How To Validate A Business Idea?

An idea, however exciting, unique, revolutionary, and necessary, isn’t a business. It’s a great starting point, and an essential one, but you have to do a good deal more work before you can sidle up to your boss and tell him exactly what you think of him. 

In this article, we will explore the steps you need to take so that you don’t have to go back to your boss in six months and plead for your old job back (and possibly eat a large piece of humble pie at the same time).

1. Researching the market

However passionate you are about your business idea, you’re unlikely already to have the answers to all the important questions concerning your marketplace. Before you can develop a successful business strategy, you have to understand as much as possible about your market and the competitors you’re likely to face.

The main way to get to understand new business areas, or areas that are new to you at any rate, is to conduct market research. The purpose of that research is to ensure that you have sufficient information on customers, competitors, and markets so that your market entry strategy or expansion plan is at least on target, if not in the bull’s eye itself. 

In other words, you need to explore whether enough people are attracted to buy what you want to sell at a price that gives you a viable business. If you miss the target altogether, which you may well do without research, you may not have the necessary resources for a second shot.

The areas to research include:

Your customers: Who may buy more of your existing goods and services and who may buy your new goods and services? How many such customers exist? What particular customer needs do you meet?

Your competitors: Who are you competing with in your product/market areas? What are those firms’ strengths and weaknesses?

Your product or service: How can you tailor your product or service to meet customer needs and give you an edge in the market?

The price: What do customers see as giving value for money, so encouraging both loyalty and referral?

The advertising and promotional material: What newspapers, journals and so forth do your potential customers read and what websites do they visit? Unglamorous as it is, analysing data on what messages actually influence people to buy, rather than just to click, holds the key to identifying where and how to promote your products and service.

Channels of distribution: How can you get to your customers and who do you need to distribute your products or services? You may need to use retailers, wholesalers, mail order or the Internet. These methods all have different costs and if you use one or more, each wants a slice of your margin.

Your location: Where do you need to be to reach your customers most easily at minimum cost? Sometimes you don’t actually need to be anywhere near your market, particularly if you anticipate most of your sales coming from the Internet. If this is the case you need to have a strategy to make sure that potential customers can find your website.

Try to spend your advertising money wisely. Nationwide advertisements or blanketing the market with free CD- ROMs may create huge short-term growth, but little evidence exists that indiscriminate blunderbuss advertising works well in retaining customers. Certainly, few people using such techniques make any money.

2. Doing the numbers

Your big idea looks as though it has a market. You’ve evaluated your skills and inclinations and you believe that you can run this business. The next crucial question is – can it make you money? You absolutely must establish the financial viability of your idea before you invest money in it or approach outsiders for backing. 

You need to carry out a thorough appraisal of the business’s financial requirements. If the numbers come out as unworkable, you can then rethink your business proposition without losing anything. If the figures look good, then you can go ahead and prepare cash flow projections, a profit and loss account and a balance sheet, and put together the all-important business plan.

You need to establish for your business:

  • Day-to-day operating costs
  • How long it will take to reach break-even
  • How much start-up capital you need
  • The likely sales volume
  • The profit level you require for the business not just to survive, but also to thrive
  • The selling price of your product or service

Many businesses have difficulty raising start-up capital. To compound this, one of the main reasons small businesses fail in the early stages is that they use too much start-up capital to buy fixed assets. 

Although some equipment is clearly essential at the start, you can postpone other purchases. You may be better off borrowing or hiring ‘desirable’ and labor-saving devices for a specific period. 

This obviously isn’t as nice as having them to hand all the time, but remember that you have to maintain and perhaps update every photocopier, printer, computer, and delivery van you buy and they become part of your fixed costs. 

The higher your fixed costs, the longer it usually takes to reach the break-even point and profitability. And time isn’t usually on the side of the small, new business: it has to become profitable relatively quickly or it simply runs out of money and dies.

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