7 Steps to Anaylzing a New Business Idea
I review lots of different business ideas on this website to determine whether it is worth the time and effort. However, I will never be able to review every single business idea out there.
Usually the best business ideas are the ones that you come up with on your own. I have written this article to assist you in determining whether you should pursue the idea or not BEFORE you actually spend any money.
Step 1: Determine if there is a Market
You need to know if there is money being spent on the type of product or service that you will be offerering. Can you make money in this business? This seems like a very obvious step; however, many business owners come up with a great invention and just ASSUME people will buy it. However, just because you invent a high tech pancake flipper doesn’t mean anyone will buy it.
So, do your research! How much money is being spent in your target industry each year? Is the industry growing or shrinking? (You want a growing industry). If you find an industry where people are spending lots of money each year, and its projected to grow, then move on to the next step. If you determine that people will not spend money in your particular industry; STOP! Try something different, or tweak your product so that people will want it.
Step 2: How Much Competition?
Okay, so hopefully you have found an attractive market that is growing. However, how competitive is the market place? Are you dealing with giant corporations that will not allow you to be successful in the market? For example, lets say you want to sell computers. Yes, the market is huge and growing; however, the market place is extremely competitive. People can buy computers at Best Buy, Circuit City, Target, eBay, local stores, online distributors, and directly from the manufacturer. Many of these competitors are well established, can spend more on marketing, and will probably be able to offer a cheaper product because of the volume in sales that they do.
So, try to find a business will as little competition as possible. (Every business WILL have some competition). Don’t just ask whether or not there is competition. Ask, how tough is the competition.
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Are competitors well established?
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How large is the competition?
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Are customers satisfied with the competition?
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Do competitors have any weaknesses?
There are lots of other things to look at as well, which will be discussed further is the strategies section. Overall, determine how fierce the competition is. Be realistic! If you are going up against Wal-mart, you better think twice before you proceed.
Step 3: Investment Required
If your idea passed the previous 2 steps, you now need to determine how much it will cost you to actually get your business up and running. I am all about running on shoestring budget. I prefer businesses that can be “bootstrapped” as opposed to borrowing money. You will care a little more if you are risking your own money. Hence, the businesses is more likely to be successful (that’s just my own opinion though). Ask yourself:
- How much will it cost to develop my product or service?
- What start-up advertising do I need?
- How much does it “cost” to get a customer?
- How much revenue should I expect from a “sale”?
- Can I roll that money back into the business?
- How much money will I need for rent?
- Other expenses?
Overall, be realistic. I highly recommend getting some sales or at least lining up some customers before you buy a bunch of new equipment or rent office space. Run the business, “Lean and Mean” for as long as possible. However, there will need to be some investment. If it costs too much money, you may need to move onto the next business idea.
Step 4: Determine Your Target Market
Congratulations, if you have made it to this step, you just might have a business idea worthy of starting. However, before you start the business, you need to analyze a few more things, including your target market. Your target market is who your ideal customer is. Who will be purchasing your product? Is it men, woman, children, families, businesses? Also, determine an age demographic if possible.
The most important aspect of determining your target market is to determine what need you are fulfilling. This will help you immensely in determining your strategy and marketing message.
For example, if you are a wedding consultant. You could say your target market it people getting married. However, this would probably be a flawed focus. You need to be more specific. A better target would be potential 18-25 year old brides stressed about marriage arrangements. (You can see how you might market that). A different target might actually be the mother of the bride. A different target might be brides of a specific religion. A different target might be brides that are older. Anyway, you get the point.
For any particular business there are lots of different potential target markets. Which one you choose and how you market to them can make a huge difference.
You don’t want to be everything to everyone. Therefore pick a niche target and dominate that niche. You can always grow from there.
Step 5: What is Your Strategy
A business strategy is what differentiates you from your competitors. Here are some well-known company strategies: Low-price leader (Wal-mart), High level of customer service (Nordstroms), and Perception of high quality (Tiffany diamonds). There are lots of different strategies that can make you successful. First look at your product. Is it high quality? Do you have great customer service? Is it an impulse buy?
Now look at your target market. Is this a major or minor purchase for them? What problems are you solving for them? What other benefits does your business provide to them? Once you understand your core competencies and your target market; your strategy is a little easier to determine.
What makes you different from your competition? I know one dentist who’s strategy is to be the “pain-free” dentist. That’s all he advertises or talks about.
Everyone knows that Wal-mart has the lowest prices. If they are not the lowest, they will match the price from one of their competitors.
So, determine how you will be different from your competitors; then market that difference.
Step 6: Marketing
Once you have determined your target market and your strategy; choosing a marketing message is simple. All you do, is choose a marketing campaign that communicates your strategy to your target market! So, advertise where your target market reads, watches TV, listens to the radio, looks, goes, or anything else they do.
The more targeted your advertising and marketing is, the more effective it will be. Your message will be so specific and different that your target market will be excited to try out your product or service.
How much to spend on marketing is different for every business. However, do as much advertising for free by word of mouth or other means as possible. Marketing does not have to be expensive. Just go to where your target customers are, and tell them about your unique proposition that differentiates you from your competitors.
Step 7: Profit Potential
This step is the most fun! Now let your imagination run wild and think of the dollars you could make! Its just fine to imagine what your business could someday become. To calculate your profit, simply look at your margin. That’s is how much money is left over after variable expenses after each sale. If you sell lemonade for $1 and it costs $0.10 for the lemonade mix and cup, then your profit margin for each sale is $0.90. Now you know how many cups of lemonade you have to sell to make $100…112 cups ($100 / $0.90).
So, figure out your margins and then start calculating. This will help you see how realistic the business is. If you have to sell more product than is possible in order to quit your day-job, you better keep working.
Well, there is a lot more analysis that could be done on a business; however, this should be sufficient to get you started in the right direction. If you have a new business idea that can pass each of the 7 steps discussed then you have a winner! If not, you may need to start on a different idea, or at least tweek the old one.
Good luck in your business ventures!
Nice Article!