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Sunday, June 1, 2008

So you’ve got a business idea… Now what? » The StartUp Blog at PartnerUp

Everyday people come up with thousands of great business ideas that could have produced multi-million dollar companies. But these ideas go nowhere because people aren’t sure where to begin.

The biggest excuse people use for not turning an idea into a business is that they aren’t sure if it will be successful. Instead of immediately succumbing to those fears, follow these five steps to figure out if your idea is worth taking to the next level.

1) Decide if potential customers would be willing to buy your product/service
The first step is to do a quick and dirty evaluation of whether your business idea has potential. Find five people or companies who could actually be potential customers. It is important that you make sure that these people are truly representative of your target customer, so choose wisely.

Have them sign an NDA and then tell them a bit about your product/service. Don’t use too many details, like information about your business model and competitive advantages. Just be sure to give them enough information so that they can make an informed decision as to whether or not they’d be willing to be a customer. Then, ask them for their opinions. Would they buy your product/service? If so, why? If not, is there something that you could do that would make it more appealing? Make clear to them that you want their complete honesty. You don’t want them to tell you that they would be interested if they really wouldn’t.

2) Perform some initial market research
If at least one of the five people/companies previously mentioned had said they’d be willing to buy your product, then I think your idea is worth moving forward and putting together some market research.

So many people talk about how difficult it is to perform market research. In actuality, it is anything but difficult. It is, however, a bit tedious. Start by typing your idea, or variations thereof, into any of the search engines (Google, Yahoo, Live, or Ask). Your goal here is to determine if someone else is already providing the product or service that you envision. Make a thorough list of each company that you would consider a competitor and take note of their web address, their location, their product/service offerings, and most importantly their pricing. Compile all of this information into a spreadsheet and save it!

Here are a few things to look for after you’ve compiled your list of competitors. How many competitors are in the marketplace? What do you think is the total sales per year for your industry and how much marketshare does each competitor have? Does it look like the companies in this market are making money (i.e. are they located in big beautiful buildings, or in someone’s garage)?

3) Accurately cost out how much it will cost you to create your product/service
Don’t skip this step and just say that since Company X can sell it for a certain amount of money that you can sell it for slightly less. For all you know Company X could be not properly costing their products/services and losing money on every product that they sell. Or, they could be offering this product/service as a loss leader. In any event if you skip this step, it will come back to haunt you.

If you are offering a service, calculate exactly how much money it will cost to provide your service. To come up with this number, add up direct labor costs, all of your overhead, and any other costs that you’ll incur providing your service. When calculating overhead, don’t skimp. If you work out of your home now, but will need to work from an office once you start your business, add that expense. Account for phone lines, internet connectivity, power/energy, computers, printers, copiers, equipment, supplies, etc. The biggest error that I see people make here is that, by not figuring for the expenses once they are in operation, they underestimate how much it will cost to offer their service.

If you are offering a product instead of a service, talk to a few engineers and contract manufacturers. Have them give you prices for designing/producing your product. From there you can figure out your total overhead and expenses. Finally, take a good guess as to how many products you expect to sell and amortize your overhead into each product by dividing the total annual overhead expense by the total number of units that you expect to sell.

4) Figure out who will sell your product/service and how much they’ll charge
It is important to decide who is going to sell your product/service and to establish what sort of costs will be involved in marketing and selling the product. This will vary greatly depending on whether you’ll be selling at retail, selling through a sales force, or relying on direct marketing.

If you plan to offer your product/service through a retail outfit, call the company and find out who the buyer for your product/service is. Call the buyer and ask for a 10-minute meeting. Too many people think that companies like Target, Best Buy, Macy’s, Home Depot, and others are unapproachable. In fact, they have hundreds of buyers whose job it is to find the next hot trends and items. So call them and discuss your idea. See if they have any interest. If they do, tell them that you are in the exploratory phase of launching your business. Ask them for some rough guidelines regarding what sort of margin they expect, whether they expect co-op marketing money, and whether they sell on consignment or if they purchase your products outright. This will give you all of the information that you need to complete your analysis.

If you are going to offer your products/services through a sales force, find one or two salespeople who are in a similar but non-competitive line of business. Offer to buy them lunch or coffee so that you can ask them a few questions about what sorts of commission they make, how the sales are handled, and what they might expect for a commission and final selling price on your products/services. There are very few salespeople out there who aren’t always looking for a great business/selling opportunity, so getting a meeting with them is a pretty safe bet.

Finally, if your product/services will be sold through direct marketing, call up a few smaller/mid-sized marketing firms who specialize in direct marketing in a business similar to yours. Setup a 30-minute meeting with them to hear about their qualifications. Ask about their company. Get their input on how much it would cost to market your product. Again, tell them that you are in the exploratory phase and that you’re looking for rough numbers. This usually allows people to let their guard down and offer accurate/honest advice without having to listen to the whole dog and pony show.

5) Add up the numbers and decide if you want to proceed
The final step is to add up everything—the total cost involved in producing/offering your product/service, the selling costs (or retailers margin expectation), and any other expenses that you’ll incur (on a per-unit basis). Now compare your costs to those of your competitors. Just because you may be more expensive doesn’t mean that your idea isn’t worth pursuing. If you have something that really differentiates your product/service from the competition, people may be more than willing to pay extra for your product. However, if you are offering the same widget as your competitors for a substantially higher price, then this is a red flag.

Now that you have the numbers and have performed a thorough assessment of the competitive marketplace, you should be ready to make a decision as to whether or not it is worth moving forward with your idea. The above research should take no more than a week, in your spare time, and you’ll eventually appreciate every second that you spent on this.

Good luck with your business!

So you’ve got a business idea… Now what? » The StartUp Blog at PartnerUp
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