Most people have come up with a potential business idea at some point in their lives. After all, the idea is the easy part. Before investing time or energy into a new business, it’s important to critically analyze the idea to ensure it will be a smart use of resources. Here are seven things every new business owner should consider before moving forward and getting serious with an idea:
1. What is the customer profile? There’s no sense in starting a business without any customers, and the better you understand your potential market, the more likely your business is to grow and succeed. The current state of the economy makes it even more crucial to take some time to research your target audience because targeting everyone in general will be too expensive. Who are your potential competitors targeting? You might find they’re missing out on a niche market you can take advantage of once you’re in business.
2. What resources are needed? Understanding the full, up-front cost of a project is vital to ensuring its success. Consider the cost of materials, labor, advertising costs and other expenses. Will the costs outweigh the profits? If an idea isn’t financially feasible, put it on hold for a later time.
3. What is the purchasing cycle? The longer it takes for profits to reach the business, the more money must be spent up-front. Understanding your purchasing cycle beforehand will help with budgeting. Once you’ve decided to move forward with an idea, remember—whether your business will have a short cycle like most retail stores, or one that lasts for months: find ways to reach your customers at each point in the cycle.
4. What product or service is this replacing? In order to effectively sell something, a company must convince its customers to buy its products instead of something else. Determine what item customers will be willing to give up in exchange for the service offered by the new business. This will also help when the time comes to advertise the product.
5. What is a reasonable sales forecast? Determine how many sales can be reasonably expected, and compare this figure against the production cost of the item or service. For example, a restaurant owner might consider the occupancy of the restaurant, the average cost of a menu item and how many people could be expected to stop in on an average day. It might help to review competing businesses to draw estimates from their data.
6. How much growth potential is there? If you’re producing a hand-crafted item, for example, can it be mass-produced if the demand requires? Services that must be rendered by a skilled individual cannot be produced in high quantities. Leave room for growth, but establish limits early on.
7. Will the idea be viable in several years? Some business ideas seem appealing at first but would not be attractive in the long haul. Before deciding on a new enterprise, an entrepreneur needs to decide if he could be happy at that same business two, five or even 10 years down the road.
Of course, a successful business needs more than a smart idea, but testing each new idea against these criteria will help to create a secure foundation for the business to grow upon.