How Do You Know if Your Business Idea is Good?

How do you know when to pursue a business idea versus when not to?

Though there are many questions that aspiring business owners tend to have, this one definitely sits at the top of the list. Yet, the process that answers this question as well as the assumptions behind it are one of the least understood aspects of successful business start-up and operation, and it’s the real, hard to measure reason why even the most promising of business ideas fail.

That said, I have a couple of goals with this post:

  1. Debunk the biggest misconception there is about being a successful entrepreneur
  2. Give you an overall framework for testing whether a business idea will fly, and what to do if it doesn’t (hint: it doesn’t necessarily mean you should throw in the towel).

The Biggest Misconception About Successful Entrepreneurs

How many people out there think that successful entrepreneurs are big risk takers? If you’ve read any of those “Do You Have What it Takes to be an Entrepreneur?” articles, you may reach that conclusion. But, the reality is that…

Successful entrepreneurship is NOT about taking risks!

We need to debunk this myth- not only because it’s wrong, but because it misleads many aspiring business owners.

THow to test your business ideahe reality is exactly the opposite. The biggest, most successful business people are those who thoroughly understand their target market and the current players within it, who know how to locate and copy real life examples of what works and what doesn’t, who know how to test their assumptions, and then use their findings to generate and tweak their business model till it becomes both profitable and scalable.

Where there are risks, they are calculated. They exist within carefully crafted situations where the loss can be easily sustained, yet the potential gains may be exponential.

You don’t have to take my word for it. The proof is in the proverbial pudding. Just take a look at companies such as Apple, Starbucks, Twitter, Amazon, Ebay, Paypal, and Google. Consider how these companies started, developed, and grew along the way. No one word argue about their success today (whether or not you are a fan of their services), nor the shear “beauty” of their current business models. But, you won’t find in this allstar group even one business where the path to growth and success was straight.

A Framework for Testing a Business Idea for Profitability

There are a couple of assumptions in this title: First realize that it is possible to know if an idea will be profitable before launching, and that there is a very real framework that anyone can follow to get this knowledge. Now obviously, nothing in life is one hundred percent certain, the point is you can (and should) do what you can to get as close to that one hundred percent certainty as possible.

The following are essential steps to take in order to get there. Some of this information is based on the book Getting to Plan B (not an affiliate link), by John Mullins and Randy Komisar, which is basically a handbook for developing a business model in the real world where things don’t typically go as planned. This book definitely tops my list of essential business reads, and I highly recommend checking it out.

Now, on to the framework…

What assumptions do you have? Many of you may have heard the idea that you should try to identify a real world problem or a gap in service within your target audience, and then come up with an idea that helps to solve it. That’s how business ideas are born, right? The problem is that many people leave out the next step: identifying all the assumptions that you may have about your target market and the demand for your product or services.

For example, you may think that many people within your targeted audience are having a hard time figuring out how to market their businesses online. But, before you go about developing a product or service to help them solve this problem, you better make sure that:

  • Your target audience actually displays a demand for such a thing
  • You can communicate the unique value of your product or service
  • You are clear about the profile of the people who want it (sometimes you can target one group, but end up attracting another)
  • Your price point is in line with what your customers are willing to pay
  • You have the resources and systems in place to properly deliver the products or services as advertised
  • You have the resources and systems in place to deliver the products and services in a profitable way

All these points are assumptions that you need to test along the way since if you are off in any of these areas, and you don’t work to correct it, then chances are pretty good that your business won’t be successful.

What is the current market landscape? Who are your competitors? What are they doing right? What are they wrong? What could be done better? Where’s the opportunity? What could you do differently? Business is not always about your gut instincts, it’s about figuring out what works and then adapting what works for your particular situation. Realize and internalize that you don’t need to reinvent the wheel to build a successful business. Look at the top businesses your market. What are they known for? How can you tweak things? What about your brand can you highlight to make it unique and valuable to your target audience?

How will you test your assumptions? As I mentioned above, you need to actively validate your assumptions to see if they will hold up or not. This is a never ending process because there are always new assumptions to validate. If you need to test for interest, for example, you should look for ways to do it relatively quickly and cheaply, before investing a huge amount of time and money into an idea. It can be as simple as making a few phone calls or sending some personalize emails to potential buyers or writing a blog post on a site that shares your target audience, then sending visitors/ subscribers to landing page with related pre-offer. Once you’ve established some basic interest in your product or service, you can take it a step further and then test again. The goal being to avoid making massive steps without some feedback from your audience and the various components of your business.

What will  your business model look like? You need to develop a business model that is sustainable, profitable, and scalable. It doesn’t matter how passionate you are about your business, if that passion is not connected to a solid business model then it won’t go anywhere. The book, Getting to Plan B, mentioned above shows you how to analyze and tweak five main components of your business model: the revenue model (involves the flow of revenue into the business), the gross margin model (involves your business’ profit margins), the operating model (involves the full costs of operating your business), the working capital model (involves your business’ cash flow), and the investment model (involves the upfront investment into the business).

Where will you get support/feedback? No matter how objective you think you are, the reality is that it can be very hard to decide by yourself whether or not your idea is any good. By bringing other people into the process, you can score some much-needed perspective and support. This support and feedback can take many forms. You could join a master mind group, or speak with a mentor, colleagues, or co-workers if they have complimentary ways of looking at things. Just a note here… You need to choose these people very carefully. It is vital that you are able to trust their judgment and their objectivity. So, turning to your best friend or a family member might not be such a good idea even if these people have extensive experience in business.

What do you need to learn? I’m including this step in here because starting a business always comes with a learning curve- and this goes even for those who have successfully started other ventures. How much more true is it if this is your first real attempt at entrepreneurship? I know many big people say that you should only seek out information with the intent to implement it. Information without implementation, they argue, is pointless. Personally, I don’t fully agree. You don’t need to head into everything with blinders on. Sometimes some seemingly extraneous knowledge can come in handy later on. But, you still have to be selective, have a system in place for building up your skills and knowledge, and make the majority of your learning to be for implementation.

In short, the most successful businesses don’t always start with the best or most unique business idea. They are born from a continual process of research, testing, feedback, and analysis. Don’t cling too tightly to your idea. Whether it is good or not, your success in building a business really and ultimately depends on your ability to embrace the process behind it.

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9 Responses to "How Do You Know if Your Business Idea is Good?"

    1. Hi,

      Yes, flexibility is definitely vital. You can absolutely not be rigid when it comes to navigating all the predictable twists and turns along the way. Building a business is a learning process and you have to be open to it.

      Reply
  1. Validation is an absolute must when it comes to knowing whether your business will succeed or not. I know of many people who attempt at startups and entrepreneurial ventures all too quickly before validating the market.

    Reply
    1. Hi Eric,

      Heading into the market with a product or service without validating either the market or the business model is like putting the horse way before the cart. But, as one business consultant told me, many aspiring business owners see their business ideas as already “up and running in their minds.” That’s where much of the problem lies.

      Reply
  2. Great article, a good overview of the set tasks needed to clear before taking off in business. We have a 5 point safety Check that covers similar ground:
    1. Trend – proven demand that will be around for the next 10-20 years
    2. Powerful Partnerships – the support team you put around you
    3. Exclusivity – pointless being in competition, how can you be unique
    4. Compensation – pricing and developing multiple streams of income
    5. Leverage – don’t use a business model that exchanges your time for money

    I agree with the comments, unless these vital checks are done BEFORE taking off, there is huge risk the business will crash and burn.

    Reply
    1. Hi Lauren,

      That’s a nice list. The first point, though, may be a bit hard to do- especially if you are in an industry that changes quickly. I would focus on the following 3 to 5 years.

      Point 4, however, is very important. Many people forget to set up multiple income streams, and it comes back to haunt them later on.

      Reply
  3. Hi Susan,

    I’m happy I found your blog and can share your work because there are so many people who just start their business on a hunch and think their make profit.

    My advice… No matter how long it takes, no matter how frustrating it gets… always do the proper market research… Go so in depth so you can nearly guarantee your success (with lots of additional hard work of course!)

    Thanks Naomi
    Naomi@Business Start Ups recently posted..Business Start up Finance – Finance Your Start up The Easy WayMy Profile

    Reply
    1. Hi Naomi,

      I agree. If you aren’t clear about your market and the conditions surrounding it, you won’t be able to build a sustainable business. And, it does take some work, but if you go into the process with the right attitude and goals, it will pay for itself many times over.

      Reply

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