Walt Disney — ‘The way to get started is to quit talking and begin doing. ‘
Before you make any life-altering changes that can’t easily be undone, take some time first to evaluate your business idea to see if it will work. The first step of the process is to do some research and analysis to dig into the potential of your idea. Here are a few ways to get you started.
Figure 1: How to test your business idea?
Unique Selling Proposition
The Entrepreneur.com encyclopedia defines the unique selling proposition as follows: “The factor or consideration presented by a seller as the reason that one product or service is different from and better than the competition.”
But what does that mean? How will a unique selling proposition help my business?
Many entrepreneurs make the mistake of attempting to stand for everything when they first start. They want to do everything well, and they want to be known that they are doing everything. For having the highest quality products AND the lowest prices AND fastest delivery AND super customer support.
“When you attempt to be known for everything, you don’t become known for anything…” – Joe Putnam, founder of www.conversionEngine.co
A unique selling proposition is a game between your buyer and you. If we imagine you like somebody in the water and your buyer as somebody on the shore, you will probably be in the crowd of swimmers. How your buyer will distinguish you from the group? You will have a better chance if you have a different swimming cap, maybe you will be the only one who does not need inflatable swimming ring, perhaps you will have a gift for him/her?
If you want to stand out, i.e. if you’re going to “have a unique selling proposition,” your business has to stand for something – this is what you will become known for. Holding for everything is impossible. Even if you pull this off for your first sale, you will not have the energy to do this in the long run.
We can study Starbucks as a great example of unique selling propositions. It was involved from a small coffee shop in Washington to one of the most recognised coffee brands in the world. This was done, well guessed, through the development of a unique selling proposition.
Starbucks doesn’t stand for premium coffee beverages AND the lowest prices. If so, it wouldn’t stand out from corner gas stations. The reason it stands out is because of its premium coffee and the free space offered for reading, and to have a pleasant conversation, without being asked if “you need anything else”. That’s why Starbucks stands out from the corner gas stations that sell coffee for 1 Euro. If instead, it was trying to compete head-to-head with gas stations on the price, quality would suffer, and their product wouldn’t be unique. Starbucks wouldn’t be able to stand out because of its premium coffee. And it is true – while we love its coffee, we know that we will spend much more on Starbucks products.
Think of the famous Domino’s Pizza slogan – “You get fresh, hot pizza delivered to your door in 30 minutes or less or it’s free” tells you exactly why you should buy from them. Their uniqueness is in the fact that you know that you are risk-free when ordering pizza from them. Buyer loves that.
Identify a Target Market
The next important step in testing a business idea is to define who will buy your product or service. The easiest way is to imagine who will be the first to bite your unique selling proposition. Who has the problem that you will solve? Consider factors such as age, gender, education level, income, and a location. The more you can narrow down the picture of your ideal customer the better. You won’t be able to figure out if there is a market for your product or service until you have a distinct idea of who you are selling it to.
For example, if you have a business idea to renew bathrooms – you need to define who your primary customers are. If you start with unique selling propositions before renewing bathrooms, you will be providing a free 3D model of a new bathroom, you can more easily define your customer. Probably, your customers will be young with easy access to the internet, who like new designs and are refurbishing old flats or houses. By keeping this in mind, the promotion, pricing, and distribution of your products and/or services are easier and more cost-effective.
It can also be helpful to create a test segment of your target market and conduct a focus group or a survey to find out what is their profile. Then, you can decide whether it makes sense to launch your business to a segment of your market to gauge response before committing fully to your business idea.
Determining the size of the market is not easy, and it should be identified regularly due to market fluctuations, new technologies, new approaches, etc. In the following article, you can find some ideas on how to determine the size of your market:
https://www.fieldboom.com/blog/market-size/.
Define your competition
We’ve been talking about the competition in Chapter 3 – Soft Skills – ability to look at your competition. The reason why we are referring to it again is that Unique Selling Proposition, Target market identification and Definition of the competition are coming hand in hand in this stage of developing your business idea. You cannot really define the target market if you don’t know what your competition is doing and what segment of the market is focusing on. Also, you cannot create a valuable, unique selling proposition if you don’t know to whom you are selling it. This connection requires a few iterations of the definition of all three segments before it integrates into your business idea.
Financial feasibility of your startup
When you are aware of the size of the market and who your competitor is, is time to see if from a financial perspective, your idea is worth developing, if it will be sustainable, and how much profit you can expect from it. It is a crown of all your efforts before the business idea will really be physically developed.
By comparing your actual financial statements to your projections, you’ll be able to see whether your company is falling short of your projections or surpassing them. If your projections are falling behind, then you’ll need to make some changes into your financial model by increasing your products’ prices, reducing costs or revising your business model. On the other hand, if your revenue exceeds your projections, then you may need to hire more employees, expand your facilities or seek funding earlier than you expected.
In other words, this process will answer the following questions with the following answers:
If I set up an ice cream shop in the centre of the city, how much money I will earn?
To answer this, you will need those three elements: 1) financial model, 2) sales forecast and 3) projected expenses.
1) The financial model is the key for your business since it defines what you will be selling, how much money you will earn and how often you will be getting it. It determines where your money will be coming from.
For example, Airbnb in 2007, on their money rising pitch defines that they will take 10% of commission on every sale they will make. You should try to do the same for your business. How many customers can you expect? How many units will be sold? What is the cost of goods sold? How will you price your products? Your financial model will be less complicated and you will have less hassle when you will try to see the sales forecast in the following steps. If you don’t know how to start, maybe this model can help you understand how the market works https://strategyzer.com/canvas/business-model-canvas. See also chapter 8 of this handbook.
2) The sales forecast needs two previously defined numbers – the size of the market and your financial model. Based on that you can project your sales for at least three years, including monthly sales for the first year, then quarterly for the following years.
3) The projected expenses, which includes both fixed costs (e.g. rent ) and variable costs (e.g. marketing expenses). You don’t need to do an incredibly detailed breakdown, such as listing the cost of every chair you will buy. .But you do need general figures.
Now you can see your business from a totally different perspective. Maybe it is clear now that you need to start right away. In general, every idea needs shifts and game of combination. Prepare a spreadsheet, apply formulas and start what-if scenarios. What will happen if we will have such and such number of customers? What if we will have too many customers, how we can expand the business? Or, what if we cannot attract enough customers?
How many customers do we need?
Nevertheless, there are a lot of financial model templates, do not make the mistake to use too complicated models that you do not understand. You need to start with simple logic, which can be calculated in your head.
For doing this, you need to first calculate how much money you need every month to “survive”. Check how much money you need for rent, salaries, taxes and give an overhead of 20%. You also need to calculate the cost of sales – do you need a car to deliver products or you will ship it? Do you need material to develop and create your product or are you a software developer? Doing this, you will be able to calculate the minimum amount of money you will need every month.
Thanks.