How to Test if Your Business Idea Will Sink or SwimDavid Cawthon
By guest contributor Jack Harwell, Business Adviser, Kansas Small Business Development Center at Johnson County Community College
If you’ve got plans for your business to enter a new market, there’s a vital step you need to take before you jump in the water: a market feasibility analysis. Why is it important? It gives you insight into an industry and customers and will improve your business’ chance of success. Basically, it helps answer the question: Will my business survive? [[CTA]]
So what is market feasibility analysis? It’s the process of defining your business idea and researching to see if that idea could generate enough revenues to be successful. Combined with planning the operations and developing financial projections, this analysis is a critical step to take before you start a business or grow a new market segment.
To help you do your own research, we’ve broken down the steps to feasibility analysis. They are:
- defining the business idea
- determining the unique value proposition
- defining the target customer
- analyzing the industry
- determining the size and location of the target market
Now, following this process won’t guarantee success, but it does tell you what you need to do to improve your odds.
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Define the Business Idea
First things first. Defining the business idea means describing what customer problem the business is solving, how it’ll compete with other businesses in the industry and who the typical customer is.
For example, the business might provide a nice place to relax, help customers do their job better or faster, or ease certain customer problems or worries. If you aren’t solving a specific problem for your customers, it will be hard for your business to succeed.
Determine the Unique Value Proposition
Small businesses are typically more successful when they carve out a niche in the marketplace that no one else has. This is your unique value proposition, and it describes how you are solving old problems in new ways or addressing new problems. You should map out your competitive position in the marketplace by considering who the competitors are, what problem they solve and how they differentiate themselves.
Once you’ve mapped your competition, you should identify the gaps and how you will fill them. There are many ways to differentiate your business from your competitor, whether it’s a better product, a better experience or better prices.
But one word of caution: There is risk to differentiating your business on lower prices. Existing competitors are in a better position to outlast you in a price war. Besides, competing on price with a better product or customer experience should command a premium price, shouldn’t it?
Define Your Customer Persona
The customer persona is a fictitious, generalized character that best represents the characteristics of your typical customer. Professional marketers use a customer persona for their marketing strategies, and it helps them craft a message that resonates with their ideal customer. The persona will help you nail down the demographics of the customer you should target (age, sex, education level, etc.) and their psychographics (what they are doing, where they are going and how they are feeling).
You might be uncomfortable distilling your customer base down to a single person, but embracing the customer persona will help you craft a clear and targeted marketing message that will have a huge halo effect that resonates with a larger audience. It reminds you that at every step of your marketing and sales process, you’re talking to real people who have real pain points you can help address.
With the business idea defined, you should next start developing questions your research will answer. That research will help you validate assumptions; learn more about the industry, competitors and market; and provide evidence that the business idea could be successful.
Bottom line: This evidence will be used to determine if the business is feasible – that is, if you can make money.
Analyze the Industry with Market Research
There are two ways to research: primary and secondary. Primary research is where you do the work yourself, whereas secondary research is where you learn from the work of others.
Some examples of primary research include conducting customer focus groups, interviewing former employees and visiting competitor locations. There’s more value in primary research because you’ll target specific questions you need answered.
But the cost of primary research is much higher, as it takes more time and may require travel. Secondary research, on the other hand, is cheaper and faster. The best source of secondary research today is (no surprise here) the internet.
When using the internet for research, be ready to dig past the first few pages and note the source. The first few search entries are typically paid results, which means a website owner paid the search provider to list their entry at the top of the page. That also usually means they’re trying to sell you something and might not offer the most reliable or unbiased information. The top listings after the paid results are usually there because the website was designed with optimum placement in mind – again, they’re trying to sell. If you skip to the third page or beyond, you’re more likely to find information that’s potentially more relevant to your research.
Keep an eye on the URL (or web address) of any website you use for information to make sure it’s reliable. Certain suffixes, like .edu, are often more reliable and information-driven than .coms.
Local Libraries: Access the Data
Did you know the local library is a great source of information for market research? Larger public libraries, like the Johnson County Library or the Mid-Continent Public Library, have business librarians who can help you identify sources for your research.
Before you research, make a prioritized list of topics to explore. This will help you keep organized and stay on task. Many public and college libraries subscribe to business databases that have valuable information for your research. You can use libraries like these to access often pricey databases at no charge.
This Is It: Go … or Not?
Once you’ve finished your research, you should have enough information to determine if the market is large enough for one more business: yours.
If the answer is positive, you can then move forward with opening your business. Hopefully, you learned some things along the way that let you fine tune your business idea and improve your odds for success. If you need funding to start your business, your research should be proof to potential investors or lenders that you’ve done your homework.
On the other hand, if you learn that the market is not ready for a business like yours, that’s also a win. It’s better to lose time in research than more time and money lost in a failed venture. Besides, maybe you found another business idea that has a better chance of success.
Jack Harwell is a consultant for the Kansas Small Business Development Center at Johnson County Community College. Jack leverages his more than 30 years of experience in manufacturing, distribution, logistics and all things supply-chain to assist clients. Jack spent 10 years with RadioShack in a unique role that involved him in marketing, store operations, product management and other retail business processes that rounded out his strong supply-chain background. Jack has a BS in mathematics and an MBA from the University of Texas at Dallas, as well as CPIM and CSCP certifications with APICS (which he is certified to teach).
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