Opportunities (what external chances are there to make greater sales or profits) and Threats (what could put your idea at risk e.g. a larger competitor copying your idea, setting up in a better location than you).
Is there anything about your technology or approach that could easily be copied by a rival with bigger buying power? If the answer is yes, think carefully before moving forward.
Mitigate the threats by protecting your intellectual property where you can. You can’t protect the idea itself, but you can safeguard your name, brand, designs and inventions through trademarks and patents. Run a search on the trademark and patent databases on the Intellectual Property Office’s website to ensure you’re not treading on anyone else’s toes.
What’s the business model?
It’s what you do with a great idea that counts – you need the right execution. Google wasn’t the first search engine and Facebook wasn’t the first social network. But by finding the right business model and honing their offering, these companies were able to build on an existing concept to become market leaders.
Often there will be several business models and revenue streams you could consider. For example, a web based business could charge end users a monthly subscription fee, or make the website free for the user but earn a commission for every ‘lead’ or sale that it generates for another company (e.g. Toptable, price comparison websites), or it could sell advertising space. The freemium model, where a basic service is offered for free but customers can pay for a premium service, is also an option.
Once again, research is vital to test the viability of your model – what are your customers willing to pay for and how much would they pay? Can you charge enough to cover your costs and turn a profit?
Can you fund your business idea?
A very important question! Do you have sufficient funds in place to get your business off the ground? You’ll need enough to support yourself and to provide sufficient working capital until your company hits profitability. To work this out, you’ll need to undertake some honest and thorough analysis of how much it will cost to set up and run your business, how much you expect to sell each month and when you expect to break even. What are your margins? Can you sell enough at the right price to make it viable?
Look at sales figures from your industry and analyse your competition to forecast more accurately and think carefully about all the costs involved. It is better to over-estimate than to find yourself falling short. Ideally, do three different forecasts, covering the best-case and worst-case scenarios, and your likely results. Can you stay afloat if the worst happens? You’ll need a contingency plan to take account of your worst-case scenario.
Think about how to keep costs to a minimum without cutting corners and avoid unnecessary extravagances. Operating online or from home initially, negotiating with suppliers, shopping around for the best deals, being ruthless with spending, trying to exchange your products, expertise or services for those of others and using freelance or part-time staff could all help to keep your start-up costs down. However make sure that your marketing budget is well thought through and is sufficient to get your business off the ground.
Unless you have savings, minimal costs or you’re starting a business while still employed, you may need to raise external finance. You will need a cast iron business plan that includes your detailed cost analysis, and sales projections backed up by solid research. Crucially, if you are looking for a bank loan, remember to factor debt repayments into your forecasting.
Have you got what it takes?
Last but by no means least, have you got the right attitude and skills to make your idea a success? We looked at this in my earlier blog post ‘So You Want To Start Your Own Business.’ Setting up a business is an endurance test. The success of your idea hinges on your commitment to seeing it through – during the good times and the bad. Your idea needs to be something you’re really passionate about, and you then need the skills, drive and belief to make it work.
The key message of this article is to take this stage of planning seriously and take time to thoroughly research your target market and evaluate whether and how your business idea has the potential to be successful. It is well worth investing in some time with an experienced business coach at this stage because s/he will be able to look at your plans with an independent and fresh eye, and point you towards areas that you’ve either over-looked or over/ under-estimated. Remember the saying by Benjamin Franklin:
“If you fail to plan, you plan to fail.”