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Start It Up

How do you know if you have a good idea for a business?

Alvin Fritschle

By Alvin Fritschle

Alvin Fritschle is the Chairman of the Board of First Bank, a community bank serving Southeastern Illinois and Southwestern Indiana. He has provided financial advice to numerous entrepreneurs for over 40 years as a certified public accountant and the President of First Bank. Over this time, he has demonstrated a strong commitment to assisting his clients with their strategic decisions.

Starting a new business is a huge leap of faith. With a startup company, you could just rely upon your gut to determine if this is a good idea. Although since the majority of new businesses fail within five years of opening, why not take a few extra steps to discover if you really do have a good idea before risking your time and savings following a hunch?

One of the biggest challenges for any business, whether it is a bootstrap startup or an established Fortune 500 company, is figuring out which ideas to pursue and which ideas should be abandoned. Established companies have the luxury of working with several very smart people who bring up new ideas frequently. The real challenge is not the lack of new ideas but figuring out which ideas are worthy of spending time and money upon. No matter who you are or how big your company is, figuring out what products to build or what services to offer is a huge challenge.

Follow these five steps to determine if your idea has merit and is worth moving to the next level.

  1. Document your key assumptions about your proposed business

    The key to this initial step is to write down your key assumptions quickly. An hour should be enough to write down your key assumptions. This step is your starting point and lays out the key questions that will need to be investigated further.

    1. Why are you doing this? All new businesses need a sense of purpose.
      • What is your mission?
      • What makes you different from others already in the business?
    2. What problem are you solving? For your business to be successful, you need to be solving a problem for potential customers. If you are not solving a problem, how will you get anyone to buy your product or service?
    3. Who are you solving this problem for? Knowing who your ideal customer is critical to starting a successful business.
    4. How are your potential customers solving this problem today? This section is where you identify your primary competitors.
    5. Do you think you can make money? At this stage do not worry about preparing detailed financial projections, but you should be able to do some basic calculations to make sure your idea could be profitable.
  2. Establish whether there is a market for your product or service

    Determining who your potential customers are, how many of them are in your area, and whether they will be interested in your offering at a price you will need to sustain your business are crucial ingredients to a business’s success. The only guaranteed way to find out exactly how the market will respond to your business is to start operating and see what happens. However, if you spend a little time up front, you can reduce the risk of failure significantly.

    Find out as much as you can about potential customers in your target market, such as:

    • Will people actually want what you are selling?
    • Which people or businesses are most likely to buy your product or service?
    • Which group of customers is likely to be the most profitable?
    • How often will your target markets buy from you?
    • What are the benefits that people want to receive when they buy from you?
    • What are the needs of the people that are not currently being met by other businesses?
    • Where are people currently buying from, and why do they choose to support those businesses?
    • Where are they located?
    • What is the best way to market to potential customers?

    Much of this information can also be used to determine whether there will be sufficient demand for your product or service for your business idea to work. It can also be used to figure out how you can modify your original idea so it will be financially viable.

    By talking directly to potential customers, you are getting on the ground feedback from potential customers about what they really think. It can also be insightful to talk to suppliers already working in your target market to tap into their knowledge of the market place.

    As you are bouncing your business ideas off of potential clients and suppliers, it is easy to end up only hearing positive feedback. Even potential customers might not want to hurt your feelings and not give you their honest opinion. This is where it is important to find those with a negative opinion of your idea and get them to shoot holes in it. It is better to start a business with your eyes wide open to the potential pit-falls that you haven’t considered.

  3. Research industry and market trends

    When you are starting a new business, it is also important to research the broader market to ensure your business is sustainable in the long-term. Pay particular attention to any economic, social and industrial trends or changes that could impact on your business’s future.

    Questions that will need to be considered include:

    • Has technology impacted consumer buyer preferences? (the Amazon effect)
    • Are total market sales increasing or decreasing?
    • Are there other national or regional competitors that may enter the market?

    The US Census Bureau has a substantial amount of information, including and beyond population characteristics such as age, income levels, and industry specific information. American FactFinder is a tool that makes it simpler to extract data from the census bureau’s databases.

    Additional sources of information on industry trends, opportunities, and threats can be found in the following sources:

    • Industry and trade publications (many will be online)
    • Reading local and online news sites for possible market changes
    • White papers available online from consultants and industry experts

    These online sources are very good at keeping you informed about industry trends and possible solutions to those threats.

  4. Analyze your competitors

    Researching your competitors is vital in determining if a market exists for your new business. These are the businesses that offer a comparable product or service to yours and you will be competing against them.

    You will need to know the following on each competitor:

    • What do your competitors offer, and how much do they charge?
    • Do they use a unique selling proposition, and how do they market their products or services?
    • What do they do well?
    • What do they not do well, which you can solve?
    • Where are there gaps that you can take advantage of?

    Do not neglect to include indirect competitors in your analysis. Indirect competitors are the companies that offer products or services that aren’t the same as yours but could still satisfy the same need. There are always other options for customers to spend their money on, and it’s important to be aware of these alternatives.

  5. Do you have a unique selling point?

    Once you know what your competitors offer, you can compare your similarities to identify your points of difference. Sometimes a new business will be lucky to find a gap in the market that they can fill--for example, you might be the only auto mechanic in town. However, most new businesses find themselves competing against similar products and services to gain market share.

    Your business needs a unique selling proposition in order to stand out from the competition and encourage customers to buy from you rather than a competitor. A unique selling proposition is anything that makes your product or service appear to be superior to the products and services offered by your competitors.

    Examples of unique selling propositions include:

    • First to market and no one else sells what you do.
    • Being the most reliable with the best guarantee.
    • Having exclusive products or contracts so you are the only available supplier in the area.
    • Cheaper or more economical to use.
    • Better designed and easier to use.
    • Locally made.
    • Healthier, with ethically or organically sourced components.

    With so many online businesses, customers have endless choices from sellers worldwide; therefore, unique selling propositions are getting harder to maintain. If you do not have a unique selling proposition to set your business apart from its competitors, you will be forced to compete strictly on price, which normally means lower profit margins.

Now it's time to move from business idea to market research!

If you are convinced that you have what it takes to be a successful entrepreneur and that your business idea is viable, it is time to determine if a market actually exists for your idea. Continue to our next article in this series: "Determining if there is a market for your new business idea."

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