Many business owners may have an idea for a small business or multiple competing ideas and are not sure if they want to pursue it. Do you wish you knew what business idea to pursue before you put a lot of time and money into something that may not work? In this guide, I will take you through a simple 3 step process to evaluate your business idea so you can move forward with confidence. Check out the checklist from score and follow along. Let’s get started.
Business Concept
Our first step is to develop our concept. You want to make sure that your business idea is a skill you have as a service or is valuable as a product, otherwise, people don't want it if you can't deliver on the promise or provide a lousy product. The other thing you need to think about is imitation. Is this a trending product or service? Is everyone doing it?
You want to offer a product or service that is valuable but not easily replicated because that just spells more competition for you and your business. That will ruin your unique selling proposition because it’s really not that unique to begin with. So, if you have a product or service that you think has value and that there are too many people doing in the market, we need to test it.
The second part of feasibility is to find out if this can be run as business? Meaning you do have to experience or organizational competence to run this venture as a business? This could be any from understanding your responsibilities to operate the business or do you need employees? And if you hire employees, could you manage those employees or contractors to work effectively? You also need to understand if this business can be run from your home or from an office space and something like that is available?
If you are able to answer all those questions, great! You now need to understand your financial feasibility. This means all those questions you answered have a cost associated with it, either from your time or paying someone for theirs and purchasing stuff for the business. You will also need to understand what level of sales you need to operate and pay yourself. As the owner you will pay yourself from the profits of the business, but you will need to know what Sales revenue you need to make and then subtract expenses.
For example, if your business needs $30,000 in profits to pay yourself and costs $15,000 to run then you need to make at least $45,000 in sales to meet that number. If that means if you sell a product that is priced at $15 you need to sell 1,000 units to break even and 3,000 units to pay yourself where you need to be. This is a crucial exercise to perform. Be real with yourself and conservative with your estimates because it could take months or years for many businesses to become profitable.
You want to offer a product or service that is valuable but not easily replicated because that just spells more competition for you and your business. That will ruin your unique selling proposition because it’s really not that unique to begin with. So, if you have a product or service that you think has value and that there are too many people doing in the market, we need to test it.
You can do this by finding about 25-30 target customers who fit your criteria and survey them. You will not only get valuable information if your idea will work but also be able to refine your offering using the feedback and make a better product or service.
Feasibility
Now that you have your concept fully fleshed out it’s time to understand the market and financial feasibility. First you want to understand your market size or total addressable market which is the amount of money out there based on who your target customer is and if this is sustainable. You can calculate this market with this formula: # of target customers x Price. This might sound easy but you can learn more about the total addressable market in this video.The second part of feasibility is to find out if this can be run as business? Meaning you do have to experience or organizational competence to run this venture as a business? This could be any from understanding your responsibilities to operate the business or do you need employees? And if you hire employees, could you manage those employees or contractors to work effectively? You also need to understand if this business can be run from your home or from an office space and something like that is available?
If you are able to answer all those questions, great! You now need to understand your financial feasibility. This means all those questions you answered have a cost associated with it, either from your time or paying someone for theirs and purchasing stuff for the business. You will also need to understand what level of sales you need to operate and pay yourself. As the owner you will pay yourself from the profits of the business, but you will need to know what Sales revenue you need to make and then subtract expenses.
For example, if your business needs $30,000 in profits to pay yourself and costs $15,000 to run then you need to make at least $45,000 in sales to meet that number. If that means if you sell a product that is priced at $15 you need to sell 1,000 units to break even and 3,000 units to pay yourself where you need to be. This is a crucial exercise to perform. Be real with yourself and conservative with your estimates because it could take months or years for many businesses to become profitable.
SWOT Analysis
Our final step is to conduct a SWOT analysis. This is much simpler than sounds but can be a source of headache for some people. You need to be brutally honest and look at the competition.S - Strengths
You need to identify your strengths in the business. What does your business do well, or have that make you better than your competitors?W - Weakness
What do your competitors do better than you? Is there something your business lacks that you need to get or any resource limitations? Are you having trouble communicating your unique value to the customer?O - Opportunities
Here is where things get interesting. You need to identify any gaps in the market like an underserved customer who will purchase your product or service. You should look and identify if there might be an emerging need to add products that no competitor currently has to capture those customers. Finally, are there any media opportunities like stories or platforms you can take advantage of that your customers use?T - Threats
This is the scariest part of your SWOT analysis. You need to identify threats to your business like new competitors who come on the scene. Are there any new laws that negatively impact your business? You also need to be aware of any negative press about the industry or changing attitudes about your type of product or service.Conclusion
Now, this may seem like a lot of work and it may be. As I said in the intro, it's simple, not necessarily easy. Depending on your idea or industry you could do this on a single weekend or over several weeks. If you are looking for help with evaluating your business idea or following the process you contact your nearest SBDC like our here at the University of LaVerne SBDC and make an appointment to get your business started.Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.
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