Let’s be fair, business ideas are easy to come by. There are very few people that haven’t, at some point in their lives, said: “I should start a business doing that”. Technology and the internet have only served to increase potential start-up opportunities for anyone with a computer and an internet connection. How many times have you thought of a great idea for an app?
The reality, though, is that it’s incredibly difficult, especially in developed countries such as the UK, to come up with a winning idea, the idea that will bring business success.
With that in mind, how can you sense check your idea before you waste too much time on it, only to find out that it was never going to work? How can you work out which of your ideas is the one that will work, so you can forget about the rest and get on with it? Here’s my five-step process to sense check your business ideas.
1/ How much does your product or service cost to make?
You need to do some research into exactly what it would take to make one unit of your product/service. This means working out how you’ll make it and therefore what you would need to purchase in order to do so, how it will be put together and how you’ll get it to your customers. Be realistic with your estimates – don’t be tempted to take lower unit prices achieved by buying in volume – you’re a start-up – chances are you won’t sell much at first, so you’ll be stuck with your money tied up in stock.
2/ How much could it sell for?
Sounds obvious, but it’s really important. What are similar products/services selling for? What would your target market be prepared to pay for what you’re selling?
3/ What else will you have to pay for to make the business work?
Will you need to purchase a machine in order to manufacture all or part of your product? Do you need a website to sell your service? Will you need storage space? A marketing budget? At this stage, you don’t need to be hugely accurate with your costs, but it is important to get a rough sense of what is required, as it will help you to establish whether the idea is feasible or not.
4/ How much money do you need to start-up?
Of all the costs you’ve identified, which do you need to cover upfront, and which can be paid for from revenue slightly later on?
5/ Will people buy it?
Now what? Well, it’s crunch time. Take the rough sales price (question 2) and subtract the unit cost (question 1). Hopefully this number is positive?! My first attempt at book publishing, almost a decade ago, ended with quite a shock when I realised that Amazon ask for a 60% discount off the RRP. I’d been able to produce one book for £3.85; just to break even, I’d have to set the RRP to at least £9.65!!! I eventually settled on £11.99 and you can guess what happened – I sold virtually nothing (and couldn’t discount without losing money). Fortunately, I had a much better model when I launched Echo Books last year!
Assuming you’re still in positive territory (if you’re not, forget it!), you then need to look at how many units of product you would need to sell to break even, so take your fixed costs (question 3) and divide by the number you just calculated. Is this number realistic? Be honest with yourself, if it’s not, it will only cause you problems further down the line.
One final check – your start-up costs (question 4). Can you afford this? Where will you get the money from?
Of course, there are many other factors to consider when starting a business. Those we have looked at here are designed to give you an initial insight into whether an idea could feasibly turn into a business, so that you can choose which of your ideas to pursue.
Once you’ve settled on your idea, its then down to you to make it work. Entrepreneurship is about acting, not spending months planning and getting every detail right – if you do that, you’ll never start. You have to do something, anything, to get yourself going and then move quickly to continuously improve what you’re doing and push it closer to your original ambition.
Ready to take the next step? Read my 5 tips to help entrepreneurs turn their business idea into reality.